econ 301 basic terms - Assignment Essays

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absolute advantage

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the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources; the cost of producing the good in country 1 is lower than the cost ofd producing that good in country 2

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actual return

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return that an asset earns

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actuarially fair

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characterizing a situation in which an insurance premium is equal to the expected payout

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adverse selection

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the problem of incomplete information - of choosing alternatives without fully knowing the details of available options; form of market failure resulting when products of different qualities are sold at single because of asymmetric information, so that too much of the low quality product and too little of the high quality product are sold

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agent

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individual employed by a principal to achieve the principal's objective

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amortization

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the reduction of a loan balance through payments made over a period of time; policy treating s one time expenditure as an annual cost spread out over some number of years

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anchoring

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the tendency, in making judgments, to rely on the first piece of information encountered or information that comes most quickly to mind

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antitrust laws

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laws that prevent monopolies and and promote competition and fairness

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arbitrage

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the practice of buying at a low price at one location and selling at a higher price in another

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arc elasticity of demand

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price elasticity calculated over a range of prices

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asset

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something that provides a flow of money or services to its owner

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asymmetric information

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a situation in which one side of the market has more reliable information than the other side

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average expenditure curve

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supply curve representing the price per unit that a firm pays for a good

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average expenditure

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price paid per unit of a good

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average fixed costs (AFC)

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total fixed costs divided by level of output. AFC = TFC/Q. It continuously falls as output rises

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average product

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the average amount produced by each unit of a variable factor of production; output per unit of a particular good

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average total cost (ATC)

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a firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost

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average variable cost (AVC)

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variable cost divided by the quantity of output

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bad

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good for which less is preferred rather than more

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bandwagon effect

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positive network externality in which a consumer wishes to possess a good in part because others do

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barrier to entry

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anything that keeps new firms from entering an industry in which firms are earning economic profits

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bertrand model

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oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge

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bilateral monopoly

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a market with only a single seller and a single buyer

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block pricing

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practice of charging different prices for different quantities or "blocks" of a good

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bond

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a financial security that represents a promise to repay a fixed amount of funds; contract in which borrower agrees to pay the bondholder (the lender) a stream of money

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bubble

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an increase in the price of a good based not on the fundamentals of demand or value, but instead on a belief that the price will keep going up

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budget constraints

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constraints that consumers face as a result of limited incomes

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budget line

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shows the consumption bundles available to a consumer who spends all of his or her income; all combinations of goods which total amount of money spent is equal to income

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capital asset pricing model (CAPM)

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a model in which the risk premium for a capital investment depends on the correlation of the investment's return with the return on the entire stock market

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cardinal utility function

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utility function describing by how much one market basket is preferred to another

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cartel

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market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits

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coase theorem

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principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified.

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Cobb-Douglas production function

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a production function that assumes some degree of substitutability among inputs; Y=AK^aL^1-a

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Cobb-Douglas Utility Function

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utility function U(X,Y) = (X^a)(Y^1-a), where X and Y are two goods and a is a constant

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company cost of capital

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expected rate of return demanded by investors in a company, determined by the average risk of the company's securities; weighted average of the expected return on a company's stock and the interest rate that it pays for debt

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comparative advantage

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the ability to produce a good at a lower opportunity cost than another producer; an individual has a relatively lower cost to produce a good than another's cost

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complements

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two goods for which an increase in the price of one leads to a decrease in the demand for the other

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completely inelastic demand

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principle that consumers will buy a fixed quantity of a good regardless of its price

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constant returns to scale

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the situation in which a firm's long-run average costs remain unchanged as it increases output; situation in which output doubles when all inputs are doubled

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constant-cost industry

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an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

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consumer price index

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an index of the variation in prices paid by typical consumers for retail goods and other items; measure of the aggregate price level

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consumer surplus

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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

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contract curve

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curve showing all efficient allocations of goods between two consumers, or of two inputs between two production functions

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cooperative game

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game in which participants can negotiate binding contracts that allow them to plan joint strategies

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corner solution

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situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line

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cost function

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function relating cost of production to level of output and other variables that the firm can control

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Cournot equilibrium (Nash-Cournot equilibrium)

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a set of quantities sold by firms such that, holding the quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity; each firm correctly assumes how much its competitor will produce and set its own production level accordingly

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cournot model

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oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce

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cross-price elasticity of demand

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a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

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cyclical industries

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industries in which sales tend to magnify cyclical changes in gross domestic product and national income

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deadweight loss

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net loss of total surplus that results from an action that alters a market equilibrium

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decreasing returns to scale

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situation in which output less than doubles when all inputs are doubled

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decreasing-cost industry

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an industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs; long-run supply curve is downward sloping

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demand curve

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a graph of the relationship between the price of a good and the quantity demanded

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law of demand

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consumers buy more of a good when its price decreases and less when its price increases

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derived demand

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demand for an input that depends on, and is derived from, both the firm's level of output and the cost of inputs

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deviation

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difference between expected payoff and actual payoff

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diminishing marginal utility

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principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility

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discount rate

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the minimum interest rate set by the Federal Reserve for lending to other banks; rate used to determine the value today of a dollar received in the future

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diseconomies of scale

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the situation in which a firm's long-run average costs rise as the firm increases output; doubling output requires more than a doubling of cost

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diseconomies of scope

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situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product

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diversifiable risk

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Risk that can be eliminated either by investing in many projects or by holding the stocks of many companies

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diversification

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practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related

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dominant firm

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firm with a large share of total sales that sets price to maximize profits, taking into account the supply response of smaller firms

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dominant strategy

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a strategy that is best for a player in a game regardless of the strategies chosen by the other players

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duopoly

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an oligopoly consisting of only two firms

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economic cost

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cost to a firm of utilizing economic resources in production

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economic efficiency

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maximization of aggregate consumer and producer surplus

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economic rent

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amount that firms are willing to pay for an input less the minimum amount necessary to obtain it

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economies of scale

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factors that cause a producer's average cost per unit to fall as output rises; output can be doubled for less than a doubling of the cost

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economies of scope

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joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

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edgeworth box

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diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes

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effective yield (rate of return)

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percentage return that one receives by investing in a bond

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efficieny wages

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a firm pays employees enough to incentivize and not shirk

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efficiency wage theory

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the theory that the productivity of workers, either individually or as a group, will increase if they are paid more; explanation for the presence of unemployment and wage discrimination which recognizes labor productivity may be affected by the wage rate

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elasticity

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a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

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endowment effect

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the tendency for people to inflate the value of objects, goods, or services they already own

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engel curve

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curve relating the quantity of a good consumed to income

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equal marginal principle

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principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods

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equilibrium

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price that equates the quantity supplied to the quantity demanded

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equilibrium in dominant strategies

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outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing

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excess demand

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at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

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excess supply

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at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

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exchange economy

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market in which two or more consumers trade two goods among themselves

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expansion path

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a curve that shows a firm's cost-minimizing combination of inputs for every level of output; passes through points of tangency between a form's isocost lines and its isoquants

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expected return

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return that an asset should earn on average

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expected utility

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sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur

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expected value

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the average of each possible outcome of a future event, weighted by its probability of occurring

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extent of a market

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boundaries of a market, both geographical and in terms of range of products produced and sold within it

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externality

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action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price.

