Econ 211 Exam 1

Welfare Economics

A branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being.

constant opportunity costs

A characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

nonprice determinant (demand)

A characteristic of the demand for a good, service, or resource other than its own market price. A change in a nonprice determinant of demand changes the relationship between price and quantity demanded, either increasing or decreasing quantity demanded at every price. Sometimes referred to as non-own-price determinant.

Nonprice determinant (supply)

A characteristic of the supply of a good, service, or resource other than its own market price. A change in a nonprice determinant of supply changes the relationship between price and quantity supplied, either increasing or decreasing quantity supplied at every price. Sometimes referred to as non-own-price determinant.

Scarcity

A condition that results from the inability of limited resources to satisfy unlimited wants.

Decrease in Demand

A decrease in the quantity demanded of a good, service, or resource at every price. Graphically, a decrease in demand is represented by a leftward shift of the demand curve.

Decrease in supply

A decrease in the quantity of a good, service, or resource supplied at every price. Graphically, a decrease in supply is represented by a leftward shift of the supply curve.

Normal Good

A good for which there is a direct relationship between the demand for the good and income. For normal goods, an increase in income increases demand, and a decrease in income decreases demand.

Inferior Good

A good for which there is an inverse relationship between the demand for the good and income. For inferior goods, an increase in income decreases demand, and a decrease in income increases demand.

Production Possibilites Frontier (PPF)

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology. The PPF shows the production combinations that are both attainable and efficient.

Supply Curve

A graphical representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply

Demand Curve

A graphical representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant.

Price ceiling

A maximum legal price at which a good, service, or resource can be sold.

nonbinding price ceiling

A maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding.

binding price ceiling

A maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.

price floor

A minimum legal price at which a good, service, or resource can be sold.

binding price floor

A minimum legal price that is set above the existing equilibrium price. Since the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding.

nonbinding price floor

A minimum legal price that is set below the existing equilibrium price. Since the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding.

Subsidy

A payment made by the government that does not necessarily require an exchange of economic activity in return. Subsidies most often take the form of payments to businesses.

Tax

A payment made to government that is the result of economic activity. Taxes are generally collected from both individuals and firms.

Law of demand

A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will fall, and vice versa, all else held constant

Law of supply

A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant.

Law of increasing opportunity cost

A principle in economics which holds that since some resources are better suited to producing one good or service than another, as the production of a good or service increases, the opportunity cost of each additional unit rises.

shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price. Also called excess demand.

surplus

A situation in which the quantity supplied is greater than the quantity demanded at the current market price. Also called excess supply.

Production Possibilities Schedule

A table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology

Supply schedule

A tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply.

Demand Schedule

A tabular representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant.

Good

A tangible product that consumers, firms, or governments wish to purchase.

Excise tax

A tax based on the number of units purchased , not on the price paid for a good or service

Land

All nature resources used in production; sometimes referred to as "gifts of nature."

Labor

All physical and mental activity devoted to producing goods and services.

Efficient Allocation of resources

Allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another.

Inefficient allocation of resources

Allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another.

Increase In Demand

An increase in the quantity demanded of a good, service, or resource at every price. Graphically, an increase in demand is represented by a rightward shift of the demand curve.

Increase in supply

An increase in the quantity of a good, service, or resource supplied at every price. Graphically, an increase in supply is represented by a rightward shift of the supply curve.

Change in demand

An increase or decrease in the quantity demanded of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the demand curve. Changes in demand are caused by changes in the nonprice determinants of demand. EQUILIBRIUM

Change in supply

An increase or decrease in the quantity supplied of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the supply curve. Changes in supply are caused by changes in a nonprice determinant of supply.

service

An intangible product or action that consumers, firms, or governments wish to purchase.

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and service.

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services.

Market

Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources

Marginal Benefit Equation

Change in total benefit over change in quantity

Marginal Cost Equation

Change in total cost over change in quantity

Microeconomics

Deals with individual households and markets, so it examine individuals and specific markets.

Macroeconomics

Examines the entire economy of a state, a country, or even the world, So it examines total output, the price level, and other aggregate measures of the economy.

Complements

Goods, services, or resources that are used or consumed with one another.

Substitute

Goods, services, or resources that are viewed as replacements for one another.

