Chapter 4-7 Microeconomics
Short run
A period of time sufficiently short that at least some of the firm's factors of production are fixed.
Marginal Utility
The additional utility gained from consuming an additional unit of a good.
Price elasticity of supply
The percentage change in the quantity supplied that will occur in response to a 1 percent change in the price of a good or service.
Profit
maximizing firm- A firm whose primary goal is to maximize the difference between its total revenues and total costs
Factor of production
an input used in the production of a good or service.
Variable factor of production
an input whose quantity can be altered in the short run.
Fixed factor of production
an input whose quantity cannot be altered in the short run.
Barrier to entry
any force that prevents firms from entering a new market.
Explicit costs
the actual payments a firm makes to its factors of production and other suppliers.
Optimal combination of goods
the affordable combination that yields the highest total utility.
Perfectly elastic demand
the demand for a good is perfectly elastic with respect to price if its price elasticity of demand is infinite.
Unit elastic
the demand for a good is unit elastic with respect to price if its price elasticity of demand is equal to 1.
Total expenditure
the dollar amount consumers spend on a product is equal to the dollar amount sellers receive.
Total revenue
the dollar amount consumers spend on a product is equal to the dollar amount sellers receive.
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.
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.
Normal profit
the opportunity cost of the resources supplied by the firm's owners; Normal profit = Accounting profit - Economic profit.
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 of Elasticity of Demand
the percentage by which the quantity demanded of the first good changes in response to a 1 percent 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 from a 1 percent change in its price.
Total cost
the sum of all payments made to the firm's fixed and variable factors of production.
Variable cost
A cost that varies with the level of an activity.
Efficient (or Pareto efficient)
A situation is efficient if no change is possible that will help some people without harming others.
Invisible hand theory
A theory stating that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.
Nominal Price
Absolute price of a good in dollar terms.
Economic Loss
An economic profits that is less than zero.
Implicit costs
all the firm's opportunity costs of the resources supplied by the firm's owners.
Allocative function of price
Changes in prices direct resources away from overcrowded markets and toward markets that are underserved.
Rationing function of price
Changes in prices that distribute scarce goods to those consumers who value them most highly.
Real price
Dollar price of a good relative to the average dollar price of all other goods and services.
Economic Rent
That part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor.
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 1.
Perfectly inelastic Demand
The demand for a good is perfectly inelastic with respect to price if its price elasticity of demand is zero.
Accounting Profit
The difference between a firm's total revenue and its explicit costs.
Economic Profit (or excess profit)
The difference between a firm's total revenue and the sum of its explicit and implicit costs; also called excess profit.
Law of Diminishing Marginal Utility
The tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point.
Profit
The total revenue a firm receives from the sale of its product minus all costs-explicit and implicit-incurred in producing it
Average Total Cost
Total cost divided by total output.
Average Variable Cost
Variable cost divided by total output.
Fixed cost
a cost that does not vary with the level of an activity.
Imperfectly competitive firm
a firm that has at least some control over the market price of its product.
Price taker
a firm that has no influence over the price at which it sells its product.
Profitable firm
a firm whose total revenue exceeds its total cost.
Perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product.
Long run
a period of time of sufficient length that all the firm's factors of production is variable.
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 producing 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.
Perfectly inelastic supply
a supply curves whose elasticity with respect to price is zero.
Perfectly elastic supply
supply curve whose elasticity with respect to price is infinite