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factors of production

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Land, labor, and capital; the three groups of resources that are used to make all goods and services

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first degree price discrimination

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charging each individual customer a different price based on their willingness to pay; charge each customer their reservation price

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fixed cost (FC)

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cost that does not vary with the level of output and that can be eliminated only by shutting down

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fixed input

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production factor that cannot be varied

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fixed proportions production function (perfect complements)

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production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

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framing

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tendency to rely on the context in which a choice is described when making a decision

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free entry and exit

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when new producers can easily enter into an industry and existing producers can easily leave that industry; no special costs that make it difficult for a firm to enter

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free rider

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a consumer or producer who does not pay for a nonexclusive good in the expectation that others will

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game

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situation in which players (participants) make strategic decisions that take into account each other's actions and responses

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general equilibrium analysis

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simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account

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giffen good

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good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect, has to be an inferior good

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horizontal integration

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system of consolidating many firms in the same business; organizational form in which several plants produce the same or related products for a firm

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human capital

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the knowledge, skills, and experience that make an individual ore productive and thereby able to earn a higher income over a lifetime

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import quota

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a limit on the amount of a good that can be imported

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income effect

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a change in consumption of a good, resulting from an increase in purchasing power, with relative prices held constant

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income elasticity of demand

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a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

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increasing returns to scale

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situation in which output more than doubles when all inputs are doubled

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increasing cost industry

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an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs; long run supply curve is upward sloping

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indifference curve

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a curve that shows consumption bundles that give the consumer the same level of satisfaction

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indifference map

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graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

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individual demand curve

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illustrates the relationship between quantity demanded and price for an individual consumer

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inferior good

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a good that consumers demand less of when their incomes increase

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infinitely elastic demand

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principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit

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interest rate

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rate at which one can borrow or lend money

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intertemporal price discrimination

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practice of separating consumers with different demand functions into different groups by charging different prices at different points in time.

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isocost line

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graph showing all possible combinations of labor and capital that can be purchased for a given total cost

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isoelastic demand curve

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demand curve with a constant price elasticity

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isoquant

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curve showing all possible combinations of inputs that yield the same output

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isoquant map

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graph combining a number of isoquants, used to describe a production function

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kinked demand curve model

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oligopoly model in which each firm faces a demand curve kinked at the currently prevailing price: at higher prices demand is very elastic, whereas at lower prices it is inelastic

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labor productivity

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the amount of goods and services that a person can produce in a given time; output per worker; average product of labor for an entire industry

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lagrangian

answer

function to be maximized or minimized, plus a
variable (the Lagrange multiplier) multiplied by the constraint.

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law of diminishing marginal returns

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principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

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learning curve

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graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output

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linear demand curve

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a straight-line curve; such as a demand curve has a constant slope but usually has a varying price elasticity

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long run

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the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

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long run average cost curve (LAC)

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curve relating average cost of production to output when all inputs, including capital, are variable

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long-run competitive equilibrium

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all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.

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long run marginal cost curve (LMC)

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curve showing the change in long-run total cost as output is increased incrementally by 1 unit.

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loss aversion

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the tendency to care more about avoiding losses than about achieving equal-size gains

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macroeconomics

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branch of economics that deals with aggregate economic variables, such as the level of growth rate of national output, interest rates, unemployment, and inflation

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marginal benefit

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the additional benefit to a consumer from consuming one more unit of a good or service

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marginal cost

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the increase in total cost that arises from an extra unit of production

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marginal expenditure

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additional cost of buying one more unit of a good

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marginal expenditure curve

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curve describing the additional cost of purchasing one additional unit of a good

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marginal external benefit

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increased benefit that accrues to other parties as a firm increases output by one unit

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marginal external cost

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increase in cost imposed externally as one or more firms increase output by one unit

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marginal product

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the additional quantity of output that is produced by using one more unit of that input

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marginal rate of substitution (MRS)

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maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good, slope of the indifference curve

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marginal rate of technical substitution (MRTS)

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amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant, slope of the firm's isoquant

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marginal rate of transformation (MRT)

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amount of one good that must be given up to produce one additional unit of a second good; the slope of the production possibility frontier, measures the marginal cost of producing one good relative to the marginal cost of producing the other

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marginal revenue (MR)

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the change in total revenue from an additional unit sold

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marginal revenue product

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additional revenue resulting from the sale of output created by the use of one additional unit of an input

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marginal social benefit

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the sum of the marginal private benefit and the marginal external benefit of production or consumption

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marginal social cost

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sum of the marginal private cost and the marginal external cost

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marginal utility (MU)

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the additional satisfaction gained by the consumption or use of one more unit of a good or service

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market

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collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products

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market basket (bundle)

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list with specific quantities of one or more goods

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market definition

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determination of the buyers, sellers, and range of products that should be included in a particular market

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market demand curve

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the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product

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market failure

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a situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

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market mechanism

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tendency in a free market for price to change until the market clears

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market power

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the ability of a seller or buyer to alter the market price of a good or service

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market price

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the price determined by supply and demand; prevailing price in a competitive market

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market signaling

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process by which sellers send signals to buyers conveying information about product quality

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maximin strategy

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strategy that maximizes the minimum gain that can be earned

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method of lagrange multipliers

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technique to maximize or minimize a function subject to one or more constraints.

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microeconomics

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a branch of economics that deals with the behavior of individual economic units - consumers, forms, workers, investors - as well as the market that these units comprise

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mixed strategy

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strategy in which a player makes a random choice among two or more possible actions, based on a set of chosen probabilities

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monopolistic competition

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a market in which firms can enter freely, each producing its own brand or version of a differentiated product

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monopoly

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a market in which there are many buyers but only one seller.

