PRINCIPLES OF MICROECONOMICS EXAM 1
welfare economics
branch of economics that studies how the allocation of resources affects economic well-being
first-in-time
buyers will wait in lines to acquire the good or service in question
positive (descriptive) analysis
concerned with what is; facts, describes and explains economic phenomena and is devoid of value judgments, economist behaves as a social scientist
Normative (prescriptive) analysis
concerned with what ought to be; opinions, advocates for a particular course of action, economist behaves as a policy advisor/ value judgment
inferior good
demand decreases as income increases
normal good
demand increases as income increases
implicit costs
do not require money payment
exogenous
factors that are independent of other factors within an economic system; ex) time, weather
market economy
firms and households jointly solve the economic problems in a decentralized way
productive efficiency
goods and services are produced at the lowest possible per-unit cost
exports
goods and services produced abroad but sold abroad
imports
goods and services produced abroad but sold domestically
principle of comparative advantage
goods and services should be produced by the economic agent with the lowest opportunity cost
substitutes
goods and services that can be used for the same purpose; An increase in the price of one good or service leads to an increase in demand for the substitute good or service
complements
goods and services used in conjunction with one another; An increase in the price of one good or service leads to a decrease in demand for the complementary good or service
centrally planned economy
government officials allocate society's scarce resources (not communism)
opportunity cost
highest-valued alternative that must be given up to engage in some activity
economic problem
how to make the best use of its scarce resources 1) What goods and services should be produced? 2) How should these goods and services be produced? 3) Who should receive these goods and services?
quantity demanded
the amount of a good or service that buyers are willing and able to purchase at a given price
quantity supplied
the amount of a good or service that sellers are willing and able to sell at a given price
aggomeration technologies
the benefits associated with clustered production in a geographic location
substitution effect
the change in the quantity demanded of a good or service that results from a change in price, making the good more or less expensive relative to other goods are substitutes; the product has become cheaper relative to other goods, so consumers substitute towards it
income effect
the change in the quantity demanded of a good or service that results from the effect of a change in the good's price on consumers' purchasing power; the consumer now has greater purchasing power and elects to purchase more goods and services overall
tax incidence
the division of the tax burden between buyers and sellers in a market; determined by the relative price elasticities of supply and demand
substitutes in production
when two or more goods or services are produced by the same firm, producing more of one requires producing less of the other
complements in production
when two or more goods or services are produced by the same firm, producing more of one requires producing more of the other
demand schedule
a table that shows the relationship between the price of a good or service and the quantity demanded
Hotelling's Law
"an undue tendency for competitors to imitate each other in the quality of goods, in location, and in other essential ways."
supply schedule
a table that shows the relationship between the price of a good or service and the quantity supplied
Change in Demand vs. Change in Quantity Demanded
A change in demand is when the whole curve shifts and a change in quantity demanded is movement along the demand curve due to a change in price; Price Doesn't shift the curve
Logrolling
An agreement by two or more lawmakers to support each other's bills
sin tax
a tax levied on a proscribed good or service with the intent of reducing consumption
Change in Supply vs. Change in Quantity Supplied
Change in supply means shift of whole curve, Change in the Quantity Supplied means shift along the curve
endogenous
a variable in a statistical model that's changed or determined by its relationship with other variables within the model
the scientific method
Good economic models generate testable hypotheses, which possibly can be rejected using data; positive analysis relies on scientific method
market equilibrium
a situation in which the market price has adjusted to ensure the quantity supplied equals the quantity demanded
scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
voluntary exchange
a situation that occurs in markets when both the buyer and seller of a product are made better off by a transaction
autarky
a situation where a country does not trade with other countries
raw materials
Unprocessed natural products used in production ex) water, land, oil, etc. (price=money)
political economy
a branch of economics that studies government behavior
willingness to pay
a buyer's willingness to pay for a good or service is the maximum amount the buyer will actually pay for that good or service; reservation price
sunk cost
a cost that has already been incurred in the past and cannot be recovered
production possibilities frontier
a curve showing the maximum attainable combinations of two goods/services that may be produced with available resources and current technology
demand market curve
a curve that illustrates the relationship between the quantity of a good or service that all consumers are willing and able to purchase and its price; has negative slope
market supply curve
a curve that illustrates the relationship between the quantity of a good or service that all firms are willing and able to sell and its price; has positive slope
demand curve
a curve that shows the relationship between the price of a good or service and the quantity demanded
supply curve
a curve that shows the relationship between the price of a good or service and the quantity supplied
