Microeconomics

Command or centrally planned economy

An economic system in which resources are allocated according to explicit instructions from a central authority.

Market economy

An economic system in which resources are allocated through individual decision making.

Business firm

An organization, owned and operated by private individuals, that specializes in production.

Input

Anything (including a resource) used to produce a good or service.

Law of diminishing marginal utility

As consumption of a good or service increases, marginal utility decreases.

time and spending power

As individuals, we face a scarcity of time and spending power. Given more of either, we could each have more of the goods and services that we desire.

Law of diminishing (marginal) returns

As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline.

Income Effect

As the price of a good decreases, the consumer's purchasing power increases, causing a change in quantity demanded for the good.

substitution effect

As the price of a good falls, the consumer substitutes the good in place of other goods whose prices have not changed.

Law of demand

As the price of a good increases, the quantity demanded decreases.

Law of supply

As the price of a good increases, the quantity supplied increases.

excess supply

At a given price, the amount by which quantity supplied exceeds quantity demanded.

necessities and elasticity

Goods we regard as necessities tend to have less elastic demand than goods we regard as luxuries.

graphical representation of relative price

If Py is the price of the good on the vertical axis and Px is the price of the good on the horizontal axis, then Px/Py = relative price of good X = the opportunity cost of one more unit of good X = the amount value of the slope of the consumer's budget line.

3 scenarios for demand elasticity, effect of price increase, and effect of price decreases

If inelastic (Ed<1), in the event of a price increase, total revenue increases. In the event of a price decrease, total revenue goes down. If unit elastic (Ed =1), in the event of a price increase or a price decrease, there is no change in total revenue. If elastic (Ed>1), in the event of a price increase, there is a decrease in total revenue and in the event of a price decrease, increase in total revenue.

Traditional Economy

Resources are allocated according to the long-lived practices of the past. Tradition was the dominant method of resource allocation for more of human history.

Command Economy

Resources are allocated mostly by explicit instructions from some higher authority.

What are the conditions for MC?

The MC curve crosses both the AVC curve and the ATC curve at their respective minimum points.

What results in the U shape of the ATC curve?

The U shape of the ATC curve results from the behavior of both AVC and AFC. At low levels of output, AVC and AFC are both falling, so the ATC curve slopes downward. At higher levels of output, rising AVC overcomes falling AFC, and ATC curve slopes upward.

What results in the U-shaped of the AVC curve?

The U-shape of the AVC curve results from the U-shape of the MC curve, which in return based on increasing and then diminishing marginal returns to labor.

Marginal product of labor

The additional output produced when one more worker is hired.

Price

The amount of money that must be paid to a seller to obtain a good or service.

Marginal utility

The change in total utility an individual obtains from consuming an additional unit of a good or service

consumer's choice

The consumer will always choose a point on the budget line,rather than a point below it.

Total fixed cost

The cost of all inputs that are fixed in the short run.

Total variable cost

The cost of all variable inputs used in producing a particular level of output.

demand curve

The demand curve shows the relationship between the price of a good and the quantity demanded in the market, holding constant all other variables that influence demand. Each point on the curve shows the quantity that buyers would choose to buy at a specific price.

tax incidence

The division of a tax payment between buyers and sellers, determined by comparing the new (after tax) and old (pretax) market equilibrium.

Explicit cost

The dollars sacrificed—and actually paid out—for a choice.

Average Fixed Cost

The firm's average fixed cost (AFC) is its total fixed cost divided by th quantity (Q) of outputs: AFC = TFC/C

The incidence of a tax

The incidence of a tax (the distribution of the burden between buyers and sellers) is the same whether the tax is collected from buyers and sellers.

the incidence of a tax collected from buyers

The incidence of a tax that is collected from buyers falls on both sides of the market. Buyers pay more, and sellers receive less, from each unit sold.

incidence of a tax collected from sellers

The incidence of a tax that is collected from sellers generally falls on both sides of the market. Buyers pay more, and sellers receive less, for each unit sold.

Does all production carry an opportunity cost?

