Principles of Economics AB (International Trade, Consumer Choice, Elasticity, Production)

Production Possibilities Frontier (PPF) (The PPF shows the production combinations that are both attainable and efficient.)

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology.

Income Elasticity of Demand

A measure of how responsive demand is to a change in consumer income; calculated as the percentage change in the quantity of a good or service demanded divided by the percentage change in income.

Elasticity

A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price.

Price Elasticity of Demand

A measure of how responsive quantity demanded is to a change in price; calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Supply

A measure of how responsive quantity supplied is to a change in price; calculated as the percentage change in quantity supplied divided by the percentage change in price.

Cross-Price Elasticity of Demand

A measure of the effect of a change in the price of one product on the quantity demanded of another; calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Small-country model

A model of international trade in which the production or consumption of a good, service, or resource in the domestic country is small relative to global markets. Since the domestic country is small relative to world markets, it is a price taker and its consumption and production do not affect the world price. Thus the country adopts the world price for any good, service, or resource as the domestic price.

Quota (Sometimes called an import quota.)

A numerical limit on the amount of a good that can be imported.

Law of Diminishing Marginal Utility

A principle in economics that states that the marginal utility associated with consumption of a good or service becomes smaller with each extra unit that is consumed in a given time period.

Gains from Trade

The benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another. The wealth, or additional well-being, created by trade does not have to be monetary.

Domestic price

The price of a good, service, or resource that prevails in the domestic market. In the small-country model, the domestic price equals the world price if the country is open to trade.

Total Product (TP)

The total amount of output produced with a given amount of resources.

Total Utility

The total satisfaction or happiness received from the consumption of a good, service, or combination of goods and services.

Deadweight loss

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium.

Opportunity Cost (Opportunity costs exist because of scarcity.)

The value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another.

Average Total Cost (ATC)

Total cost (TC) divided by the amount of output produced; total cost per unit.

Average Fixed Cost (AFC)

Total fixed cost (TFC) divided by the amount of output produced; fixed cost per unit.

Economic Profit (as measure)

Total revenue minus economic costs, which include both explicit and implicit costs of production.

Accounting Profit

Total revenue minus the explicit costs of production.

Average Variable Cost (AVC)

Total variable cost (TVC) divided by the amount of output produced; variable cost per unit.

Increasing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource.

Fixed Costs

Costs that do not change with the amount of output produced.

Diminishing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.

Economies of Scale

A condition in which the long-run average total cost of production decreases as production increases.

Diseconomies of Scale

A condition in which the long-run average total cost of production increases as production increases.

Constant Returns to Scale

A condition in which the long-run average total cost of production remains constant as production increases.

Short-run Average Total Cost Curve (ATC)

A curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity.

Long-run Average Total Cost Curve (LRATC)

A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable.

Normal Good

A good for which there is a direct relationship between the demand for the good and income; a good with a positive income elasticity of demand.

Inferior Good

A good for which there is an inverse relationship between the demand for the good and income; a good with a negative income elasticity of demand.

Autarky (Before international travel via ships, many island countries existed in a state of autarky; they simply had no access to many products that were commonplace in other parts of the world.)

A situation in which a country is closed to any international trade.

Util

A subjective measure of the utility associated with consuming a good or service.

Tariff (When the United States imposes a tariff on foreign steel, any foreign producers that want to sell their steel in the U.S. have to pay an extra fee, making it more expensive for them to sell their products.)

A tax or fee that must be paid on goods imported from other countries.

Barrier to trade

Any policy that is designed to reduce the competitiveness of foreign producers that wish to sell their goods or services in the domestic market, thereby reducing the imports of foreign goods and services.

Variable Costs

Costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases.

Price takers

Firms that take or accept the market price and have no ability to influence that price.

Imports (M)

Goods, services, or resources produced abroad and sold domestically.

Exports (X) (In the United States, many agricultural products are produced at a lower cost than in other countries, and clothing is often produced at a higher cost than in other countries. As a result, agricultural products are part of U.S. exports, and clothing is part of U.S. imports.)

Goods, services, or resources produced domestically and sold abroad.

