Econ 1

Profitable Firm

A firm whose total revenue exceeds its total costs

Unattainable Point

Any combination of goods that cannot be produced using currently available resources

Implicit Costs

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

Equilibrium

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

Economic Efficiency

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

Sunk Cost

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

Imperfectly Competitive Firm

A firm that has at least some control over the market of its product

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

Inferior Good

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

Normal Good

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

Supply Curve

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

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

Perfectly Competitive Market

A market in which no individual 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

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

The Incentive Principle

A person (or a firm or society) is more likely to take an action if its benefit rises, and less likely to if its cost rises. In short, incentives matter.

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

Variable

A quantity that is free to take a range of different values

Demand Curve

A schedule or graph showing the quantity of a good buyers wish to by at each price

Change in Demand

A shift of the entire demand curve

Change in Supply

A shift of the entire supply curve

Outsourcing

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

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

Invisible Hand Theory

Adam Smith's theory that the actions of independent, self interested buyers and sellers will often result in the most efficient allocation of resources

Constant

Also known as a parameter; a quantity that is fixed in value

The Principle of Increasing Opportunity Cost

Also known as the "Low Hanging Fruit Principle"; In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.

The Equilibrium Principle

Also known as the "No Cash on the Table Principle"; a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

The Scarcity Principle

Also known as the "No Free Lunch Principle" and goes as follows: Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Cash on the Table

An economic metaphor for unexploited gains from exchange

Positive Economic Principle

An economic principle that predicts how people will behave. Much more descriptive, and less predictive.

Normative Economic Principle

An economic principle that says how people should behave

Economic Loss

An economic profit that is less than zero

The Cost-Benefit Principle

An individual (or a firm or society) should take an action if and only if the extra benefits from taking the action are at least as great as the extra 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

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 another

Inefficient Point

Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

Attainable Point

Any combination of goods that can be produced using currently available resources; any point on the production possibilities curve

Allocative Function of Price

Changes in price direct resources away from overcrowded markets and towards markets that are underserved

Rationing Function of Price

Changes in price distribute scarce goods to those consumers who value them most highly

The Efficiency Principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice

The Principle of Comparative Advantage

Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest.

Slope

In a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)

Vertical Intercept

In a straight line, the value taken by the dependent variable when the independent variable equals zero

Law of Demand

Law that states: People do less of what they want to do as the cost of doing it rises

Market Economy

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

Comparative Advantage

One person has a comparative 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 the other person

Rational Spending Rule

Rule that states: Spending should be allocated across goods so that the marginal utility per dollar is the same for each good

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can

Nominal Price

The absolute price of a good in dollar terms

Explicit Costs

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

Marginal Utility

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

Optimal Combination of Goods

The affordable combination that yields the highest total utility

Producer Surplus

The amount by which price exceeds the sellers reservation price

Excess Supply

The amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price

Excess Demand

The amount by which the quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

Economic Surplus

The benefit of taking an action minus its cost

Income Effect

The change in the 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 the good changes

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

Unit Elastic

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

Consumer Surplus

The difference between a buyer's reservation price for a product and the price actually paid

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

Buyer's Surplus

The difference between the buyer's reservation price and the price he or she actually pays

Total Surplus

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

Seller's Surplus

The difference between the price received by the seller and his or her reservation price

Real Price

The dollar price of a good relative to the average dollar price of all other goods

Marginal Benefit

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

Marginal Cost

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

Buyer's Reservation Price

The largest dollar amount the buyer would be willing to pay for a good

Market

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

Normal Profit

The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit

Equilibrium Price and Quantity

The price and quantity 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 goods

Sellers Reservation Price

The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

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 and variable factors of production

Fixed Cost

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

Variable Cost

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

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

Average Benefit

The total benefit of undertaking n units of an activity divided by n

Average Cost

The total cost of undertaking n units of an activity divided by n

Profit

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

Opportunity Cost

The value of what must be forgone to undergo an activity (your next best option)

Average Total Cost

Total cost divided by total output

Complements

Two goods are complement 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)

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 a if a decrease causes a leftward shift)

Average Variable Cost (AVC)

Variable cost divided by total output