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monopsony

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a market with only one buyer

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monopsony power

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buyer's ability to affect the price of a good

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moral hazard

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when a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event

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nash equilibrium

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a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen; set of strategies or actions in which each firm does the best it can given its competitor's actions

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natural monopoly

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firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms

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negatively correlated variable

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variables having a tendency to move in opposite directions

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net present value (NPV) criterion

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rule holding that one should invest if the present value of the expected future cash flow from an investment is larger than the cost of the investment

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network externality

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situation in which each individual's demand depends on the purchases of other individuals

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nominal price

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absolute price of a good, unadjusted for inflation

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noncoopertive game

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game in which negotiation and enforcement of binding contracts are not possible

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nondiversifiable risk

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Risk that cannot be eliminated by investing in many projects or by holding the stocks of many companies

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nonexclusive good

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good that people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use

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nonrival good

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good for which the marginal cost of its provision to an additional consumer is zero

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normative anaylsis

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analysis concerned with what ought to be

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oligopoly

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a market structure in which only a few sellers offer similar or identical products, and entry by new firms is impeded

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oligopsony

answer

a market with only a few buyers

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opportunity cost

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the most desirable alternative given up as the result of a decision; cost associated with opportunities forgone when a form's resources are not put to their best alternative use

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opportunity cost of capital

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rate of return that one could earn by investing in an alternate project with similar risk

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optimal strategy

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strategy that maximizes a player's expected payoff

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ordinal utility function

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utility function that generates a ranking of market baskets in order of most to least preferred

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pareto efficient allocation

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allocation of goods in which no one can be made better off unless someone else is made worse off

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parallel conduct

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form of implicit collusion in which one firm consistently follows actions of another

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partial equilbrium analysis

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determination of equilibrium prices and quantities in a market independent of effects from other markets

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payoff

answer

value associated with a possible outcome

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payoff matrix

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table showing profit (or payoff) to each firm given its decision and the decision of its competitor

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peak load pricing

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practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high.

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perfect complements

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two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles

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perfect substitutes

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two goods for which the marginal rate of substitution of one for the other is a constant

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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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perpetuity

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bond paying out a fixed amount of money each year, forever

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point elasticity of demand

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price elasticity at a particular point on the demand curve

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positive analysis

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analysis describing relationships of cause and effect

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positively correlated variables

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variables having a tendency to move in the same direction

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predatory pricing

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the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market to enjoy higher profits

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present discounted value (PDV)

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the current value of an expected future cash flow

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price discrimination

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practice of charging different customers different prices for the same product

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price elasticity of demand

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a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

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price elasticity of supply

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a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

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price leadership

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pattern of pricing in which one firm regularly announces price changes that other firms then match

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price of risk

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extra risk that an investor must incur to enjoy a higher expected return

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price rigidity

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characteristic of oligopolistic markets by which firms are reluctant to change prices even if costs or demands change

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price signaling

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form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit

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price support

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price set by government above free-market level and maintained by governmental purchases of excess supply

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price taker

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a firm that has no influence over the price at which it sells its product

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price consumption curve (PCC)

answer

curve tracing the utility-maximizing combinations of two goods as the price of one changes

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principal

answer

individual who employs one or more agents to achieve an objective

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principal-agent problem

answer

a problem arising from conflict between the objectives of the principals and those of the agents who take decisions on their behalf

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prisoners' dilemma

answer

a situation in which two (or more) actors cannot agree to cooperate for fear that the other will find its interest best served by reneging on an agreement; pursuing dominant strategies results in noncooperation that leaves everyone worse off

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producer price index (PPI)

answer

measure of the aggregate price level for intermediate products and wholesale goods

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producer surplus

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sum of all units produced by a form of differences between the market price of a good and the marginal cost of production

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product transformation curve

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curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs

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production function

answer

function showing the highest output that a firm can produce for every specified combination of inputs

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production possibilities frontier (PPF)

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a curve showing all combinations of two goods that can be produced with the resources and technology currently available; derived from the production contract curve

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profit

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the difference between total revenue and total cost

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property rights

answer

legal rules stating what people or forms may do with their property

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public good

answer

the marginal cost of provision to an additional customer is zero and people cannot be excluded from consuming it; non excludable and non rival

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pure strategy

answer

strategy in which a player makes a specific choice or takes a specific action

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quantity forcing

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use of a sales quota or other incentives to make downstream firms sell as much as possible.

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reaction curve

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relationship between a firm's profit-maximizing output and the amount it thinks its competitor will produce

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real price

answer

price of a good relative to an aggregate measure of prices; price adjusted for inflation

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real return

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simple (or nominal) return on an asset, less the rate of inflation

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reference point

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the point from which an individual makes a consumption decision

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rent seeking

answer

spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly

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rental rate

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cost per year of renting one unit of capital

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repeated game

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game in which actions are taken and payoffs received over and over again

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reservation price

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maximum price that a customer is willing to pay for a good

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return

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total monetary flow of an asset as a fraction of its price

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returns to scale

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rate at which output increases as inputs are increased proportionately

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risk averse

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condition of preferring a certain income to a risky income with the same expected value
expected utility(lottery) < U(expected value)

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risk loving

answer

condition of preferring a risky income to a certain income with the same expected value

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risk neutral

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condition of being indifferent between a certain income and an uncertain income with the same expected value

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risk premium

answer

the maximum amount an individual would be willing to give up to be guaranteed the expected value of a lottery instead of playing the lottery, difference between expected value of lottery and its certainty equivalent

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riskless (risk-free) asset

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asset that provides a flow of money or services that is known with certainty

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risky asset

answer

asset that provides an uncertain flow of money or services to its owner

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R-squared statistic

answer

percentage of the variation in the dependent variable that is accounted for. by all the explanatory variables

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salience

answer

the perceived importance of a good or service

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second degree price discrimination

answer

practice of charging different prices per unit for different quantities of the same good or service

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sequential game

answer

game in which players move in turn, responding to each other's actions and reactions

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shirking model

answer

principle that workers still have an incentive to shirk if a firm pays them a market-clearing wage, because fired workers can be hired somewhere else for the same wage.

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short run

answer

a period of time sufficiently short that at least some of the firm's factors of production are fixed

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short run average cost curve (SAC)

answer

curve relating average cost of production to output when level of capital is fixed

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shortage

answer

a situation in which quantity demanded is greater than quantity supplied

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snob effect

answer

negative network externality in which a consumer wishes to own an exclusive or unique good

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social rate of discount

answer

opportunity cost to society as a whole of receiving an economic benefit in the future rather than the present

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social welfare function

answer

measure describing the well-being of society as a whole in terms of the utilities of individual members

question

specific tax

answer

tax of a certain amount of money per unit sold

question

speculative demand

answer

demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase

question

stackelberg model

answer

oligopoly model in which one firm sets its output before other firms do

question

stock of capital

answer

total amount of capital available for use in production

question

strategy

answer

rule or plan of action for playing a game

question

subsidy

answer

payment reducing the buyer's price below the seller's price

question

substitutes

answer

two goods for which an increase in the price of one leads to an increase in the demand for the other

question

substitution effect

answer

change in consumption of a good associated with a change in its price, with the level of utility held constant

question

sunk cost

answer

expenditure that has been made and cannot be recovered

question

supply curve

answer

a graph of the relationship between the price of a good and the quantity supplied

question

law of supply

answer

Tendency of suppliers to offer more of a good at a higher price

question

surplus

answer

a situation in which quantity supplied is greater than quantity demanded

question

tariff

answer

a tax on imported goods

question

technical efficiency

answer

condition under which firms combine inputs to produce a given output as inexpensively as possible

question

technological change

answer

development of new technologies allowing factors of production to be used more effectively

