Economic Principles-Microeconomics Terms

studies the decisions made by individual consumers and firms

studies the economy as a whole

individuals who purchase services and goods

the organizations which buy these factors and use them to produce goods and services

how much buying and selling goes on in the economy over a period of time

all the production and exchange activities that take place

the limited nature of society's resources

-people face trade offs
-opportunity cost
-rational people think in the margin
-people respond to incentives
-trade can make everyone better off
-markets can be a good way to organize economic activity
-govts can sometimes improve market outcomes
-an economy's standard of living depends on its ability to produce
-prices rise when the govt prints too much money
-society faces a trade-off bt inflation and unemployment

the loss of benefits from a decision to forego or sacrifice one option balanced against the benefits incurred from the choice made

the property of society getting the most it can from its scarce resources

the property of economic prosperity being distributed evenly amongst members of society

whatever must be given up to obtain some item

sacrifice of good x/gain in good y

a small incremental adjustment

an individual, firm or organization that has an impact in some way on an economy

the assumption that decision makers can make consistent choices bt alternatives

the benefit you get from an incremental adjustment

total revenue minus total cost

the way in which resources are organized and allocated to provide for the needs of an economy's citizens

incorporates the principles of the private ownership of factors of production to produce goods ans services which are exchanged through a price mechanism

an economy that allocates resources through the decentralized decisions in the marketplace

-consumers can buy whatever/firms can producer whatever

econ activity organized by central planners who decided on the answers to fundamental econ questions

the govt plans how much should be produced

a situation where scarce resources are not allocated to their most efficient use

the cost or benefit of a good or service that is not included in the purchase price of that good or service

when a firm faces little competition and have significant control over the price

the increase in the number of goods and services produced in an economy over a period of time

the total value of all the goods and services produced in a country divided by how many people live there

-Avg income of all the ppls of your country

the amount of goods and services that can be produced by the population of a country

what determines a country's GDP per capita

-# of goods and services that can be produces by each hour of a worker's time

an increase in the overall level of prices in the economy

a curve that shows the short-run trade-off between inflation and unemployment

a representation of reality which facilitates understanding of how something works

a model which replicates how the economy as a whole works

illustrates many basic economic concepts

an input into the production process such as labour or machines

a variable who's value is determined within the model

a variable whose value is determined outside the model

a term used to describe analysis where one variable in the model is allowed to vary while others are held constance

a conclusion or explanation derived from evidence and reasoning

begins with known truths or facts

begins with data and observations

the possibility of a theory being rejected as a result of the new observations or new data

a view that the market is a central feature in generating well being and answering the 3 questions all societies have to face

argues econ well-being is not simply provided through market exchange but also includes unpaid work carried out in the home

views firms and markets not as entities but as collections of humans, and it is these humans who make decisions

believe business cycles are caused by government intervention in the economy

claims that attempt to describe the world as it is
-testable
-based on facts

claims that attempt to prescribe how the world should be
-not testable
-prescriptive, value based statement

occurs when competing forces are balanced and stability is achieved

- once reached the system will stay right there unless outside conditions change

a group of buyers and sellers of a particular good or service

a market in which there are many buyers and sellers so that each has a negligible impact on the market price

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

a table that shows the relationship between the price of a good and the quantity demanded

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

a person's real income has increased, and part of the increase in quantity demanded can be put down into this effect

-the change in consumption that results when a price changes moves the consumer to a higher or lower indifference curve

the sum of all the individual demands for a particular good or service

shows how the total quantity demanded of a good varies as the price of the good varies, while all the other factors that affect how much consumers want to buy are held constant

shifts demand curve to the right

shifts the demand curve to the left

two goods for which an increase in the price of one leads to an increase in the demand for other (and vice versa)

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

a good for which, ceteris paribus, an increase in income leads to an increase in demand

a good for which, other things equal, an increase in income leads to a decrease in demand

ex- public transportation

the claim that the quantity supplied of a good rises when the price of the good rises

a table that shows the relationship bt the price of a good and the quantity supplied

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

shifts the supply curve to the right

shifts the supply curve to the left

the price where the quantity demanded is the same as quantity supplied

the quantity bought and sold at the equilibrium price

A situation in which quantity supplied is greater than quantity demanded at the going market price