Yes, virtually all production carries an opportunity cost. To produce more of one thing, society must shift resources away from producing something else.

demand curve fact 2

a change in the price of a good causes a movement along the demand curve

budget constraint

a consumer's budget constraint identifies which combinations of goods and services the consumer can afford with a limited budget, at given prices.

the effect of a fall in the price of an input

a fall in the price of an input causes an increase in supply, shifting the supply curve to the right

price ceiling

a government imposed maximum price in a market

price floor

a government imposed minimum price in a market.

a leftward shift of the supply curve

a leftward shift of the supply curve causes a leftward movement along the demand curve. Equilibrium price rises, but equilibrium quantity falls.

mortgage

a loan given to a home-buyer for part of the purchase price of the home.

black market

a market in which goods are sold illegally at a price above the legal ceiling.

change in quantity supplied

a movement along a supply curve in response to a change in price

interpretation of cross-price elasticity of demand

a positive cross-price elasticity means that the two goods are substitutes and a negative cross-price elasticity means that the goods are complements.

price ceiling

a price ceiling creates a shortage and increases the time and trouble required to buy the good. While the price decreases, the opportunity cost may rise.

a rightward shift in the demand

a rightward shift in the demand curve causes a rightward movement along the supply curve. Equilibrium price and equilibrium quantity both rise.

effect of a rise in the price of complement

a rise in the price of a complement deceases the demand for a good, shifting the demand curve to the right

effect of a rise in price

a rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right

change in supply

a shift of a supply curve in response to a change in some variable other than price.

sunk cost

a sunk cost is one that already has been paid, or must be paid, regardless of any future action being considered. Sunk costs should not be considered when making decisions.

a tax collected from buyers

a tax collected from buyers shifts the demand curve downward by the amount of the tax.

flow variable

a variable representing a process that takes place over some time period.

stock variable

a variable representing a quantity at a moment in time

model

an abstract representation of reality. A model should be as simple as possible to accomplish its purpose.

long-run elasticity

an elasticity measured a year or more after a price change

short-run elasticity

an elasticity measured just a short time after a price change

surplus

an excess supply not eliminated by a fall in price, so that quantity supplied continues to exceed quantity demanded.

an increase in income

an income in income will shift the budget line upward (and rightward). A decrease in income will shift the budget line downward (and leftward). These shifts are parallel.. Changes in income do not affect the budget line's slope.

effect of an increase in price on total revenue

an increase in price raises total revenue when demand is inelastic, and shrinks total revenue when demand is elastic.

increase in the number of sellers

an increase in the number of sellers-and no other change-shifts the supply curve rightward

effect of an increase in weath

an increase in wealth will increase (shift the curve rightward) for a normal good, and decrease demand (shift the curve leftward) for an inferior good.

critical assumption

any assumption that affects the conclusions of a model in an important way.

Simplifying assumption

any assumption that makes a model simpler without affecting any of its important conditions.

excess demand

at a given price, the amount by which quantity demanded exceeds quantity supplied.

total revenue

at any point on a demand curve, sellers' total revenue is the area of a rectangle with height equal to price and width equal to quantity demanded.

ownership cost

both current and prospective homeowners face an interest cost of ownership. This cost rises when current home price rise, and falls when current home prices fall.

The marginal product of labor (MPL)

change in total product (delta Q) dividedf by the change in the number of workers employed (delta L): MPL = delta W / delta L. The MPL tells us the rise in the output produced when one more worker is hired.

effect of technology

cost-saving technological advances increase the supply of a good, shifting the supply curve to the right

Fixed cost

costs of fixed inputs, which remain constant as output changes.

rent controls

government-imposed maximum rents on apartments and stores.

what happens to housing price when restrictions on new building prevent the housing stock from growing as fast as demand?

housing prices rise.

general difference in elasticity

in general, long-run elasticities are greater than short-run supply elasticities.

Entrepreurship

the ability (and the willingness to use it) to combine the other resources into a productive enterprise.