question

theory of consumer behavior

answer

description of how consumers allocate incomes among different goods and services to maximize their well-being

question

theory of the firm

answer

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

question

third degree price discrimination

answer

practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group

question

tit-for-tat strategy

answer

repeated game strategy in which a player responds in kind to an opponents previous play, cooperating with cooperative opponents and retaliating against uncooperative ones

question

total cost (TC)

answer

total economic cost of production, consisting of fixed and variable costs

question

transfer prices

answer

internal prices at which parts and components from upstream divisions are "sold" to downstream divisions within a firm

question

two part tariff

answer

form of pricing in which consumers are charged both an entry and a usage fee

question

tying

answer

practice of requiring a customer to purchase on good in order to purchase another

question

user cost of capital

answer

annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest

question

user cost of production

answer

opportunity cost of producing and selling a unit today and so making it unavailable for production and sale in the future

question

utility

answer

numerical score representing the satisfaction that a consumer gets from a given market basket

question

utility function

answer

formula that assigns a level of utility to individual market baskets

question

utility possibility frontier

answer

curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals

question

value of complete information

answer

difference between the expected value of a choice when there is complete information and the expected value when information is incomplete

question

variability

answer

extent to which possible outcomes of an uncertain event differ

question

variable cost (VC)

answer

cost that varies as output varies

question

variable profit

answer

sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs.

question

vertical integration

answer

organizational form in which a form contains several divisions, with some producing parts and components that others use to produce finished products

question

welfare economics

answer

the branch of economics that studies how the allocation of resources affects economic well-being; normative evaluation of markets and economic policy

question

welfare effects

answer

gains and losses to consumers and producers

question

zero economic profit

answer

a firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

question

reinvestment Risk

answer

the risk that a fixed-income investor will not be able to reinvest interest payments or the par value at attractive interest rates. Happens when rates are falling

question

feedback effect

answer

a price or quantity adjustment in one market caused by price and quantity adjustments in related markets

question

invisible hand

answer

a term coined by Adam Smith to describe the self-regulating nature of the marketplace

question

equity

answer

a condition in which people receive from a relationship in proportion to what they give to it

question

egalitarian

answer

all members of society receive equal amounts of goods

question

rawlsian

answer

maximize the utility of the least well-off person

question

utilitarian

answer

maximize the total utility of all members of society

question

market-oriented

answer

the market outcome is the most equitable

question

first theorem of welfare economics (FTWE)

answer

if everyone trades in the competitive marketplace, all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be pareto efficient

question

second theorem of welfare economics (STWE)

answer

if individual preferences are convex, then every pareto efficient allocation (every point on the contract curve) is a competitive equilibrium for some initial allocation of goods, any equilibrium deemed to be equitable can be achieved by a suitable distribution of resources among individuals and that such a distribution need not in itself generate inefficiencies

question

output efficiency

answer

a mix of outputs that simultaneously supports exchange and input efficiency; MRS = MRT = MCx/MCy = Px/Py

question

input: IOU

answer

input: other under

question

output: OOO

answer

output: other over

question

efficiency in exchange

answer

all allocations must lie on the exchange contract curve so that evert customer's marginal rate of substitution (MRS) of good x for good y is the same, a competitive market achieves this efficient outcome because, for consumers, the tangency of the budget line and the highest attainable indifference curve ensures that:
MRSj =MRSk = Px/Py

question

efficiency in the use of inputs in production

answer

every producer's marginal rate of technical substitution (MRTS) of labor for capital is equal in the production of both goods, a competitive market achieves this technically efficient outcome because each producer maximizes profit by choosing labor and capital inputs so that the ratio of the input prices is equal to the MRTS:
MRTSx = MRTSy = w/r

question

efficiency in the output market

answer

the mix of outputs must be chosen so that the marginal rate of transformation (MRT) between outputs is equal to consumer's marginal rate of substitution (MRS), a competitive market achieves this efficient outcome because profit-maximizing producers increase their output to the point at which marginal cost equals price but consumers maximize their satisfaction in competitive markets if the MRS equals the price ratio of the two goods: MRT = MRS = Px/Py = MCx/MCy

question

shut down condition (short run)

answer

when price is less than average variable cost, total revenue must cover total variable costs in the short run to continue producing, MC = AVC

question

shut down condition (long run)

answer

revenue is unable to cover total costs, firm will be making losses in long run

question

profit maximizing condition

answer

MR=MC=P

question

monopoly power

answer

the ability of a firm to make it impossible for rival firms to compete with it, either through advertising or in some other way, MR will be less than price for firms

question

zero economic profit condition

answer

P = ATC

question

price taking condition

answer

MC = P

question

coupon payment

answer

an interest payment on a bond, (Face Value) x(Coupon rate)

question

face value of a bond

answer

the amount the issuer of a bond will have to pay on the maturity date.

question

coupon rate

answer

the interest rate that a bond issuer will pay to a bondholder, the annual coupon divided by the face value of a bond

question

maturity rate

answer

the date on which the final payment on a bond is due from the bond issuer to the investor

question

yield to maturity (YTM & i)

answer

the rate of return a bondholder will receive if the bond is held to maturity

question

fave values of bonds vs interest and coupon rates

answer

Price (bond) < face value when i > coupon rate
Price (bond) = face value when i = coupon rate
Price (bond) > face value when i < coupon rate

question

strict monotonicity

answer

more is better

question

convexity

answer

tend to prefer combinations to extremes

question

weak monotonicity

answer

more is at least as good

question

utility optimization condition

answer

legrange = u(x,y) + lamda(I - ((Px)X) -((Py)Y))
MRS = MUx/MUy = Px/Py
Px(x) + Py(Y) = I

question

quasi linear preferences

answer

the value that an individual attributes to a good is constant relative to the substitute good, and independent of their current consumption of this initial good. Their marginal rate of substitution between good 1 and good 2 depends only on their current level of consumption of good 1. MRS is therefore equal for any given value of good 1, ex: U (x,y) = lnx+y

question

cross price elasticity with complements

answer

negative

question

cross price elasticity with substitutes

answer

positive

question

income elasticity of interior goods

answer

negative

question

income elasticity of normal goods

answer

positive

question

interior solution

answer

an optimal bundle that is a combination of both goods, the budget constraint and the indifference curve have the same slope at the point where they touch (tangent)

question

income consumption curve (ICC or income expansion path)

