Microeconomics Hubbard / O’Brien

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

The study of the choices people make to attain their goals, given their scarce resources.

A simplified version of reality used to analyze real-world economic situations.

1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Analysis that involves comparing marginal benefits and marginal costs.

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

The highest-valued alternative that must be given up to engage in an activity.

1. What goods and services will be produced?
2. How will the good and services be produced?
3. Who will receive the goods and services produced?

An economy in which the government decides how economic resources will be allocated.

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

A situation in which a good or service is produced at the lowest possible cost.

A state of the economy in which production is in accordance to consumer preferences; In particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.

The fair distribution of economic benefits.

Something measurable that can have different values, such as the wages of software programmers.

Concerned with what is.

Concerned with what should be.

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their chocies.

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

The total amount received for selling a good or service.

The difference between revenue and costs.

Manufactured goods used to produce other goods or services, such as computers, factories, tools, and trucks.

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Production that fully utilizes all available resources, and the fewest possible resources are being used to produce a given amount of output. All points on a production possibilities frontier.

Maximum output is not being obtained from available resources.

The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. Illustrated by an outward bowed PPF.

Entire PPF curve expands upward and rightward

The ability of the economy to increase the production of goods and services.

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same resources.

Markets for the factors of production, labor, capital, natural resources, and entrepreneurial ability.

Firms purchase factors from households through factor markets, and sell householders goods and services through product markets.

The table showing the relationship between the price of a product and the quantity of the product demanded.

The amount of a good or service that a consumer is willing and able to purchase at a given price.

A curve that shows the relationship between the price of a product and the quantity demanded.

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded will decrease.

The change in quantity demanded that results from a change in price, making that good or service more or less expensive RELATIVE to other goods that are substitutes.

The change in quantity demanded that results from the effect of a change in the good's price on consumers' purchasing power.

"All else equal."

1. Income
2. Prices of related goods
3. Tastes
4. Population and demographics
5. Expected future prices

Increases is income increase demand for normal goods and decrease demand for inferior goods.

If the price of a substitute increases, demand increases.

If the cost of a complement increases, demand for the product decreases.

As expected future price increases, demand increases.

1. Price of inputs
2. Technological change
3. Prices of substitutes in production
4. Number of firms in the market
5. Expected future prices

The amount of a good or service that a firm is willing and able to supply at a given price.

Demand curve is downward, supply curve is upward.

The rule that, everything else constant, increases in price cause increases in quantity supplied, and decreases in price causes decreases in quantity supplied.

As prices of inputs increase, supply decreases.

As the price of the substitute increases, supply decreases.

As expected future price increases, supply decreases.

As productivity increases, supply increases.

As the number of firms increases, supply increases.

A situation in which quantity demanded equals quantity supplied.

A situation in which the quantity supplied is greater than the quantity demanded.

A situation in which the quantity demanded is greater than the quantity supplied.

The equilibrium price falls.

The equilibrium price rises.

A legally determined maximum price that sellers may charge.

A legally determined minimum price that sellers may receive.

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays.

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

The additional cost to a firm of producing one more unit of a good or service.

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

The sum of consumer and producer surplus.

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. The sum of consumer surplus and producer surplus will be at maximum.

A price floor increases producer surplus and reduces consumer surplus. This results in a deadweight loss due to a permanent surplus of production.

A price floor increases consumer surplus and reduces producer surplus. This results in a deadweight loss to due a permanent shortage.

A minimum wage creates a deadweight loss due to a permanent surplus of workers.

A market in which buying and selling take place at prices that violate government price regulations.

When the tax on a good or service increases, less are supplied.

The actual division of the burden of a tax between buyers and sellers in a market.

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

The total cost of a good or service, including the private cost plus any external cost.

The cost bourne by the producer of a good or service.

The benefit received by the consumer of a good or service.

The total benefit from consuming a good or service, including both the private benefit and any external benefit.

When there is a negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium, because marginal social cost is greater than marginal private cost.

When there is a positive externality in producing a good or service, too little of the good or service will be produced at market equilibrium, because marginal social benefit is greater than marginal private cost.

A situation in which the market fails to produce the efficient level of output.

If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. In reality, this seldom happens.

The most economically efficient level of pollution is that at which the marginal benefit from pollution reduction equals the marginal cost.

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

The approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring specific pollution controls.

The situation when one person's consumption of a good prevents others from consuming it.

The situation in which those who do not pay for a good or service cannot consume it.

Goods that are both rival and excludable. Example: Sandwich.

A good that is nonrival and nonexcludable. Example: National defense.

Goods that are excludable but not rival. Example: Cable TV.

A good that is rival but not excludable. Example: Forest land in many poor countries.

The tendency of a common resource to be overused.

A measure of how much one economic variable responds to changes in another economic variable.

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Percentage change in quantity demanded is greater than the percentage change in price. In other words, PE > 1.

Percentage change in quantity demanded is less than the percentage change in price. In other words, PE < 1.

Percentage change in quantity demanded is exactly equal to the percentage change in price. In other words, PE = 1.

Absolute value of price elasticity is infinity.

Absolute value of price elasticity is zero. Example: Insulin.

Generally, the more substitutes a product has, the more elastic the demand.

Price elasticity increases with time.

The greater the share of a good in a consumer's budget, the greater the price elasticity.

If demand is elastic, a price increase will decrease revenue.

If demand is elastic, a price increase will increase revenue.

The percentage change in quantity demanded of one good divided by the percentage change int he price of another good.

Negative.

Postitive.

A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income.

Positive and less than one.

Negative

Positive and greater than one.

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in quantity supplied by the percentage change in the product's price.

Availability of substitutes.

Percentage change in quantity demanded divided by percentage change in price.

Flatter is more elastic.

A firm owned by a single individual and not organized as a corporation.

A firm owned jointly by two or more persons and not organized as a corporation.

A form of business that provides owners with protection from losing more than their investment, should the business fail.

The legal provision that shields owners from losing more than they have invested in a firm.

A situation in which the management, not stockholders, control day-to-day operations.

A problem caused by an agent pursuing his own interests rather than that of the principal who hired him.

1. Reinvesting profits
2. Recruiting additional owners
3. Borrowing funds

1. Stocks
2. Bonds

A financial security that represents partial ownership of a firm.

A financial security that represents to repay a fixed amount of funds.

A financial statement that summarizes a firm's revenues, costs, and profits over a period of time.

A financial statement that summarizes a firm's financial position at a point in time (assets and liabilities).

Anything of value owned by a person or firm.

Anything owed to a person or firm. Debt.

A tax imposed by a government on imports.

Goods and services bought domestically but produced by other countries.

Goods and services produced domestically but sold in other countries.

A situation in which a country does not trade with our countries. Example: North Korea.

1. Not all goods and services are traded internationally.
2. Production of most goods involves increasing opportunity costs.
3. Tastes for products differ.

1. Climate and natural resources.
2. Relative abundance of labor and capital.
3. Technology.
4. External economies (areas within a nation can become specialized)

A numerical limit imposed by a government on the quantity of a good that can be imported into the country.

1. Saving jobs.
2. Protecting high wages.
3. Protecting infant industries.
4. Protecting national security.

Selling a product for a price below that of production.

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