ECO 110 - Final Exam

Production Possibilities Curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

Labor Union

A group of workers who bargain collectively with employers for better wages and working conditions

Perfectly Competitive Market

A market in which no indivudal supplier has significant influence on the market price of the product

Equation

A mathematical expression that describes the relationship between two or more variables

Price Ceiling

A maximum allowable price, specified by law

Natural Monopoly

A monopoly that results from economies of scale (increasing returns to scale)

Change in the Quantity Demanded

A movement along the demand curve that occurs in response to a change in price

Change in the Quantity Supplied

A movement along the supply curve that occurs in response to a change in price

Long Run

A period of time of sufficient length that all the firm's factors of production are variable

Short Run

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

Constant Returns to Scale

A production process is said to have __________ if, when all inputs are changed by a given proportion, output changes by the same proportion

Increasing Returns to Scale

A production process is said to have ____________________ if, when all inputs are changed by a given proportion, output changes by more than that proportion; also called economies of scale

Efficient Point

Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the order

Inefficient Point

Any combination of goods for which currently available resources enable an increase in the production of the other

Barrier to Entry

Any force that prevents firms form entering a new market

Marginal Benefit

The _____________ of an activity is the increase in total benefit that results from carrying out one additional unit of activity

Explicit Costs

The actual payments a firm makes to its factors of production and other suppliers

Marginal Product of Labor (MP)

The additional output a firm gets by employing one additional unit of labor

Marginal Utility

The additonal utility gained from consuming an additional unit of a good

Consumer Surplus

The economic surplus gained by the buyers of a product as measured by the cumulative difference between their respective reservation prices and the price they actually paid

Producer Surplus

The economic surplus gained by the sellers of a product as measured by the cumulative difference between the price received and their respective reservation prices

Income Elasticity of Demand

The percentage by which a good's quantity demanded changes in response to a 1 percent change in income

Cross-Price Elasticity of Demand

The percentage by which the quantity demanded of the first good changes in response to a 1% change in the price of the second

Price Elasticity of Demand

The percentage change in the quantity demanded of a good or service that results form a one percent change in its price

Price Elasticity of Supply

The percentage change in the quantity supplied that will occur in response to a one percent change in the price of a good or service

Substitutes

Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

Inferior Good

A good whose demand curve shifts leftward when the incomes of buyers increase

Normal Good

A good whose demand curve shifts rightward when the incomes of buyers increase

Supply curve

A graph or schedule showing the quantity of a good that sellers wish to sell at each price

Equilibrium

A balanced or unchanging situation in which all forces at work within a system are cancelled by others

External Benefit (Positive Externality)

A benefit of an activity received by people other than those who pursue the activity

Cartel

A coalition of firms that agree to restrict output for the purpose of earning an economic profit

External Cost (Negative Externality)

A cost of an activity that falls on people other than those who pursue the activity

Fixed Cost

A cost that does not vary with the level of an activity; the sum of all payments made to the firm's fixed factors of production

Sunk Cost

A cost that is beyond recovery at the moment a decision must be made

Variable Cost

A cost that varies with the level of an activity; the sum of all payments made to the firm's variable factors of production

Compensating Wage Differential

A difference in the wage rate - negative or positive - that reflects the attractiveness of a job's working conditions

Perfectly Discriminating Monopolist

A firm that charges each buyer exactly his or her reservation price

Price Taker

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

Profit-Maximizing Firm

A firm whose primary goal is to maximize the difference between its total revenues and total costs

Price Setter

A firm with at least some latitude to set its own price

Market Power

A firm's ability to raise the price of a good without losing all it's sales

Public Good

A good or service that , to at least some degree, is both nonrival and nonexcludable

Collective Good

A good or service that, to at least some degree, is nonrival but excludable

Nonexcludable Good

A good that is difficult, or costly, to exclude nonpayers from consuming

Nonrival Good

A good whose consumption by one person does not diminish its availability for others

Law of Diminishing Returns

A property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factor

Constant (or parameter)

A quantity that is fixed in value

Demand Curve

A schedule or graph showing the quantity of a good that buyers with to buy at each price

Change in Demand

A shift of the entire demand curve

Change in Supply

A shift of the entire supply curve

Effiecient (Pareto-Efficient)

A situation is efficient if no change is possible that will help some people without helping others

Perfectly Elastic Supply Curve

A supply curve whose elasticity with respect to price is infinite

Perfectly Inelastic Supply Curve

A supply curve whose elasticity with respect to price is zero

Head Tax

A tax that collects the same amount from every taxpayer

Regressive Tax

A tax under which the proportion of income paid in taxes declines as income rises

Outsourcing

A term increasingly used to connote having services performed by low-wage workers overseas

Independent Variable

A variable in an equation whose value determines the value taken by another variable in the equation