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes, prices held constant
if positive, both good are normal
if negative, one normal, other inferior

question

fisher model (consumption today vs tomorrow)

answer

describes the relationship between inflation and both real and nominal interest rates

question

revealed preference

answer

the idea that people's preferences can be determined by observing their choices and behavior

question

certainty equivalent

answer

the guaranteed income level at which an individual would receive the same expected utility level as from an uncertain income

question

full insurance

answer

payout covers entire loss in the case of an adverse event

question

actuarially fair insurance

answer

expected payout by insurance equals the premium (what you pay)

question

cost minimization conditions

answer

legrange = wL + rK + lamda[q - F(L,K)]
MRTS = MPL/MPK = w/r
q = F(K,L)

question

perfect substitutes function

answer

q = aL + Kb
MRTS = a/b
interior (if w =r): q = L + K, TC = wL + rK
corner (if w > r): L = 0, K = q, TC= rK

question

perfect complements function

answer

q = min[aK,bL]
aK = bL, TC* = (w+r)q

question

bang to buck ratio

answer

MPL/w = MPK/r

question

implicit yield

answer

the difference between the current yield (dividend) paid on a bond and the rate that the bondholder will receive at a fixed point in the future

question

interest rate risk

answer

the risk that arises for bond owners from fluctuating interest rates

question

output expansion path

answer

the locus of tangencies (minimum-cost input combinations) traced out by an isocost line of given slope as it shifts outward into the isoquant map for a production process, cost-minimizing inout choices for all possiple output levels for a fixed set of input prices

1 of 333

question

absolute advantage

answer

question

actual return

answer

return that an asset earns

question

actuarially fair

answer

characterizing a situation in which an insurance premium is equal to the expected payout

question

adverse selection

answer

question

agent

answer

individual employed by a principal to achieve the principal's objective

question

amortization

answer

the reduction of a loan balance through payments made over a period of time; policy treating s one time expenditure as an annual cost spread out over some number of years

question

anchoring

answer

the tendency, in making judgments, to rely on the first piece of information encountered or information that comes most quickly to mind

question

antitrust laws

answer

laws that prevent monopolies and and promote competition and fairness

question

arbitrage

answer

the practice of buying at a low price at one location and selling at a higher price in another

question

arc elasticity of demand

answer

price elasticity calculated over a range of prices

question

asset

answer

something that provides a flow of money or services to its owner

question

asymmetric information

answer

a situation in which one side of the market has more reliable information than the other side

question

average expenditure curve

answer

supply curve representing the price per unit that a firm pays for a good

question

average expenditure

answer

price paid per unit of a good

question

average fixed costs (AFC)

answer

total fixed costs divided by level of output. AFC = TFC/Q. It continuously falls as output rises

question

average product

answer

the average amount produced by each unit of a variable factor of production; output per unit of a particular good

question

average total cost (ATC)

answer

a firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost

question

average variable cost (AVC)

answer

variable cost divided by the quantity of output

question

bad

answer

good for which less is preferred rather than more

question

bandwagon effect

answer

positive network externality in which a consumer wishes to possess a good in part because others do

question

barrier to entry

answer

anything that keeps new firms from entering an industry in which firms are earning economic profits

question

bertrand model

answer

oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge

question

bilateral monopoly

answer

a market with only a single seller and a single buyer

question

block pricing

answer

practice of charging different prices for different quantities or "blocks" of a good

question

bond

answer

a financial security that represents a promise to repay a fixed amount of funds; contract in which borrower agrees to pay the bondholder (the lender) a stream of money

question

bubble

answer

an increase in the price of a good based not on the fundamentals of demand or value, but instead on a belief that the price will keep going up

question

budget constraints

answer

constraints that consumers face as a result of limited incomes

question

budget line

answer

shows the consumption bundles available to a consumer who spends all of his or her income; all combinations of goods which total amount of money spent is equal to income

question

capital asset pricing model (CAPM)

answer

a model in which the risk premium for a capital investment depends on the correlation of the investment's return with the return on the entire stock market

question

cardinal utility function

answer

utility function describing by how much one market basket is preferred to another

question

cartel

answer

market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits

question

coase theorem

answer

principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified.

question

Cobb-Douglas production function

answer

a production function that assumes some degree of substitutability among inputs; Y=AK^aL^1-a

question

Cobb-Douglas Utility Function

answer

utility function U(X,Y) = (X^a)(Y^1-a), where X and Y are two goods and a is a constant

question

company cost of capital

answer

question

comparative advantage

answer

the ability to produce a good at a lower opportunity cost than another producer; an individual has a relatively lower cost to produce a good than another's cost

question

complements

answer

two goods for which an increase in the price of one leads to a decrease in the demand for the other

question

completely inelastic demand

answer

principle that consumers will buy a fixed quantity of a good regardless of its price

question

constant returns to scale

answer

the situation in which a firm's long-run average costs remain unchanged as it increases output; situation in which output doubles when all inputs are doubled

question

constant-cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

consumer price index

answer

an index of the variation in prices paid by typical consumers for retail goods and other items; measure of the aggregate price level

question

consumer surplus

answer

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

question

contract curve

answer

curve showing all efficient allocations of goods between two consumers, or of two inputs between two production functions

question

cooperative game

answer

game in which participants can negotiate binding contracts that allow them to plan joint strategies

question

corner solution

answer

situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line

question

cost function

answer

function relating cost of production to level of output and other variables that the firm can control

question

Cournot equilibrium (Nash-Cournot equilibrium)

answer

question

cournot model

answer

oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce

question

cross-price elasticity of demand

answer

question

cyclical industries

answer

industries in which sales tend to magnify cyclical changes in gross domestic product and national income

question

deadweight loss

answer

net loss of total surplus that results from an action that alters a market equilibrium

question

decreasing returns to scale

answer

situation in which output less than doubles when all inputs are doubled

question

decreasing-cost industry

answer

question

demand curve

answer

a graph of the relationship between the price of a good and the quantity demanded

question

law of demand

answer

consumers buy more of a good when its price decreases and less when its price increases

question

derived demand

answer

demand for an input that depends on, and is derived from, both the firm's level of output and the cost of inputs

question

deviation

answer

difference between expected payoff and actual payoff

question

diminishing marginal utility

answer

principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility

question

discount rate

answer

the minimum interest rate set by the Federal Reserve for lending to other banks; rate used to determine the value today of a dollar received in the future

question

diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output; doubling output requires more than a doubling of cost

question

diseconomies of scope

answer

situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product

question

diversifiable risk

answer

Risk that can be eliminated either by investing in many projects or by holding the stocks of many companies

question

diversification

answer

practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related

question

dominant firm

answer

firm with a large share of total sales that sets price to maximize profits, taking into account the supply response of smaller firms

question

dominant strategy

answer

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

question

duopoly

answer

an oligopoly consisting of only two firms

question

economic cost

answer

cost to a firm of utilizing economic resources in production

question

economic efficiency

answer

maximization of aggregate consumer and producer surplus

question

economic rent

answer

amount that firms are willing to pay for an input less the minimum amount necessary to obtain it

