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.