Econ Exam 1 Terms

Complements-in-production

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises

Cost-benefit principle

Says that costs and benefits are the incentives that shape decisions. Suggesting that before you make any decisions you should: - Evaluate the full sets of costs and benefits associated w/ that choice - Pursue that choice, only if the benefits are at least as large as the costs

Holding other things constant

a commonly used qualifier noting your conclusions may change if some factor that you haven't analyzed changes.

Sunk Costs

a cost that has been incurred and can't be reversed. It exists whatever choice you make and hence it is not an opportunity cost. Good decisions ignore sunk costs.

Inferior goods

a good for which higher income causes a decrease in demand (clothes from Walmart)

Normal good

a good for which higher income causes an increase in demand (clothes from Gucci)

Individual supply curve

a graph plotting the quantity of an item that a business plans to sell at each price.

Market demand curve

a graph plotting the total quantity of an item demanded by the entire market, at each price

Individual demand curve

a graph, plotting the quantity of an item that someone plans to buy, at each price.

Decrease in supply

a leftward shift of the curve because the quantity supplied is lower at each and very price.

Decrease in demand

a leftward shift, because the quantity demanded is lower at each and every price.

Shift in the demand curve

a movement of the demand curve itself

Shift in the supply curve

a movement of the supply curve itself, any factor that changes your marginal costs will shift your supply curve

Movement along the demand curve

a price change causes movement from one point on a fixed demand curve to another point on the same curve.

movement along the supply curve

a price change causes movement from one point on a fixed supply curve to another point on the same curve

Increase in supply

a rightward shift of the curve because at each price, the quanty supplied is higher

Market

a setting bringing together potential buyers and sellers. Markets transform your desires into a price that you're willing to pay. This price provides a profit signal that motivates firms to produce and supply desired products

Increase in demand

a shift of the curve to the right, because at each and every price, the quantity demanded is higher.

Tariffs

a tax on imported products, they increase their trade costs.

Substitutes-in-production

alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.

Rational Rule for Buyers

buy more of an item IF the marginal benefit of one more is greater than (or equal to) the price. - To maximize your economic surplus, keep applying the Rational rule for buyers, continuing to buy until Price=marginal benefit

Someone else's shoes technique

by mentally "trading places" with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.

Planned economics

centralized decisions are made about what is produced, how, by whom, and who gets what.

Variable costs

costs like labor and raw materials that vary with the quantity of output you produce. Marginal costs are the additional variable costs. -When you calculate marginal costs, they should inclue only variable costs

Fixed costs

costs that don't vary when you change the quantity of output you produce. Fixed costs are irrelevant to the marginal cost.

World demand

describes the total quantity of goods demanded across all buyers in every country.

World supply

describes the total quantity of goods produced by all manufactures in the world at each price.

Diminishing marginal benefit

each additional item yields a smaller marginal benefit than the previous item.

Specialization

focusing on specific tasks, spending more time on what they're relatively good at, and less time doing other stuff.

Complementary goods

goods that go together, your demand for a good will decrease if the price of complementary goods rises. (ex: a hot dog bun is a complement to a hot dog)

Substitute goods

goods that replace each other, your demand for a good will increase if the price of s substitute good rises (ex: walking, cycling, ride-sharing, or catching the bus are all substitutes for driving. If the price of bus tickets doubles, you might start driving to work instead of catching the bus, increasing your demand for gas.)

Rational Rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs. Choose the quantity where the marginal benefit equals the marginal cost. That way, you will maximize your economic surplus.

Willingness to pay

in order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: "what is the most I am willing to pay to get these benefits (or avoid that cost)?"