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises; output can be doubled for less than a doubling of the cost

question

economies of scope

answer

joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

question

edgeworth box

answer

diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes

question

effective yield (rate of return)

answer

percentage return that one receives by investing in a bond

question

efficieny wages

answer

a firm pays employees enough to incentivize and not shirk

question

efficiency wage theory

answer

question

elasticity

answer

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

question

endowment effect

answer

the tendency for people to inflate the value of objects, goods, or services they already own

question

engel curve

answer

curve relating the quantity of a good consumed to income

question

equal marginal principle

answer

principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods

question

equilibrium

answer

price that equates the quantity supplied to the quantity demanded

question

equilibrium in dominant strategies

answer

outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing

question

excess demand

answer

at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

question

excess supply

answer

at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

question

exchange economy

answer

market in which two or more consumers trade two goods among themselves

question

expansion path

answer

a curve that shows a firm's cost-minimizing combination of inputs for every level of output; passes through points of tangency between a form's isocost lines and its isoquants

question

expected return

answer

return that an asset should earn on average

question

expected utility

answer

sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur

question

expected value

answer

the average of each possible outcome of a future event, weighted by its probability of occurring

question

extent of a market

answer

boundaries of a market, both geographical and in terms of range of products produced and sold within it

question

externality

answer

action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price.

question

factors of production

answer

Land, labor, and capital; the three groups of resources that are used to make all goods and services

question

first degree price discrimination

answer

charging each individual customer a different price based on their willingness to pay; charge each customer their reservation price

question

fixed cost (FC)

answer

cost that does not vary with the level of output and that can be eliminated only by shutting down

question

fixed input

answer

production factor that cannot be varied

question

fixed proportions production function (perfect complements)

answer

production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

question

framing

answer

tendency to rely on the context in which a choice is described when making a decision

question

free entry and exit

answer

when new producers can easily enter into an industry and existing producers can easily leave that industry; no special costs that make it difficult for a firm to enter

question

free rider

answer

a consumer or producer who does not pay for a nonexclusive good in the expectation that others will

question

game

answer

situation in which players (participants) make strategic decisions that take into account each other's actions and responses

question

general equilibrium analysis

answer

simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account

question

giffen good

answer

good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect, has to be an inferior good

question

horizontal integration

answer

system of consolidating many firms in the same business; organizational form in which several plants produce the same or related products for a firm

question

human capital

answer

the knowledge, skills, and experience that make an individual ore productive and thereby able to earn a higher income over a lifetime

question

import quota

answer

a limit on the amount of a good that can be imported

question

income effect

answer

a change in consumption of a good, resulting from an increase in purchasing power, with relative prices held constant

question

income elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

question

increasing returns to scale

answer

situation in which output more than doubles when all inputs are doubled

question

increasing cost industry

answer

question

indifference curve

answer

a curve that shows consumption bundles that give the consumer the same level of satisfaction

question

indifference map

answer

graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

question

individual demand curve

answer

illustrates the relationship between quantity demanded and price for an individual consumer

question

inferior good

answer

a good that consumers demand less of when their incomes increase

question

infinitely elastic demand

answer

question

interest rate

answer

rate at which one can borrow or lend money

question

intertemporal price discrimination

answer

practice of separating consumers with different demand functions into different groups by charging different prices at different points in time.

question

isocost line

answer

graph showing all possible combinations of labor and capital that can be purchased for a given total cost

question

isoelastic demand curve

answer

demand curve with a constant price elasticity

question

isoquant

answer

curve showing all possible combinations of inputs that yield the same output

question

isoquant map

answer

graph combining a number of isoquants, used to describe a production function

question

kinked demand curve model

answer

oligopoly model in which each firm faces a demand curve kinked at the currently prevailing price: at higher prices demand is very elastic, whereas at lower prices it is inelastic

question

labor productivity

answer

the amount of goods and services that a person can produce in a given time; output per worker; average product of labor for an entire industry

question

lagrangian

answer

function to be maximized or minimized, plus a
variable (the Lagrange multiplier) multiplied by the constraint.

question

law of diminishing marginal returns

answer

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

question

learning curve

answer

graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output

question

linear demand curve

answer

a straight-line curve; such as a demand curve has a constant slope but usually has a varying price elasticity

question

long run

answer

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

question

long run average cost curve (LAC)

answer

curve relating average cost of production to output when all inputs, including capital, are variable

question

long-run competitive equilibrium

answer

all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.

question

long run marginal cost curve (LMC)

answer

curve showing the change in long-run total cost as output is increased incrementally by 1 unit.

question

loss aversion

answer

the tendency to care more about avoiding losses than about achieving equal-size gains

question

macroeconomics

answer

branch of economics that deals with aggregate economic variables, such as the level of growth rate of national output, interest rates, unemployment, and inflation

question

marginal benefit

answer

the additional benefit to a consumer from consuming one more unit of a good or service

question

marginal cost

answer

the increase in total cost that arises from an extra unit of production

question

marginal expenditure

answer

additional cost of buying one more unit of a good

question

marginal expenditure curve

answer

curve describing the additional cost of purchasing one additional unit of a good

question

marginal external benefit

answer

increased benefit that accrues to other parties as a firm increases output by one unit

question

marginal external cost

answer

increase in cost imposed externally as one or more firms increase output by one unit

question

marginal product

answer

the additional quantity of output that is produced by using one more unit of that input

question

marginal rate of substitution (MRS)

answer

maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good, slope of the indifference curve

question

marginal rate of technical substitution (MRTS)

answer

amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant, slope of the firm's isoquant

question

marginal rate of transformation (MRT)

answer

question

marginal revenue (MR)

answer

the change in total revenue from an additional unit sold

question

marginal revenue product

answer

additional revenue resulting from the sale of output created by the use of one additional unit of an input

question

marginal social benefit

answer

the sum of the marginal private benefit and the marginal external benefit of production or consumption

question

marginal social cost

answer

sum of the marginal private cost and the marginal external cost

question

marginal utility (MU)

answer

the additional satisfaction gained by the consumption or use of one more unit of a good or service

question

market

answer

collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products

question

market basket (bundle)

answer

list with specific quantities of one or more goods

question

market definition

answer

determination of the buyers, sellers, and range of products that should be included in a particular market

question

market demand curve

answer

the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product

question

market failure

answer

a situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

question

market mechanism

answer

tendency in a free market for price to change until the market clears

question

market power

answer

the ability of a seller or buyer to alter the market price of a good or service

question

market price

answer

the price determined by supply and demand; prevailing price in a competitive market

question

market signaling

answer

process by which sellers send signals to buyers conveying information about product quality

question

maximin strategy

answer

strategy that maximizes the minimum gain that can be earned

question

method of lagrange multipliers

answer

technique to maximize or minimize a function subject to one or more constraints.

question

microeconomics

answer

a branch of economics that deals with the behavior of individual economic units - consumers, forms, workers, investors - as well as the market that these units comprise

question

mixed strategy

answer

strategy in which a player makes a random choice among two or more possible actions, based on a set of chosen probabilities

question

monopolistic competition

answer

a market in which firms can enter freely, each producing its own brand or version of a differentiated product

question

monopoly

answer

a market in which there are many buyers but only one seller.

