Microeconomics Terms and Definitions

Price Taker

A competitive firm that must take the price of its product as given because the firm cannot influence its price.

Explicit Cost

A cost that involves spending money. Sometimes called accounting costs.

Perfectly Competitive Firms

A firm that is such a small part of the total industry that it cannon affect the price of the product or service that it sells. Price Taker. Perfectly elastic demand curve at the going market price.

Production Possibility Curve

A hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. Assumes: Resources are fully employed, production takes place over a specific time period, Resources are fixed for the time period, Technology does not change over the time period.

Implicit Cost

A non-monetary opportunity cost.

Dependent Variable

A variable whose value changes according to changes in the value of one or more independent variables.

Independent Variable

A variable whose value is determined independently of or outside the equation under study.

Average Total Cost

ATC=TC/Q ATC=AFC+AVC

Normative Economics

Analysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be.

Five Resources or Factors of Production

Land - Natural resources or the gifts of nature. Labor - The work of individuals at all levels of an org. Physical Capital - Tools and machinery used in prod. Human Capital - Training and education of workers. Entrepreneurship - Person who organizes, manages and combines other resources.

Fixed Costs

Costs that remain constant as output changes.

Average Fixed Costs

Fixed cost divided by the quantity of output produced. AFC=FC/Q

Needs

In economics, the term need is not definable.

Scarcity

Ingredients for producing things what people desire are insufficient to satisfy all wants. Means we never have enough of everything, including time to satisfy our every desire. Its not a shortage, Its not the same thing as poverty, Scarcity is even a problem for the affluent.

Absolute Advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs.

Slope (Graph)

The change in the y value divided by the corresponding change in the x value of a curve. The incline of the curve.Rise over run.

Consumer Surpluss

The different between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay.

Profit Maximizing Rate of Production

The rate of production that maximizes total profits, or the difference between total revenues and total costs. Also, the rate of production at which marginal revenue equals marginal cost. MR=MC

Division of Labor

The segregation of resources into different specific tasks.

Constant Returns to Scale

The situation in which a firm's long-run average costs remain unchanged as it increases output.

Diseconomies of Scale

The situation in which a firm's long-run average costs rise as the firm increases output.

Economies of Scale

The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants. The study of how people make choices, Political Economy or Economics is the study of mankind in the ordinary business of life.

Resources

Things used to produce other things to satisfy peoples wants

Profit

Total Revenue(TR) - Total Cost(TC) TR=P x Q TC=TFC-TVC P is determined by the market in a perfect competition.. Q is determined by the producer to maximize profit.

Economic Protifs

Total revenues minus total opportunity costs of all inputs used. The total on implicit and explicit costs.

Average Variable Cost

Variable cost divided by the quantity of output produced. AVC=VC/Q

Behavioral Economics

Approach to the study of consumer behavior. Emphasizes psychological limitations and complications which may interfere with rational decision making.

Perfect Copmetition

A market structure in which decisions of individual buyers and sellers have no effect on market price. 1.Large number of buyers and sellers 2.Homogeneous products and perfect substitutes and indistinguishable across firms 3.Both buyers and sellers have equal access to information 4.No barriers to entry of exit

Economic Rent

A payment for the use of any resource over and above its opportunity cost.

Opportunity Cost

An opportunity cost is what was sacrificed to do or acquire something. There would not be a need to sacrifice one thing for another if there was not scarcity in our world.

Ceteris Paribus

Assumption. Nothing changes excpet the facot or factors being studied. Other things constant. Other things equal.

Variable Costs

Costs that change as output changes.

Economic Systems

Decides What, how much, how, for whom items will be produced. Two different systems in the world: 1. Centralized Command and Control. 2. Price Controlled Market System

Utility

Economists refer to the enjoyment of satisfaction that people obtain from consuming goods and services as utility.

Marginal Revenue

MR=(change in TR)/(change in Q) MR=(Change in TC)/(Change in Q) The change in total revenue divided by the change in output.

Economic Growth

Over time it is possible to have more of everything. Economic growth is illustrated with a shift of the production possibilities curve to the right.

Perfect Competition

Price is determined by the intersection of the market demand curve and market supply curve. The market supply curve is equal to the horizontal summation of the supply curves of the individual firms.

Total Revenues

Price per unit times the total quantity sold. Same as total receipts from sale of output.

Positive Economics

Purely descriptive statements or scientific predictions; If A then B, a statement of what is

Incentives

Rewards for engaging in a particular activity.

Monolopy

Singe Seller No Close Substitutes Price Maker Blocked Entry Non-Price competition Marginal Revenue less than demand. Set prices in the elastic region.

Diminishing Marginal Utility

Subsequent items give less utility.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost. Is always a relative concept.

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker.

Economic Depreciation

The difference between the amount paid for capital at the beginning of the year and the amount it could be sold for at the end of they year

Producer Surpluss

The difference between the total amount that producers actually receive for an item and the total amount that they would have been willing to accept for supplying that item.

Minimum Efficient Scale

The level of output at which all economies of scale are exhausted.

Short Run

The period of time during which at least one of a firms inputs is fixed.

Long Run

The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.

Short Run Break Even Price

The price at which a firms total revenue equal its total costs Its covering its explicit and implicit costs.

Short Run Shutdown Price

The price that just covers average variable costs. Occurs just below the intersection of the marginal cost curve and the average variable cost curve.

Microeconomics

The study of decision making by individuals, households and by firms.

Macroeconomics

The study of the behavior of the economy as a whole. Deals with economy-wide phenomena

Wants

What people would buy if their incomes were unlimited. Goods and services on which we place a positive value People have unlimited wants.