Basic Terms
microeconomics
The study of smaller economic units such as individual consumers, families, and individual businesses.
positive economic principles are those that
predicts how people WILL behave
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 (most desirable/most valuable one... the one you would have chosen to spend your time doing)
mixed economies
economies made up of elements from more than one economic system (free markets, some government intervention, most economies are made up of this)
increasing returns to scale
the bigger you get, the more efficient you are
income effect
the change in quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power
marginal cost
the cost of an additional unit of activity
economic surplus
the difference between the benefit of making the trip and its cost
When a market is not in equilibrium:
the economic motives of sellers and buyers will move the market to its equilibrium.
the marginal benefit of an activity is
the extra benefit associated with an extra unit of an activity
pure monopolies
1 seller; tend to have barriers to entry and a unique product
invisible hand
A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all
The buyer's reservation price for a particular good or service is the:
largest price the buyer would be willing to pay for it.
What will happen to the equilibrium price and quantity of beef if more lenient FDA inspections increase the number of cattle ranches?.
Equilibrium price will decrease and equilibrium quantity will increase.
Which of the following is NOT a characteristic of rent controls?
Greater availability of apartments.
sunk costs
a cost that is beyond recovery at the moment a decision must be made
oligopolies
a few forms dominate the industry
monopolistic competition
a market structure in which many companies sell products that are similar but not identical (many buyers and sellers, free entry and exit, similar but differentiated products)
price ceiling
a maximum allowable price, specified by law
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
demand curve
a schedule or graph showing the quantity of a good that buyers wish to buy at each price
change in demand
a shift of the ENTIRE demand curve
market
consists of buyers and sellers of that good
cost benefit principle
an action should be taken if, and only if, its benefits exceed its costs
decreasing returns to scale
as we get bigger, we get less efficient
When two people agree to a price in a negotiation, we can assume that:
both parties will benefit.
Equilibrium price and quantity are determined by:
both supply and demand
A movement along a demand curve from one price-quantity combination to another is called a:
change in quantity demanded.
Those most likely to benefit from an increase in the minimum wage are
hose workers who get a higher wage due to the minimum wage and who are still able to keep their jobs.
normative economic principle
how people SHOULD behave (ex: cost benefit analysis)
excess demand
is the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price
marginal price equals
marginal benefit
An outcome is socially optimal if it:
maximizes total economic surplus.
If the demand for a good decreases as income decreases, then the good is a(n):
normal good.
positive economic principle
one that describes how we WILL ACTUALLY behave
economic naturalist
someone who uses isights from economics to help make sense of observations from everyday life
macroeconomics
study of the large economy as a whole or economic aggregates
perfect competition are price
takers
excess supply
the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds equilibrium price
marginal benefit
the benefit of an additional unit of the activity
buyer's reservation price
the largest dollar amount the buyer would be willing to pay for a good
Milton Friedman argues that, in a free-enterprise system, a corporate executive is an employee of
the owners of the business
Economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society
When a market is in equilibrium:
there is neither excess demand or excess supply
Milton Friedman argues that the political principle underlying free markets is ______________ becaues mutual benefits ensure that all parties participate voluntarily.
unanimity
constant returns to scale
when long-run average total cost is constant as output increases
For two goods, X and Y, to be classified as substitutes, it must be the case that:
when the price of X rises, the demand for Y increases.
According to the textbook, government price controls fail because:
legislation cannot alter basic economic incentives.