Prediction market

is a market where payoffs are linked to whether an uncertain event occurs

Import quota

limits the quantity of a good that can be imported

Perfect competition

markets in which 1) all firms in an industry sell an identical good; and 2) there are many buyers and sellers, each of whom is small relative to the size of the market.

internal markets

markets within a company to buy and sell scarce resources

Market supply curve

plots the total quantity that the entire market-including all producers-will supply, at each price

Interdependence principle

recognizes that your best choice depends on your choices, the choices that others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Marginal principle

says that decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

Rational Rule for sellers in a competitive market

sell one more if the price is greater than or equal to the marginal cost - When you're a supplier in a competitive market, the marginal benefit of selling an additional item is the price. As such adapting the rule to your role as a supplier in a competitive market says that you should expand production until Price=marginal cost

Export

sell their goods and services to foreign buyers-when they can get a better price if they just sold them in America.

Production Possibilty Frontier

shows the different sets of output that are attainable with your scarce resources, it illustrates the trade-offs-that is, the opportunity costs you confront when deciding how to best allocate scarce resources.

Domestic demand curve

shows the quantity of a good that all domestic consumers added together plan to buy, at each price.

Domestic supply curve

shows the quantity of a good that all domestic suppliers added together plan to sell, at each price

Price takers

someone who decides to charge the prevailing price and whose actions do not affect the prevailing price. Essentially, they take the market price as given and just follow along.

Comparative advantage

the ability to do a task at a lower opportunity cost - To get the most output with your given inputs, you should allocate each task to the person with the lowest opportunity cost - It's comparative because opportunity cost compares what you can produce if assigned one task with what you would produce if you spent that time on another task. And it's an advantage because a lower opportunity cost means that you give up less to get a task done so it's more efficient for you to do that task.

Absolute advantage

the ability to do a task using fewer inputs

Gains from trade

the benefits that come from reallocating resources, goods, and services to better uses.

Change in the quantity demanded

the change in quantity associated with the movement along a fixed demand curve

Change in the quantity supplied

the change in quantity is associated with movement along a fixed supply curve.

Economic surplus

the difference between the benefits you enjoy and the costs you incur, as well as a measure of how much your decision has improved your well-being.

Marginal benefit

the extra benefit from one extra unit (of goods purchased, hours studied, etc.)

Marginal cost

the extra cost from one unit

Trade costs

the extra costs-aside from the price- incurred as a result of buying or selling internationally, rather than domestically.

Marginal product

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

Globalization

the increasing economic, political, and cultural integration of different countries, it is largely due to declining trade costs. -As trade costs fall, companies trade more intermediate inputs, creating global supply chains.

Diminishing marginal product

the marginal product of an input declines as you use more of that input.

Equilibrium

the point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded. - The equilibrium occurs at the point at which the market supply and demand curves cross because this is the point at which the quantity supplied equals the quantity demanded.

Equilibrium price

the price at which the market is in equilibrium

World price

the price that a product sells for in a global market. It's the price that consumers pay to buy imported products, and the price that producers can get for exporting their products.

scarcity

the problem that resources are limited

Equilibrium quantity

the quantity demanded and supplied in equilibrium

Law of demand

the tendency for quantity demanded to be higher when the price is lower

Law of supply

the tendency for the quantity supplied to be higher when the price is higher

Opportunity cost principle

the true cost of something is the next best alternative you have to give up to get it. This principle reminds you that whether you are deciding how to spend your money, your time, or anything else, you should think about its alternative uses. - This principle forces you to focus on the real trade-offs you face

Import

to buy goods and services from foreign sellers-when foreign products are cheaper than their American-made equivalents

Framing effect

when a decision is affected by how a choice is described or framed.

Congestion effect

when a good becomes less valuable bc other people use it. If more people buy such a good, your demand for it will decrease.

Network effect

when a good becomes more useful bc other people use it. If more people buy such a good, your demand for it will also increase

knowledge problem

when knowledge needed to make a good decision is not available to the decision market.

Shortages

when the quantity demanded exceeds the quantity supplied, leading to markups that cause the price to rise.

Surplus

when the quantity demanded is less than the quantity supplied, leading to discounts that cause the price to fall.