A situation in which quantity demanded is greater than quantity supplied

the comparison of one initial static equilibrium with another

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

a measure of how much the quantity demanded of a good responds to a change in the price of that good

-always negative
-Between 0 and 1, elasticity is said to be price inelastic
-If elasticity is greater than 1 it said to be price elastic

the greater the price elasticity of demand

the amount paid by buyers, computed as the price of the good times the quantity purchased

PxQ

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

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

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

if the quantity supplied responds substantially to changes in the price

greater than 1

if the quantity supplied responds only slightly to changes in the price

less than 1

when supply curve is vertical

when supply curve is horizontal

The amount received by sellers of a good,
-computed as the price of the good times the quantity sold

PxQ

people may earn more money now than they did 20 years Ago, but evidence suggests that as people's incomes increase, they spend a smaller proportion of income on food

(SEM) assumes humans behave rationally when making assumption choices

only make decisions based on a very strict set of assumptions

the worth to an individual of owning an item represented by the satisfaction derived from its consumption and their willingness to pay to own it

the satisfaction derived from the consumption of a certain quantity of a product

where both the ordering and the magnitude matter

(WTP) how much of our limited income we are prepared to pay is a reflection of the value we out on acquiring a good

the limit on the consumption that a consumer can afford

some combination of goods and services that the consumer might purchase

the set of alternatives available to the consumer

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

the consumer is able to compare any 2 bundles

- The consumer can state that A is preferred to B, B is preferred to A, or that they are indifferent bt the 2

If a>b and b>c, then a>c

1. indifference curves are downward sloping
2. higher indifference curves are preferred to lower ones
3. indifference curves cannot cross
4. indifference curves are bowed inward

the satisfaction gained from the consumption of a good

the addition to the total utility as a result of consuming one extra unit of a good

the tendency for the additional satisfaction from consuming extra units of a good to fall

(MRS) the rate at which an consumer is willing to trade one good for another

two goods with straight line indifference curves

two goods with right angle indifference curves

the point at which this indifference curve and budget constraint touch

- Slope of the indifference curve and slope of the budget constraint are equal here

the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

a line showing the consumer optimum as the price of one of the goods changes, assuming incomes and the price of the good are held constant

a good for which an increase in price raises the quantity demanded

rare, never really been discovered

as income rises, the proportion spent on food decreases, whereas the proportion of income devoted to other goods, such as leisure, increases

the idea that humans make decisions under the constraints of limited and sometimes unreliable information

short cuts or rules of thumb that ppl use in decision making

input costs that require an outlay of money by the firm

input costs that do not require an outlay of money by the firm

the period of time in which some factors of production cannot be charged

the period of time in which all factors of production can be altered

the increase in output that arises from an additional unit of input

MP=Q/L

L=(labour)

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Q= square root of LxK

the property whereby the marginal product of an input declines as the quantity of the input increases

o graphs the 2 columns of data w/the quantity produced on the horizontal axis and total cost on the vertical axis

costs that are not determined by the quantity of output produced

costs that are dependent on the quantity of output produced

TC (Q)= VC (Q) + FC

(ATC) total cost divided by the quantity of output

ATC= TC/Q

(AFC) fixed costs divided by the quantity of output

AFC= FC/Q

variable costs divided by the quantity of output

AVC=VC/Q

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

MC=TC/Q

the quantity of the output that minimizes avg total cost

the property whereby long-run average total cost stays the same as the quantity of output changes

the property whereby long-run average total cost falls as the quantity of output increases

the property whereby long-run average total cost rises as the quantity of output increases

% in quantity of output/% in quantity of all factor inputs

The advantages of large scale production that arise through the growth of the firm

refers to the ability of firms operating at scale to be able to negotiate lower prices for supplies and other factor inputs

the smaller the firm the more risk associated with it from the lender's perspective

large firms can employ specialists in different areas of the business with expertise that can help the business become more efficient

smaller firms tend to be associated with a greater risk of failure

the advantages of large scale production that arise through the growth and concentration of the industry

occurs where output is at its maximum from a given set of factor inputs

the failure of a firm to operate at max efficiency due to a lack of competitive pressure and reduced incentives to control costs