Dependent Variable

A variable in an equation whose value is determined by the value taken by another variable in the equation

Variable Factor of Production

An Input whose quantity can be altered in the short run

Employer Discrimination

An arbitrary preference by an employer for one group of workers over another

Economic Loss

An economic profit that is less than zero

Externality

An external cost or benefit of an activity

Free-Rider Problem

An incentive problem i nwhich too little of a good or service is produced because nonpayers cannot be excluded from using it

Oligopoly

An industry structure in which a small number of large firms produce products that are either close or perfect substitutes

Factor of Production

An input used in the production of a good or service

Fixed Factor of Production

An input whose quantity cannot be altered in the short run

Efficiency

Condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

Coase Theorem

If at no cost people can negotiate the purchase and sale of the right to perform activities that cuase externalities, they can always arrive at efficeint solutions to the problems caused by externalities

Monopolistic Competition

Industry structure in which a large number of firms produce slightly differentiated products that are resonably close substitutes for one another

Market Equilibrium

Occurs when all buyers and sellers are satisfied with their respective quantities at the market price

Common Resource

One for which nonpayers cannot easily be excluded and for which each unit consumed by one person means one less unit available for others

Progressive Tax

One in which the proportion of income paid in taxes rises as income taxes

Comparitive Advantage

One person has a comparitave advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

Absolute Advantage

One person has an absolute advantage over another if he or she takes fewer hours to perform a task than another person

Proportional Income Tax

One under which all taxpayers pay the same proportion of their incomes in taxes

Law of Demand

People do less of what they want to do as the cost of doing it rises

Marginal Revenue

The change in a firm's total revenue that results from a one-unit change in output

Income Effect

The change in teh quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

Substitution Effect

The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of a good changes

Deadweight Loss

The deadweight loss caused by a policy is the reduction in economic surplus that results from adoption of that policy

Elastic

The demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

Inelastic

The demand for a good is inelastic with respect to price if its price elasticity of demand is less than one

Perfectly Elastic Demand

The demand for a good is perfectly elastic with respect to price if its price elasticity of demand is infinite

Perfectly Inelastic Demand

The demand for a good is perfectly inelastic with respect to price if its price elasticity of demand is zero

Unit Elastic

The demand for a good is unit elastic with respect to pricce if its price elasticity of demand is equal to 1

Accounting Profit

The difference between a firm's total revenue and its explicit costs

Economic Profit

The difference between a firm's total revenue and the sum of its explicit and implicit costs; also called excess profits

Total Surplus

The difference between the buyer's reservation price and the seller's reservation price

Excess Supply (Surplus)

The difference between the quantity supplied and the quantity demanded when the price of a good exceeds the equilibrium price; sellers are dissatisfied when there is excess supply

Excess Demand (Shortage)

The difference between the quantity supplied and the quantity demanded when the price of a good lies below the equilibrium price; buyers are dissatisfied when there is excess demand

Value of Marginal Product of Labor (VMP)

The dollar value of the additional output a firm gets by emplying one additional unit of labor

Economic Surplus

The economic surplus from takin gany action is the benefit of taking the action minus its cost

Marginal Cost

The marginal cost of an activity is the increase in total cost that results from carrying out one additional unit of the activity; as output changes from one level to another, the change in total cost divided by the corresponding change in output

Market

The market for any good consists of all buyers and sellers of that good

Pure Monopoly

The only supplier of a unique product with no close substitutes

Opportunity Cost

The opportunity cost of an activity is the value of what must be forgone to undertake the activity

Implicit Costs

The opportunity costs of the resources supplied by the firm's owners

Hurdle Method of Price Discrimination

The practice by which a seller offers a discount to all buyers who overcome some obstacle

Price Discrimination

The practice of charging different buyers different prices for essentially the same good or service

Equilibrium Price and Equilibrium Quantity

The price and quantity of a good at the intersection of the supply and demand curves for the good

Socially Optimal Quantity

The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

Macroeconomics

The study of the performance of national economies and the policies that governments use to try to improve that performance

Total Cost

The sum of all payments made to the firm's fixed variable factors of production

Tragedy of the Common

The tendency for a resource that has no price to be used until its marginal benefit falls to zero

Law of Diminishing Marginal Utility

The tendency for the additional utility gained from consuming an additional unit of a good to diminsih as consumption increases beyond some point

Profit

The toal revenue a firm receives from the sale of its product minus all costs - explicit and implicit - incurred in producing it

Customer Discrimination

The willingness of consumers to pay more for a product by members of a favored group, even if the quality of a product is unaffected

Average Benefit

Total benefit of undertaking n units of an activity divided by n

Average Total Cost (ATC)

Total cost divided by total output

Average Cost

Total cost of undertaking n units of an activity divided by n

Complements

Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

Average Variable Cost (AVC)

Variable cost divided by total output