Technological change

the discovery of new ways to produce more from a given quantity of resources. A technological change or an increase in resources, even when the direct impact is to increase production of just one type of good, allows us to choose greater production of all types of goods.

spending and elasticity

when spending on a good makes up a larger proportion of families' budgets, demand tends to be more elastic.

what happens to housing stock and housing price

when the demand for housing begins rising faster than previously, the housing stock typically lags behind, and housing prices rise.

rise in price of an alternative

when the price for an alternative arises-either an alternate good or the same good in an alternate market-the supply curve shifts leftward.

change in price of a good

when the price of a good changes, the budget line rotates: both its slope and one of its intercept in change.

proportion for cross-price elasticity of demand

% of change in Quantity demanded of X divided by % change in price of Z

Perfectly competitive market

(informal definition) a market in which no buyer or seller has the power to influence the price.

Demand schedule

A list showing the quantities of a good that consumers would choose to purchase at different prices, which all other variables held constant.

Supply schedule

A list showing the quantity of a good or service that firms would choose to produce and set at different prices, with all other variables held constant.

Possibility possibilities frontier

A curve showing all combinations of two goods that can be produced with the resources and technology currently available.

opportunity cost

A firm's "costs" is its opportunity cost, which includes both implicit and explicit costs.

A firm's total cost

A firm's total cost of producing a given level of output is the opportunity cost of the owners-everything they must give up in order to produce that amount of output.

Supply curve

A graph of a supply schedule, showing the quantity of a good or service supplied at various prices, with all other variables held constant. The supply curve shows the relationship between the price of a good and the quantity supplied in the market, holding constant the values of all other variables that affect supply. Each point on the curve shows the quantity that sellers would choose to sell at a specific price.

Market

A group of buyers and sellers with the potential to trade with each other.

Markets

A group of buyers and sellers with the potential to trade with each other.

Capital

A long-lasting tool that is used to produce other goods.

Comparative advantage

A nation has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than some other nations.

price floor

A price floor creates a surplus of a good. In order to maintain the price floor, the government must prevent the surplus from diving down the market price. In practice, the government often accomplishes this goal by purchasing the surplus itself.

Utility

A quantitative measure of pleasure or satisfaction obtained from consuming goods and services

a rise in income

A rise in income-with no change in prices-leads to a new quantity demanded for each good. Whether a particular good is normal (quantity demanded increases) or inferior (quantity demanded decrease) depends on the individual's preferences, as represented by the marginal utilities for each good, at each point along his budget line.

Circular Flow

A simple model that shows goods, resources, and dollar payments flow between households and firms.

Productively Inefficient

A situation in which more of at least one good can be produced without sacrificing the production of any other good.

subsidy

A subsidy paid to buyers shifts the demand curve upward by the amount of the subsidy.A subsidy paid to buyers benefits both sides of a market. Buyers pay less and sellers receive more for each unit sold. The distribution of benefits from a subsidy is the same, regardless of whether the subsidy is paid to buyers or sellers.

effect of a tax collected from sellers

A tax collected from sellers shifts the supply curve upward by the amount of the tax.

a utility-maximizing consumer's choice

A utility-maximizing consumer will choose the point ont he budget line where marginal utility per dollar is the same for both goods (MUx/Px=MUy/Py). At that point, there is no further gain from reallocating spending on either direction.

supply curve for housing

A vertical line showing the total number of homes in a market that are available for ownership.

Average total cost

ATC is the toal cost per unit of output

Average variable cost

AVC is the cost of the variable inputs per unit of output: AVC=TVC/Q

Law of increasing opportunity cost

According to the law of increasing opportunity cost, the more of something we produce, the greatest the opportunity cost and producing even more of it.

Variable cost

Costs of variable inputs, which change with output.

demand curve for housing

Demand curve for housing: a curve showing, at each price, the total number of homes that everyone in the market would like to own, given the constraints that they face. The demand curve for housing tells us, at each price, the total number of homes that everyone in the market would like to own, given the constraints that they face.

