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scarcity
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the resources we use to produce goods and services are limited
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economics
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the study of choices when there is scarcity
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factors of production
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the resources used to produce goods and services: also known as production inputs or resources
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natural resources
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resources provides by nature and used to produce goods and services
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labor
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human effort, including both physical and mental effort, used to produce goods and services
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physical capital
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the stock of equipment, machines, structures, and infrastructure that is used to produce goods and services
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human capital
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the knowledge and skills acquired by a worker through education and experience and used to produce goods and services
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entrepreneurship
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The effort used to coordinate the factors of production—natural resources, labor, physical capital, and human capital—to produce and sell products.
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positive analysis
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Answers the question "What is?" or "What will be?"
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Normative analysis
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Answers the question "What ought to be?"
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economic model
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a simplified representation of an economic environment, often employing a graph
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variable
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a measure of something that can take on different values
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cetris paribus
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the latin expression meaning that the other variables are held fixed
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marginal change
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A small, one-unit change in value
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macroeconomics
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the study of the nations economy as a whole; focuses on the issues of inflation, unemployment, and economic growth
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microeconomics
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the study of the choices made by households, firms, and government and how these choices affect the markets for goods and services
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marginal benefit
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The additional benefit resulting from a small increase in some activity
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marginal cost
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the additional cost resulting from a small increase in some activity
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nomial value
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the face value of an amount of money
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opportunity cost
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what you sacrifice to get something
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production possibilities curve
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a curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and effectively used.
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real value
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the value of an amount of money in terms of what it can buy
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positive relationship
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a relationship in which two variables move in the same direction
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negative relationship
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a relationship in which two variables move in the opposite direction
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slope of a curve
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the vertical difference between two points divided by the difference
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perfectly competitive market
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a market with many sellers and buyers of a homogeneous product and no barriers to entry
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quantity demanded
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the amount of a product that consumers are willing and able to buy
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demand schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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individual demand curve
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a curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus
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law of demand
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there is a negative relationship between price and quantity demanded, ceteris paribus
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market demand curve
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a curve showing the relationship between price and quantity demanded by all consumers
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change in quality demand
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a change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curve
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quantity supplied
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the amount of a product that firms are willing and able to sell
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supply schedule
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a table that shows the relationship between the price of a good and the quantity supplied
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Law of Supply
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there is a positive relationship between price and quantity supplied
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individual supply curve
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A curve showing the relationship between price and quantity supplied by a single firm, ceteris paribus.
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change in quantity supplied
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A change in the quantity firms are willing and able to sell when the price changes; represented graphically by movement along the supply curve.
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minimum supply price
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the lowest price at which a product will be supplied
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market supply curve
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a curve showing the relationship between the market price and quantity supplied by all firms, ceteris paribus
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market equilibrium
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a situation in which the quantity demand equals the quantity supplied at prevailing market price
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excess demand
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a situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied
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excess supply
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a situation in which the quantity supplied exceeds the quantity demand at the prevailing price
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change in demand
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a shift of the demand curve caused by a change in a variable other than the price of the product
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normal good
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a good for which an increase in income increases demand
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inferior good
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a good for which an increase in income decreases demand
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Substitutes
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two goods for which an increase in the price of one good increases the demand for the other good
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complements
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Two goods for which a decrease in the price of one good increases the demand for the other good
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change in supply
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A shift of the supply curve caused by a change in a variable other than the price of the product
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price elasticity of demand
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A measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded by the percentage change in price
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elastic demand
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the price elasticity of demand is greater than one, so the percentage charge in quantity exceeds the percentage change in price
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inelastic demand
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the price elasticity of demand is less than one, so the percentage change in quantity is less than the percentage change in price
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unit elastic demand
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the price elasticity of demand is one, so the percentage change in quantity equals the percentage change in price
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perfectly inelastic demand
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The price elasticity of demand is zero
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perfectly elastic demand
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the price elasticity of demand is infinite
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total revenue
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the money a firm generates from selling its product
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income elasticity of demand
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a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income
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cross-price elasticity of demand
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A measure of the responsiveness of demand to changes in the price of another good; equal to the percentage change in the quantity demanded of one good (X) divided by the percentage change in the price of another good (Y).
