Intro to Microeconomics Midterm

Incentive Principle

A person is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter is a POSITIVE economic principle

trade-offs

a compromise that balances the distribution and use of multiple limited available resources

cash on the table

an economic metaphor for unexploited gains from exchange

income effect of demand

changes in price affect the buyers' purchasing power and acts like a change in income

sunk costs

costs that have already been incurred and cannot be recovered or refunded

unit elastic

demand is ________ if price elasticity is EQUAL TO 1

inelastic

demand is ________ if price elasticity is LESS THAN 1 if the quantity demanded is HIGHLY UNRESPONSIVE to changes in price, it is ________

marginal benefit

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

market demand

the sum of all individual demands from a particular good or service quantity demanded in a market is the sum of the quantities demanded by all buyers at each price

Law of Diminishing Marginal Utility

the tendency for 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

Opportunity Cost

the value of what must be forgone to undertake an activity all costs -- implicit and explicit -- are ____________

complements

two goods are _________ 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 __________ in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

substitution effect of demand

when the price of a good goes up, substitutes for that good are relatively more attractive

Scarcity Principle

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

Efficiency Principle

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

change in quantity demanded

a MOVEMENT ALONG the demand curve that occurs in response to a change in price

change in quantity supplied

a MOVEMENT ALONG the supply curve that occurs in response to a change in price

(economic) efficiency

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

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand (example: the demand for houses in unsafe neighborhoods declines as soon as people can afford to buy houses in better neighborhoods) 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 for which, other things equal, an increase in income leads to an increase in demand a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease

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

Equilibrium Principle

a market equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action (also called the "No-Cash-on-the-Table Principle")

Competitive Markets

a market in which there are many buyers and many sellers of the same good or service so that each has a negligible impact on the market price no individual's (seller's or buyer's) actions have a noticeable effect on the price at which the good or service is sold

price ceiling

a maximum allowable price, specified by law

Elasticity

a measure of the change in quantity demanded or supplied as a result of a change in market conditions

Price Elasticity of Demand

a measure of the responsiveness of quantity demanded to changes in price the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price

Demand Curve

a schedule or graph showing the quantity of a good that buyers wish to buy at each price is downward-sloping with respect to price

Supply Curve

a schedule or graph showing the quantity of a good that sellers wish to sell at each price upward-sloping with respect to price

change in supply

a shift of the ENTIRE _________ curve of the quantity that seller's wish to make available to buyer's

change in demand

a shift of the ENTIRE demand curve

outsourcing

a term used to connote having services performed by low-wage workers overseas an American service-worker's job is at risk if a lower-paid worker can perform the same service somewhere else

Cost-Benefit Principle

an individual should take an action ONLY IF the extra benefits from taking the action are at least as great as the extra costs

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 the other points that lie ALONG THE PPC are ______________

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 points that lie WITHIN THE PPC are _____________

attainable point

any combination of goods that can be produced using currently available resources points that lie either ALONG THE PPC or WITHIN IT are _________

unattainable point

any combination of goods that cannot be produced using currently available resources points that lie OUTSIDE THE PPC are ____________

increasing opportunity cost

as we expand the production of a good, we turn first to those whose opportunity cost of producing the good is lowest, and then to those with a higher opportunity cost one reason that supply curve is upward-sloping

elastic

demand is __________ if price elasticity is GREATER THAN 1 if the quantity demanded is HIGHLY RESPONSIVE to changes in price, it is __________

perfectly elastic demand

demand is ____________ with respect to price if price elasticity of demand is infinite one of two special cases of elasticity

perfectly inelastic demand

demand is ____________ with respect to price if price elasticity of demand is zero one of two special cases of elasticity

International trade

increases the total value of all goods and services produced in each nation, it does not guarantee that each individual will do better

Market Equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities and market price

Comparative Advantage

one person has a __________ 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 _________________ over another if he or she takes fewer hours to perform a task than the other person

Positive Economic Principle

one that PREDICTS how people WILL BEHAVE these statements are objective and fact-based Example: Government provided health care increases public expenditures

Normative Economic Principle

one that SAYS how people SHOULD BEHAVE (ex: Cost-Benefit Principle) these statements are subjective and value-based Example: Government SHOULD subsidize college education to all citizens

Law of Demand

people do less of what they want to do as the cost of doing it rises

utility maximization

people try to allocate their incomes so as to maximize their satisfaction

utility

represents the satisfaction people derive from their consumption activities measured indirectly so it is subjective

rational person

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

Rational Spending Rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

perfectly elastic supply

supply is _____________ with respect to price if elasticity is infinite

perfectly inelastic supply

supply is _____________ with respect to price if elasticity is zero

equilibrium price and quantity

the _____ and ________ at the intersection of the supply and the demand curves for the good

Market

the _________________ for any good consists of all the buyers and the sellers of that good

nominal price

the absolute price of a good in dollar terms

Marginal Utility (MU)

the additional utility gained from consuming an additional unit of a good mathematically speaking, equivalent to the change in utility divided by the change in consumption

optimal combination of goods

the affordable combination that yields the highest total utility

excess demand

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

excess supply

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds 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 one reason that the demand curve is downward-sloping

substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from _____________ when the price of the good changes one reason that the demand curve is downward-sloping

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

consumer surplus

the economic ________ received by buyers is often referred to as _________ mathematically speaking, the difference between a buyer's reservation price for a product and the price actually paid

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

(buyer's) reservation price

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

income elasticity of demand

the percentage by which quantity demanded changes in response to a 1 percent change in income POSITIVE ____________ is a NORMAL good NEGATIVE ____________ is an INFERIOR good

cross-price elasticity of demand

the percentage by which quantity demanded of the first good changes in response to a 1 percent change in the price of the second COMPLEMENTS have NEGATIVE ____________ SUBSTITUTES have POSITIVE ________________

Price Elasticity of Supply

the percentage change in quantity supplied that occurs in response to a 1 percent change in price

Total Expenditure

the product of PRICE of product X QUANTITY of product same thing as TOTAL REVENUE

socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

seller's 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 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 economics and the policies that governments use to try to improve that performance