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monopsony

answer

a market with only one buyer

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monopsony power

answer

buyer's ability to affect the price of a good

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moral hazard

answer

when a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event

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nash equilibrium

answer

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natural monopoly

answer

firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms

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negatively correlated variable

answer

variables having a tendency to move in opposite directions

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net present value (NPV) criterion

answer

rule holding that one should invest if the present value of the expected future cash flow from an investment is larger than the cost of the investment

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network externality

answer

situation in which each individual's demand depends on the purchases of other individuals

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nominal price

answer

absolute price of a good, unadjusted for inflation

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noncoopertive game

answer

game in which negotiation and enforcement of binding contracts are not possible

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nondiversifiable risk

answer

Risk that cannot be eliminated by investing in many projects or by holding the stocks of many companies

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nonexclusive good

answer

good that people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use

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nonrival good

answer

good for which the marginal cost of its provision to an additional consumer is zero

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normative anaylsis

answer

analysis concerned with what ought to be

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oligopoly

answer

a market structure in which only a few sellers offer similar or identical products, and entry by new firms is impeded

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oligopsony

answer

a market with only a few buyers

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opportunity cost

answer

the most desirable alternative given up as the result of a decision; cost associated with opportunities forgone when a form's resources are not put to their best alternative use

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opportunity cost of capital

answer

rate of return that one could earn by investing in an alternate project with similar risk

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optimal strategy

answer

strategy that maximizes a player's expected payoff

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ordinal utility function

answer

utility function that generates a ranking of market baskets in order of most to least preferred

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pareto efficient allocation

answer

allocation of goods in which no one can be made better off unless someone else is made worse off

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parallel conduct

answer

form of implicit collusion in which one firm consistently follows actions of another

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partial equilbrium analysis

answer

determination of equilibrium prices and quantities in a market independent of effects from other markets

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payoff

answer

value associated with a possible outcome

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payoff matrix

answer

table showing profit (or payoff) to each firm given its decision and the decision of its competitor

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peak load pricing

answer

practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high.

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perfect complements

answer

two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles

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perfect substitutes

answer

two goods for which the marginal rate of substitution of one for the other is a constant

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perfectly competitive market

answer

a market with many sellers and buyers of a homogeneous product and no barriers to entry

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perpetuity

answer

bond paying out a fixed amount of money each year, forever

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point elasticity of demand

answer

price elasticity at a particular point on the demand curve

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positive analysis

answer

analysis describing relationships of cause and effect

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positively correlated variables

answer

variables having a tendency to move in the same direction

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predatory pricing

answer

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market to enjoy higher profits

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present discounted value (PDV)

answer

the current value of an expected future cash flow

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price discrimination

answer

practice of charging different customers different prices for the same product

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price elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

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price elasticity of supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

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price leadership

answer

pattern of pricing in which one firm regularly announces price changes that other firms then match

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price of risk

answer

extra risk that an investor must incur to enjoy a higher expected return

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price rigidity

answer

characteristic of oligopolistic markets by which firms are reluctant to change prices even if costs or demands change

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price signaling

answer

form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit

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price support

answer

price set by government above free-market level and maintained by governmental purchases of excess supply

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price taker

answer

a firm that has no influence over the price at which it sells its product

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price consumption curve (PCC)

answer

curve tracing the utility-maximizing combinations of two goods as the price of one changes

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principal

answer

individual who employs one or more agents to achieve an objective

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principal-agent problem

answer

a problem arising from conflict between the objectives of the principals and those of the agents who take decisions on their behalf

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prisoners' dilemma

answer

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producer price index (PPI)

answer

measure of the aggregate price level for intermediate products and wholesale goods

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producer surplus

answer

sum of all units produced by a form of differences between the market price of a good and the marginal cost of production

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product transformation curve

answer

curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs

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production function

answer

function showing the highest output that a firm can produce for every specified combination of inputs

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production possibilities frontier (PPF)

answer

a curve showing all combinations of two goods that can be produced with the resources and technology currently available; derived from the production contract curve

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profit

answer

the difference between total revenue and total cost

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property rights

answer

legal rules stating what people or forms may do with their property

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public good

answer

the marginal cost of provision to an additional customer is zero and people cannot be excluded from consuming it; non excludable and non rival

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pure strategy

answer

strategy in which a player makes a specific choice or takes a specific action

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quantity forcing

answer

use of a sales quota or other incentives to make downstream firms sell as much as possible.

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reaction curve

answer

relationship between a firm's profit-maximizing output and the amount it thinks its competitor will produce

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real price

answer

price of a good relative to an aggregate measure of prices; price adjusted for inflation

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real return

answer

simple (or nominal) return on an asset, less the rate of inflation

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reference point

answer

the point from which an individual makes a consumption decision

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rent seeking

answer

spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly

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rental rate

answer

cost per year of renting one unit of capital

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repeated game

answer

game in which actions are taken and payoffs received over and over again

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reservation price

answer

maximum price that a customer is willing to pay for a good

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return

answer

total monetary flow of an asset as a fraction of its price

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returns to scale

answer

rate at which output increases as inputs are increased proportionately

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risk averse

answer

condition of preferring a certain income to a risky income with the same expected value
expected utility(lottery) < U(expected value)

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risk loving

answer

condition of preferring a risky income to a certain income with the same expected value

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risk neutral

answer

condition of being indifferent between a certain income and an uncertain income with the same expected value

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risk premium

answer

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riskless (risk-free) asset

answer

asset that provides a flow of money or services that is known with certainty

question

risky asset

answer

asset that provides an uncertain flow of money or services to its owner

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R-squared statistic

answer

percentage of the variation in the dependent variable that is accounted for. by all the explanatory variables

question

salience

answer

the perceived importance of a good or service

question

second degree price discrimination

answer

practice of charging different prices per unit for different quantities of the same good or service

question

sequential game

answer

game in which players move in turn, responding to each other's actions and reactions

question

shirking model

answer

principle that workers still have an incentive to shirk if a firm pays them a market-clearing wage, because fired workers can be hired somewhere else for the same wage.

question

short run

answer

a period of time sufficiently short that at least some of the firm's factors of production are fixed

question

short run average cost curve (SAC)

answer

curve relating average cost of production to output when level of capital is fixed

question

shortage

answer

a situation in which quantity demanded is greater than quantity supplied

question

snob effect

answer

negative network externality in which a consumer wishes to own an exclusive or unique good

question

social rate of discount

answer

opportunity cost to society as a whole of receiving an economic benefit in the future rather than the present

question

social welfare function

answer

measure describing the well-being of society as a whole in terms of the utilities of individual members

question

specific tax

answer

tax of a certain amount of money per unit sold

question

speculative demand

answer

demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase

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stackelberg model

answer

oligopoly model in which one firm sets its output before other firms do

question

stock of capital

answer

total amount of capital available for use in production

question

strategy

answer

rule or plan of action for playing a game

question

subsidy

answer

payment reducing the buyer's price below the seller's price

question

substitutes

answer

two goods for which an increase in the price of one leads to an increase in the demand for the other

question

substitution effect

answer

change in consumption of a good associated with a change in its price, with the level of utility held constant

question

sunk cost

answer

expenditure that has been made and cannot be recovered

question

supply curve

answer

a graph of the relationship between the price of a good and the quantity supplied