market
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
price ceiling
a legally determined maximum price that can be charged for a good or service
price floor
a legally determined minimum price that can be charged for a good or service
perfectly competitive market
a market in which there are many buyers and many sellers, products are homogenous, and there are no barriers to entry
competitive market
a market in which there are many buyers and many sellers, where each agent's behavior has a negligible impact on market price
Arrow's Impossibility Theorem
a mathematical theorem holding that no system of voting can be devised that will consistently represent the underlying preferences of voters; that is, under certain conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
Elasticity
a measure of how much one economic variable responds to changes in another economic variable; responsiveness
income elasticity of demand
a measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income
circular flow diagram
a model that illustrates how participants in markets are linked
technological change
a positive or negative change in the ability of a firm to produce a level of output with a given quantity of inputs
labor
all types of work performed by humans (price=wage)
rent-seeking
refers to attempts by individuals and firms to use government action to make themselves better off at the expense of others
explicit costs
require monetary payment
giffen good
inferior items
marginal analysis
involves comparing the additional benefit to the additional cost associated with a small incremental (one-unit) change in some activity
average cost
is equal to total cost divided by the number of units of a good produces
veblen good
luxury items
mixed economy
most economic decisions result from the interaction of buyers and sellers, but the government plays a significant role in the allocation of resources
producer's surplus
the amount a seller is paid for a good or service minus the seller's cost for that unit; PS= P- Cost
regulatory capture
occurs when a government agency acts in the interest of the firm it is supposed to regulate
free market
one with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed
Condorcet Voting Paradox
pairwise voting results in non-transitive (cyclical) outcomes; ex) A > B > C > A
physical capital
physical assets that are not used up by the production process (price= interest rate)
allocative efficiency
production is consistent with consumer preferences
perfect inelastic demand
quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero
perfect elastic demand
quantity demanded is infinitely responsive to price, so the price elasticity equals infinity
rationality
using all available information to achieve one's goals
discrimination
sellers choose which buyers receive the good or service in question
incentive
something that induces a person to act
economics
study of how society manages its scarce resources
equity
the "fair" distribution of economic benefits
economic growth
the ability of an economy to increase the production of goods and services
entreneurial ability
the ability to bring together the factors of production (price=profit)
product technologies
the ability to develop new products; ex) the U.S because they have a comparative advantage in high levels of human capital (higher education)
process technologies
the ability to improve processes to make existing products
comparative advantage
the ability to produce a good or service at a lower opportunity cost than others; trade happens because of this
absolute advantage
the ability to produce a good or service using fewer inputs than others
marginal benefit
the additional benefit incurred by a one-unit increase in some action; equals marginal cost
marginal cost
the additional cost incurred by a one-unit increase in some action; equals price
consumer surplus
the amount a buyer is willing to pay minus the amount the buyer actually pays; CS= WTP-P
international trade
the exchange of goods and services between countries
trade off
the idea that because of scarcity, producing more of one good or service means producing less of another
human capital
the knowledge, skill, and expertise embodying humans
unit-elastic demand
the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value
elastic demand
the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value
inelastic demand
the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value
cross-price elasticity of demand
the percentage change in quantity demanded of one good or service divided by the percentage change in the price of another good or service; do not take absolute value
ceteris paribus ("all else equal") condition
the requirement that when analyzing the relationship between two variables- such as price and quantity demanded- other variables must be held constant
price elasticity of demand
the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price
price elasticity of supply
the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price
Karl Popper's falsifiability requirement
the scientific methods requires the possibility of establishing that a hypothesis is false
market failure
the situation in which the allocation of resources is inefficient; Price>Marginal Cost
government failure
the situation where government intervention leads to an inefficient allocation of resources
rational ignorance
the state of being uninformed about politics because of the cost in time and energy; voters are this way because the loss is small
total (market) producer surplus
the sum of all individual PS; area above the supply curve but below the price
total revenue
the total income paid by the buyers and received by the sellers of a good or service, calculated by multiplying the price per unit by the number of units sold
cost
the value of everything a seller must give up to produce a product (opportunity cost); it includes the cost of all resources used to produce the product, including the value of the seller's time
median voter theorem
the winner of a majority vote is likely to represent the preferences of the voter who is in the "political middle"