AR= TR/Q

TR=PxQ

the change in total revenue from an additional unit sold

the minimum amount required to keep factors of production in their current use

the profit over and above normal profit

refers to a short-run decision not to produce anything during a specific period of time because of current market conditions

refers to a long-run decision to leave the market

Exit if P<ATC
Enter if P>ATC

a cost that already has been committed and cannot be recovered

the study of how the allocation of resources affects economic well-being

the way in which people evaluate their own happiness

measure the quality of life using specified indicators

a resource allocation where the value of the output by sellers matches the value placed on that output by buyers

skilled and unskilled workers

buildings, machinery, and inventory

intermediate inputs such as raw plastics, cotton, aluminim, wood, water, etc

a buyer's willingness to pay minus the amount the buyer actually pays

an interaction resulting in an agreed outcome bt two interested and competing economic agents

the value of everything a seller must give up to produce a good

the amount a seller is paid for a good minus the seller's cost of providing it

the property that total surplus received by all those in society is maximized

the notion that the decisions and choices of economic agents are coordinated across markets

the total value to buyers of the goods, as measured by their willingness to pay, minus the cost to sellers of providing those goods

Total surplus= value to buyers - cost to sellers

occurs if it is not possible to reallocate resources in such a way as to make one person better off without making anyone else worse off

when an action makes at least one economic agent better off without harming another economic agent

the govt has not done a thing, but prices guide us to the efficient allocation

A legal maximum on the price at which a good can be sold

support buyers

A legal minimum on the price at which a good can be sold

supports sellers

a tax levied on income and wealth

a tax levied on the sale of goods and services

a fixed rate tax levied on goods and services expressed as a sum per unit

An indirect tax based on a percentage of the price of a good

the way in which the burden of a tax is shared among participants in a market

the relationship bt the tax rate and revenue

payment to buyers and sellers to supplement income or lower costs and which thus encourages consumption or provides an advantage to the recipient

shifts supply curve down

the fall in total surplus that results from a market distortion, such as a tax

optimizing your affairs so that you pay as little tax as possible without breaking the law- legal

lying ab your affairs in order to reduce the amount of tax paid-illegal

each person should ay according to their ability to pay, so that the rich should pay more in taxes than the poor

1.Equality
-should be charged according to ability to pay

2.Efficiency
-relatively inexpensive to collect

3.Certainty
-tax payer should know how much to pay

4.Convenience
-should be paid when suitable to taxpayer

(ATR) total taxes paid divided by total income

(MTR) the extra taxes paid on an additional dollar of income

a tac that is the same amount for every person

the idea that people should pay taxes based on the benefits they receive from government services

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

states that taxpayers with similar abilities to pay should contribute the same amount

(flat tax) a tax for which high income and low income taxpayers pay the same fraction of income

a tax for which high-income taxpayers pay a smaller fraction of their income than do low income taxpayers

a tax for which high-income taxpayers pay a larger fraction of their income than do low income taxpayers

part of the economy where business activity is owned, financed and controlled by the state, and goods and services are provided by the state on behalf of the whole population

part of the economy where business activity is owned, financed, and controlled by private indivs

the property of a good whereby a person can be prevented from using it when they do not pay for it

the property of a good whereby one person's use diminishes other people's use

goods that are excludable and rival

goods that are neigher excludable nor rival

goods that are rival but not excludable

goods that are excludable but not rival in consumption

when one person uses a common resource, other people are worse off, and yet they are not compensated for this loss

a person who receives the benefit of a good but avoids paying for it

a study that compares the costs and benefits to society of providing a public good

buyers of a private good reveal the value they place on it by the prices they are willing to pay when they purchase and thus use a good

(CVM) this methos is a survey based approach which aims to place a monetary value on a good through getting respondents to state a preference and willingness to to pay

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

goods which can be provided by the market but may be under-consumed as a result of imperfect info ab the benefits

where decisions made today can affect choices facing individuals in the future

goods that are over-consumed if left to the market mechanism and which generate both private and social costs which are not taken into account by the decision maker

the costs imposed on a third part of a decision

the benefits to a third party of a decision

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

the costs that parties incur in the process of agreeing to and following through on a bargain