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"