Sellers

Market participants who are willing and able to sell goods, services, or resources.

Buyers

Market participants who seek to obtain goods, services, and resources

Tax Revenue (TR)

Tax (x) quantity

Comparative advantage

The ability to produce a good or service at a lower relative opportunity cost than that of another producer.

Marginal Benefit

The additional benefit associated with 1 more unit of an activity

Marginal cost

The additional cost associated with 1 more unity of an activity.

Seller expectations

The anticipated future outcomes, including prices, that sellers associate with the production of a good, service, or resource.

Expectations

The anticipation by individuals and firms of costs and benefits that lie in the future.

Gains from trade

The benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another. The wealth, or additional well-being, created by trade does not have to be monetary.

Change in quantity demanded

The change in the quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy due to a change in its price.

Relative Scarcity

The comparison of the scarcity of one good, service, or resource to that of another.

Consumer Surplus

The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay. Consumer surplus can also be thought of as the wealth that trade creates for consumers in a market. Consumer surplus is measured in dollars. Graphically, consumer surplus is the area below the demand curve and above the equilibrium price, from zero to the quantity traded. If you were willing and able to pay up to $40 for a new pair of jeans and you then find out that they're on sale for $30, you'd receive $10 in consumer surplus if you purchased the jeans.

producer surplus

The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept. Producer surplus can also be thought of as the wealth that trade creates for producers in a market. Producer surplus is measured in dollars. Graphically, producer surplus is the area below the equilibrium price and above the supply curve, from zero to the quantity traded.If you were willing to sell your used car for as little as $2,000, but someone paid you $2,500 for it, you received producer surplus of $500.

Income Effect

The effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources.

Substitution Effect

The effect that a change in the price of one good, service, or resource has on the demand for another. For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa.

Self-Interest

The idea that people choose to do things that interest them.

Optimization

The idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost; people will engage in an activity as long as the marginal benefit of an activity is greater than or equal to its marginal cost.

Resources

The inputs used to produce goods and services; also known as factors of production. Resources fall into one of four categories: land, labor, capital, and entrepreneurial ability.

Technology

The knowledge, inventions, and innovations that can potentially increase resource productivity.

Optimal level of output

The level of output at which the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit

minimum wage

The lowest wage firms can legally pay employees in the labor market.

Decreasing marginal benefit

The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit.

Diminishing Marginal Utility

The negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time.

Market Demand

The overall or total demand for a good, service, or resource. It represents the summation of individual demand curves, whether they represent individuals, communities, states, or nations.

Market Supply

The overall, or total, supply of a good, service, or resource. It represents the horizontal summation of the quantities supplied by individuals, firms, states, or even nations at each price over a fixed time period.

Taste and Preference

The perception of the desirability associated with consuming a good, service, or resource.

Increasing Marginal cost

The positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; the more of a good or service that is produced, in a given period of time, the higher the marginal cost associated with each additional unit.

Specialization

The practice of producing a single good or service rather than producing multiple goods or services.

Equilibrium Price

The price at which the quantity supplied of a good, service, or resource equals the quantity demanded; the price at which the demand and supply curves intersect. Also known as the market-clearing price.

Terms of Trade

The price of one good, service, or resource in terms of another.

Diminishing marginal productivity

The principle that if at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant.

Allocation

The process of assigning a good, service, or resource to that of another.

Marginal decision making

The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action.

Quantity Demanded

The quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy at a given price, all else held constant.

Equilibrium Quantity

The quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded.

Economic Surplus

The sum of consumer and producer surplus; a measure of the total welfare, or wealth, that trade creates for consumers and producers in a market. Also known as social welfare or total surplus.

Entrepreneurial Ability

The talent or ability to combine land, labor, and capital to produce goods and services. Entrepreneurial ability is different from human capital in that it primarily involves assuming risk and organizing resources into productive process.

Capital

The tools, machinery, infrastructure, and knowledge used to produce goods and services. Capital is sometimes divided into "physical" and "human" capital. Physical capital refers to tangible items that are created to increase productivity; Human Capital refers to the knowledge and skills that people acquire in order to increase productivity.

Deadweight loss

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium.

Opportunity Cost

The value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another. Opportunity costs exist because of scarcity