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law of supply

answer

Tendency of suppliers to offer more of a good at a higher price

question

surplus

answer

a situation in which quantity supplied is greater than quantity demanded

question

tariff

answer

a tax on imported goods

question

technical efficiency

answer

condition under which firms combine inputs to produce a given output as inexpensively as possible

question

technological change

answer

development of new technologies allowing factors of production to be used more effectively

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theory of consumer behavior

answer

description of how consumers allocate incomes among different goods and services to maximize their well-being

question

theory of the firm

answer

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

question

third degree price discrimination

answer

practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group

question

tit-for-tat strategy

answer

repeated game strategy in which a player responds in kind to an opponents previous play, cooperating with cooperative opponents and retaliating against uncooperative ones

question

total cost (TC)

answer

total economic cost of production, consisting of fixed and variable costs

question

transfer prices

answer

internal prices at which parts and components from upstream divisions are "sold" to downstream divisions within a firm

question

two part tariff

answer

form of pricing in which consumers are charged both an entry and a usage fee

question

tying

answer

practice of requiring a customer to purchase on good in order to purchase another

question

user cost of capital

answer

annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest

question

user cost of production

answer

opportunity cost of producing and selling a unit today and so making it unavailable for production and sale in the future

question

utility

answer

numerical score representing the satisfaction that a consumer gets from a given market basket

question

utility function

answer

formula that assigns a level of utility to individual market baskets

question

utility possibility frontier

answer

curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals

question

value of complete information

answer

difference between the expected value of a choice when there is complete information and the expected value when information is incomplete

question

variability

answer

extent to which possible outcomes of an uncertain event differ

question

variable cost (VC)

answer

cost that varies as output varies

question

variable profit

answer

sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs.

question

vertical integration

answer

organizational form in which a form contains several divisions, with some producing parts and components that others use to produce finished products

question

welfare economics

answer

the branch of economics that studies how the allocation of resources affects economic well-being; normative evaluation of markets and economic policy

question

welfare effects

answer

gains and losses to consumers and producers

question

zero economic profit

answer

a firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

question

reinvestment Risk

answer

the risk that a fixed-income investor will not be able to reinvest interest payments or the par value at attractive interest rates. Happens when rates are falling

question

feedback effect

answer

a price or quantity adjustment in one market caused by price and quantity adjustments in related markets

question

invisible hand

answer

a term coined by Adam Smith to describe the self-regulating nature of the marketplace

question

equity

answer

a condition in which people receive from a relationship in proportion to what they give to it

question

egalitarian

answer

all members of society receive equal amounts of goods

question

rawlsian

answer

maximize the utility of the least well-off person

question

utilitarian

answer

maximize the total utility of all members of society

question

market-oriented

answer

the market outcome is the most equitable

question

first theorem of welfare economics (FTWE)

answer

if everyone trades in the competitive marketplace, all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be pareto efficient

question

second theorem of welfare economics (STWE)

answer

question

output efficiency

answer

a mix of outputs that simultaneously supports exchange and input efficiency; MRS = MRT = MCx/MCy = Px/Py

question

input: IOU

answer

input: other under

question

output: OOO

answer

output: other over

question

efficiency in exchange

answer

question

efficiency in the use of inputs in production

answer

question

efficiency in the output market

answer

question

shut down condition (short run)

answer

when price is less than average variable cost, total revenue must cover total variable costs in the short run to continue producing, MC = AVC

question

shut down condition (long run)

answer

revenue is unable to cover total costs, firm will be making losses in long run

question

profit maximizing condition

answer

MR=MC=P

question

monopoly power

answer

the ability of a firm to make it impossible for rival firms to compete with it, either through advertising or in some other way, MR will be less than price for firms

question

zero economic profit condition

answer

P = ATC

question

price taking condition

answer

MC = P

question

coupon payment

answer

an interest payment on a bond, (Face Value) x(Coupon rate)

question

face value of a bond

answer

the amount the issuer of a bond will have to pay on the maturity date.

question

coupon rate

answer

the interest rate that a bond issuer will pay to a bondholder, the annual coupon divided by the face value of a bond

question

maturity rate

answer

the date on which the final payment on a bond is due from the bond issuer to the investor

question

yield to maturity (YTM & i)

answer

the rate of return a bondholder will receive if the bond is held to maturity

question

fave values of bonds vs interest and coupon rates

answer

Price (bond) < face value when i > coupon rate
Price (bond) = face value when i = coupon rate
Price (bond) > face value when i < coupon rate

question

strict monotonicity

answer

more is better

question

convexity

answer

tend to prefer combinations to extremes

question

weak monotonicity

answer

more is at least as good

question

utility optimization condition

answer

legrange = u(x,y) + lamda(I - ((Px)X) -((Py)Y))
MRS = MUx/MUy = Px/Py
Px(x) + Py(Y) = I

question

quasi linear preferences

answer

question

cross price elasticity with complements

answer

negative

question

cross price elasticity with substitutes

answer

positive

question

income elasticity of interior goods

answer

negative

question

income elasticity of normal goods

answer

positive

question

interior solution

answer

an optimal bundle that is a combination of both goods, the budget constraint and the indifference curve have the same slope at the point where they touch (tangent)

question

income consumption curve (ICC or income expansion path)

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes, prices held constant
if positive, both good are normal
if negative, one normal, other inferior

question

fisher model (consumption today vs tomorrow)

answer

describes the relationship between inflation and both real and nominal interest rates

question

revealed preference

answer

the idea that people's preferences can be determined by observing their choices and behavior

question

certainty equivalent

answer

the guaranteed income level at which an individual would receive the same expected utility level as from an uncertain income

question

full insurance

answer

payout covers entire loss in the case of an adverse event

question

actuarially fair insurance

answer

expected payout by insurance equals the premium (what you pay)

question

cost minimization conditions

answer

legrange = wL + rK + lamda[q - F(L,K)]
MRTS = MPL/MPK = w/r
q = F(K,L)

question

perfect substitutes function

answer

q = aL + Kb
MRTS = a/b
interior (if w =r): q = L + K, TC = wL + rK
corner (if w > r): L = 0, K = q, TC= rK

question

perfect complements function

answer

q = min[aK,bL]
aK = bL, TC* = (w+r)q

question

bang to buck ratio

answer

MPL/w = MPK/r

question

implicit yield

answer

the difference between the current yield (dividend) paid on a bond and the rate that the bondholder will receive at a fixed point in the future

question

interest rate risk

answer

the risk that arises for bond owners from fluctuating interest rates

question

output expansion path

answer

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