Variation of elasticity of demand

Elasticity of demand varies along a downward-sloping straight-line demand curve. More specifically, demand becomes less elastic (Ed gets smaller) as we move downward and rightward.

change in weather and other natural events

Favorable weather increases crop yields, and causes a rightward shift of the supply curve for that crop. Unfavorable weather destroys crops and shrinks yields, and shifts the supply curve leftward.

Normal Good

For normal goods, the substitution and income effects work together, causing quantity demanded to move in the opposite direction of the price. Normal goods, therefore, must always obey the law of demand.

short-run elasticity and long-run elasticity in a market

In a market where it takes a long time for buyers to fully adjust to a price change, demand will be more elastic in the long run than in the short run.

expected price

In many markets, an expectation of a future price rise shifts the current supply curve leftward. Similarly, an expectation of a future price drop shifts the current supply curve rightward.

the effect of an expectation in price

In many markets, an expectation that price will rise in the future shifts the current demand curve rightward, while an expectation that price will fall shifts the current demand curve leftward.

Shift of resources

In order to produce more goods and services in the future, we must shift resources toward R and D and capital production, and away from producing things we'd enjoy right now.

In the long run

In the long run, there are no fixed inputs or fixed costs; all inputs and all costs are variable.

income elasticity in normal/inferior goods

Income elasticity is positive for normal goods, but negative for inferior goods.

The least-cost rule

It states that a business firm will produce any given output level using the least-cost combination of inputs available to it.

long-run average total cost

LRATC = LRTC/Q

Ceteris paribus

Latin for "all else remaining the same."

Marginal cost

MC is the change in the total cost (change in TC) divided by the change in output (change in Q).

Product markets

Markets in which firms sell goods and services to households.

Resource markets

Markets in which households that own resources sell them to firms.

Fixed input

Over shorter time periods, fixed inputs are an input whose quantity must remain constant over time period. Short run is a time period during which at least one of the firm's inputs is fixed (a time horizon during which at least one of the firm's inputs cannot be varied).

Variable inputs

Over the long run, all the inputs the firm uses are viewed as variable inputs-inputs that can be adjusted up or down as desired.)

Rational preferences

Preferences that satisfy two conditions 1. any two alternatives can be compared and one is preferred or else the two are valued equally, and (2) the comparisons are logically consistent or transitive.

Income Effect

The income effect of a price change arises from a change in purchasing power over both goods. A drop in price increases total purchasing power, while a rise in price decreases total purchasing power.

Resources

The labor, capital, land (including natural resources), and entrepreneurship that are used to produce goods and services.

Short-run versus long-run

The long-run is a time period long enough for a firm to change the quantity of all of its inputs. (A time horizon long enough for a firm to vary all of its inputs).

capital loss

The loss to the owner of an asset when it is sold for a price lower than its original purchase price.

Diminishing marginal returns to labor

The marginal product of labor decreases as more labor is hired.

Increasing marginal returns to labor

The marginal product of labor increases as more labor is hired.

the market demand curve

The market demand curve is found by horizontally summing the individual demand curve of every consumer in the market.

equilibrium price

The market price that, once achieved, remains constant until either the demand curve or supply curve shifts.

equilibrium quantity

The market quantity bought and sold per period that, once achieved, remains constant until either the demand curve or supply curve shifts.

Technology

The methods available for combining inputs to produce a good or service.

Two opportunity costs

The opportunity cost of a choice includes both explicit costs and implicit costs.

opportunity cost

The opportunity cost of any choice is what we must forego when we make that choice.

Physical Capital

The part of the capital stock consisting of physical goods, such as machinery, equipment, and factories.

Cross-price elasticity of demand

The percentage change in quantity demanded of one good caused by 1 percent change in the price of another good.

Land

The physical space on which production takes place, as well as the useful materials-natural resources-found under it or on it, such as crude oil, iron, coal, or fertile soil.

Normative economics

The practice of recommending policies to solve economic problems.

The price elasticity of demand

The price elasticity for demand for a good is the percentage change in quantity demanded (% delta Qd) divided by the percentage change in price (% change in P).

Relative price

The price of one good relative to the price of another

Aggregation

The process of combining distinct things into a single whole.

quantity demanded

The quantity of a good that all buyers in a market would choose to buy during a period of time, given their constraints.

