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constant unitary elasticity
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when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied
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cross-priced elasticity of demand
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the percentage change in the quantity of good A that id demanded as a result of a percentage change in good B
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elastic demand
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when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
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elastic supply
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when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
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elasticity
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an economics concept that measures responsiveness of one variable to changes in another variable
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elasticity of savings
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the percentage change in the quantity of savings divided by the percentage change in interest rates
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inelastic demand
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when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price change
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inelastic supply
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when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
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infinite/perfect elasticity
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the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
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price elasticity
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the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
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price elasticity of demand
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percentage change in the quantity demanded of a good or service divided by the percentage change in price
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price elasticity of supply
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percentage change in the quantity supplied divided by the percentage change in price
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tax incidence
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manner in which the tax burden is divided between buyers and sellers
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unitary elasticity
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when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
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wage elasticity of labor supply
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the percentage change in hours worked divided by the percentage change in wages
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zero/perfect inelasticity
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the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
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behavioral economics
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a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation
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budget constraint (budget line)
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shows the possible combinations of two goods that are affordable given a consumer's limited incomes
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consumer equilibrium
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point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities
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diminishing marginal utility
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the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
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fungible
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the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of a mutual substitution with each other and carry equal value of the individual
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income effect
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a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
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marginal utility
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the additional utility provided by one additional unit of consumption
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marginal utility per dollar
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the additional satisfaction gained from purchasing a good given the price of a product; MU/price
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substitution effect
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when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
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total utility
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satisfaction derived from consumer choices
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accounting profit
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total revenues minus explicit costs, including depreciation
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average profit
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profit divided by the quantity of output produced; also known as profit margin
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average total cost
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total cost divided by the quantity of output
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average variable cost
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variable cost divided by the quantity of output
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constant returns of scale
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expanding all inputs proportionately does not change the average cost of production
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diminishing marginal productivity
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general rule that as a firm employs more labor, eventually the amount of additional output produced declines
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diseconomies of scale
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the long-run average cost of producing output increases as total output increases
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economic profit
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total revenues minus total costs (explicit plus implicit costs)
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economies of scale
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the long-run average cost of producing output decreases as total output increases
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explicit cots
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out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
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factors of production (inputs)
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resources that firms use to produce their products, for example, labor and capital
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firm
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an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
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fixed cost
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cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level
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fixed inputs
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factors of production that can't be easily increased or decreased in a short period of time
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implicit costs
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opportunity cost of resources already owned by a firm and used in business, for example, expanding a factory onto land already owned
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long run
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period of time during which all of a firm's inputs are variable
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long-run average cost (LRAC) curve
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shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
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marginal cost
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the additional cost of producing one more unit
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marginal product
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change in a firm's output when it employees more labor
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private enterprise
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the ownership of businesses by private individuals
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production
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the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
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production function
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mathematical equation that tells how much output a firm can produce with given amounts of the inputs
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production technologies
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alternative methods of combining inputs to produce output
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revenue
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income from selling a firm's product; defined as price times quantity sold
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short run
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period of time during which at least one or more of the firm's inputs is fixed
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short-run average cost (SRAC) curve
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the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
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total cost
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the sum of fixed and variable costs of production
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total product
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synonym for a firm's output
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variable cost
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cost of production that increases with the quantity produced; the cost of the variable inputs
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variable inputs
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factors of production that a firm can easily increase or decrease in a short period of time
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