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price elasticity of supply
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a measure of the responsiveness of the quantity supplied to changes in price; equal to the percentage change in quantity supplied divided by the percentage change in price
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perfect inelastic supply
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the price elasticity of supply equals zero
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perfect elastic supply
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the price elasticity of supply is equal to infinity
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economic profit
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total revenue minus economic cost
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economic cost
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The opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost
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explicit cost
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a monetary payment
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inplicit cost
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an opportunity cost that does not involve a monetary payment
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accounting cost
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The explicit costs of production
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accounting profit
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total revenue minus total accounting cost
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marginal product of labor
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the change in output from one additional unit of labor
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diminishing returns
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as one input increases while the other inputs are held fixed, output increases at a decreasing rate
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total-product curve
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A curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus
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fixed cost
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cost that does not vary with the quantity produced
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variable cost
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cost that varies with the quantity produced
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short-run total cost
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The total cost of production when at least one input is fixed; equal to fixed cost plus variable cost
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average fixed cost
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fixed cost divided by the quantity produced
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average variable cost
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variable cost divided by quantity produced
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short-run average total cost
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short-run total cost divided by the quantity produced; equal to AFC plus AVC
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short-run marginal cost
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the change in short-run total cost resulting from a one-unit increase in output
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long-run total cost
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the total cost of production when a firm is perfectly flexible in choosing its inputs
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long-run average cost
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The long-run cost divided by the quantity produced
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constant returns to scale
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A situation in which the long-run total cost increases proportionately with output, so average cost is constant
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long-run marginal cost
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The change in long-run cost resulting from a one-unit increase in output
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indivisible input
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an input that cannot be scaled down to produce a smaller quantity of output
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economies of scale
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A situation in which the long-run average cost of production decreases as output increases
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minimum efficient scale
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the output at which scale economies are exhausted
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diseconomies of scale
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A situation in which the long-run average cost of production increases as output increases
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price taker
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a buyer or seller that takes the market price as given
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firm-specific demand curve
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a curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell
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marginal revenue
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the change in total revenue from selling one more unit of a product
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shut-down price
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the price at which the firm is indifferent between operating and shutting down; equal to the minimum average variable cost
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break-even price
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The price at which economic profit is zero; price equals average total cost
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sunk cost
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a cost that a firm has already paid or committed to pay, so it cannot be recovered
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short-run supply curve
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A curve showing the relationship between the market price of a product and the quantity of output supplied by a firm in the short run
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short-run market supply curve
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a curve showing the relationship between the market price and quantity supplied in the short run
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long-run market supply curve
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a curve showing the relationship between the market price and quantity supplied in the long run
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increasing-cost industry
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An industry in which the average cost of production increases as the total output of the industry increases; the long-run supply curve is positively sloped.
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constant-cost industry
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an industry in which the average cost of production is constant; the long-run supply curve is horizontal
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Monopoly
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a market in which a single firm sells a product that does not have any close substitutes
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market power
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the ability of a firm to affect the price of its product
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barrier to entry
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something that prevents firms from entering a profitable market
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patent
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the exclusive right to sell a new good for some period of time
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network externalities
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the value of a product to a consumer increases with the number of of other consumers who use it.
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natural monopoly
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the market at which the economies of scale in a production are so large that only a single large firm can earn a profit.
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price discrimination
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the practice of selling a good at different prices to different customers.
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monopolistic competition
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a market served by many firms that sell slightly different products
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product differentiation
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the process used by firms to distinguish their products from the products of competing firms
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concentration ratios
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the percentage of the market output produced by the largest firms
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duopoly
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a market with two firms
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cartel
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a group of firms that act in unison, coordinating their price and quantity decisions.
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price fixing
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an arrangement in which firms conspire to fix prices
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game tree
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a graphical representation of the consequences of different actions in a strategic setting
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dominant strategy
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the action that is the best choice for a player, no matter what the other player does.
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duopolists' dilemma
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A situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price.
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Nash equilibrium
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An outcome of a game in which each player is doing the best he or she can, given the action of the other players.
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low-price guarantee
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a promise to match a lower price of a competitor
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grim-trigger strategy
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A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit
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tit-for-tat strategy
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a strategy where one firm chooses whatever price the other firm chose in the preceding period
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price leadership
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a system under which one firm in an oligopoly takes the lead in setting prices
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limit pricing
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the strategy of reducing the price to deter entry
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limit price
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the price that is just low enough to deter entry
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contestable market
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a market with low entry and exit costs
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trust
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an arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees.
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merger
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a process in which two or more firms combine their operations
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tie-in sale
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a business practice under which a business requires a consumer of one product to purchase another product
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predatory pricing
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a firm sells a product at a price below its production cost to drive a rival out of business and then increases the price
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