Economic Costs

The costs associated with the use of resources; the sum of explicit and implicit costs.

Perfectly Elastic Demand

Infinite price elasticity of demand; quantity demanded that is so responsive to a change in price that if price increases or decreases by 1%, quantity demanded decreases to zero.

Explicit Costs

Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs.

Unit-elastic Demand

Price elasticity of demand equal to 1 in absolute value; prices and quantities demanded change by equal percentages, such that if price changes by 1%, quantity demanded changes by 1% as a result.

Perfectly Inelastic Demand

Price elasticity of demand equal to zero; quantity demanded is completely nonresponsive to price changes, such that any increases or decreases in price leave quantity demanded unchanged.

Elastic Demand

Price elasticity of demand greater than 1 in absolute value; quantity demanded that is relatively more responsive to a change in price, such that if price changes by 1%, quantity demanded changes by more than 1% as a result.

Inelastic Demand

Price elasticity of demand less than 1 in absolute value; quantity demanded that is relatively less responsive to a change in price, such that if price changes by 1%, quantity demanded changes by less than 1% as a result.

Comparative Advantage

The ability to produce a good or service at a lower relative opportunity cost than that of another producer.

Absolute Advantage

The ability to produce more output, given similar resources, than another producer.

Marginal Cost (MC)

The additional cost associated with 1 more unit of an activity. For production, it is the change in total cost due to the production of 1 more unit of output.

Marginal Product (MP)

The additional output produced as a result of utilizing 1 more unit of a variable resource (i.e., labor or capital).

Marginal Utility

The additional satisfaction or happiness received from the consumption of an additional unit of a good or service.

Average Product (AP)

The average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed.

Consumer Surplus (Consumer surplus can also be thought of as the wealth that trade creates for consumers in a market. Consumer surplus is measured in dollars. Graphically, consumer surplus is the area below the demand curve and above the equilibrium price, from zero to the quantity traded.)

The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay.

Producer Surplus (Producer surplus can also be thought of as the wealth that trade creates for producers in a market. Producer surplus is measured in dollars. Graphically, producer surplus is the area below the equilibrium price and above the supply curve, from zero to the quantity traded.)

The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept.

Welfare effects (Welfare effects are generally found by comparing changes in consumer and producer surplus.)

The effects that a change in market conditions, usually price, has on the welfare, or economic well-being, of market participants.

Equal Marginal Principle (for utility maximization)

The idea that consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundle is equal.

Quota rent

The income earned by whoever has the right to import the good at the world price and sell it in the domestic market at the higher quota price. The dollar value of a quota rent is equal to the size of the quota times the difference between the quota price and the world price.

Minimum Efficiency Scale

The lowest level of output at which the long-run average total cost is minimized.

Implicit Costs

The opportunity costs of using owned resources; costs for which no monetary payment is explicitly made.

Specialization (If the United States specializes in producing cars while its neighbor Canada specializes in producing lumber, it is likely that both countries will be able to consume more cars and lumber when they trade with each other.)

The practice of producing a single good or service rather than producing multiple goods or services.

World price

The price of a good, service, or resource that prevails in the world market.

Terms of Trade (Colombia and Brazil decide that Colombia will sell 1 ton of coffee to Brazil in exchange for 5 tons of bananas. The 5 tons of bananas for 1 ton of coffee are the terms of trade.)

The price of one good, service, or resource in terms of another.

Utility Maximization

The process of obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to consumers' preferences, incomes, and prices.

Tariff revenue

The revenue collected from the imposition of a tariff on goods, services, or resources.

Utility

The satisfaction or happiness received from the consumption of goods and services.

Economics Surplus

The sum of consumer and producer surplus. It is a measure of the total welfare, or wealth, that trade creates for consumers and producers in a market. Also known as social welfare or total surplus.

Total Cost

The sum of fixed and variable costs of production.

Long Run

The time period in which all inputs of production can be changed.

Short Run

The time period in which at least one input of production is fixed but other inputs can be changed.

Immediate Period

The time period in which producers cannot increase their use of economic resources to increase quantity supplied.

Free trade

Trade between nations that is free from barriers such as regulations, tariffs, or quotas.