Positive economics

The study of how the economy works.

Microeconomics

The study of the behavior of individual households, firms, and governments; the choices they make; and their interaction in specific matters.

Macroeconomics

The study of the behavior of the overall economy

substitution effect

The substitution effect of a price change always moves quantity demanded in the opposite direction to the price change. When the price of a good decreases, the substitution effect works to increase quantity demanded; when price increases, the substitution effect works to decrease quantity demanded.

supply and demand

The supply and demand model is designed to show how prices are determined in perfectly competitive markets.

Labor

The time human beings spend producing goods and services.

Implicit cost

The value of something sacrificed when to direct payment is made.

Two public differences among economists

These differences arise from 1. positive disagreements (about the outcomes of different policies) and 2. differences in values (how those outcomes are evaluated.

how to find the equilibrium in a competitive market

To find the equilibrium in a competitive market, draw the supply and demand curves. Market equilibrium occurs where the two curves cross. At this crossing point, the equilibrium price is found on the vertical axis, and the equilibrium quantity on the horizontal axis.

Total cost

Total cost (TC) is the sum of all fixed and variable output. The costs of all inputs-fixed and variable- used to produce a given output level in the short run.

When is total production of every good or service greatest?

Total production of every good or service is greatest when nations shift production toward their comparative advantage goods and trade with each other.

Specialization

Total production of every good or service will be greatest when individuals specialize according to their comparative advantage.

Profit

Total revenue minus total cost

close substitution and elasticity

When close substitutes are available for a product, the demand tends to be more elastic.

Sensible Allocation of Resources

When resources are allocated by the market, and people must pay for their purchases, they are forced to consider the opportunity cost to society of the goods they consume. In this way, market help to create a sensible allocation of resources.

mutually exclusivity

When the alternatives to a choice are mutually exclusive, only the next best choice—the one that would actually be chosen—is used to determine the opportunity cost of the choice.

what happens to housing prices when the housing stock grows as the same rate as housing demand?

When the housing stock grows at the same rate as housing demand, housing price remain unchanged.

when the marginal product of labor (MPL) rises

When the marginal product of labor (MPL) rises, marginal cost (MC) falls. When MPL falls, MC rises. Since MPL ordinarily rises and then falls, MC will do the opposite: It will fall and then rise. Thus the MC curve is U-shaped.

the long-run average cost of producing a given level of output

it can be less than or equal to, but notrun averag greater than, the short-run total cost (LRATC <= ATC).

the long-run total cost of producing a given level of output

it can be less, but not greater than or equal to, but not greater than, the short run total cost. (LRTC <=TC).

supply curve for housing

it tells us the number of homes in a market that are available for ownership-the housing stock.

Total product

maximum quantity of output that can be produced from a given combination of inputs.

the equilibrium price in a housing market

the equilibrium price in a housing market is the price at which the quantity of homes demanded (the number that people want to own) and quantity supplied (the housing stock) are equal.

capital gain

the gain to the owner of an asset when it is sold for a price lighter than its original purchase price.

budget line

the graphical representation of a budget constraint, showing the maximum affordable quantity of one good for given amounts of another good.

income elasticity of demand in quantity demanded

the percentage change caused by 1 percent change in income

price elasticity of supply

the percentage change in girl supplied (% change in Qs) divided by the percentage change in price (% change in P): % change of Qs/% change in P.

price elasticity of supply

the percentage change in quantity supplied caused by 1 percent change in price

short side of the market

the smaller of quantity supplied and quantity demanded at a particular price. When the quantity supplied and quantity demanded differ, the short side of the market-whichever of the two quantities is smaller-will prevail.

Economics

the study of choice under conditions of scarcity

inferior good

the substitution and income effects of a price change work against each other. The substitution effect moves quantity demanded in the opposite direction of the price, while the income effect moves it in the same direction as the price. But since the substitution effect virtually always dominates, consumption of inferior goods-like normal goods- will virtually always obey the law of demand.