Econ 101 Vocab

Rational Rule for Employees

Hire more workers if the marginal revenue product is greater than (or equal to) the price. The Rational Rule for Employers: Hire more workers as long as their marginal revenue product is greater than (or equal to) the wage.You'll notice that this looks a lot like the Rational Rule for Buyers that we covered in Chapter [2\Demand]. The Rational Rule for Buyers says to buy more of something if its marginal benefit is greater than or equal to its price. As an employer, you are a buyer—buying the time and effort of your workers—so naturally, you follow a similar rule. Wage = marginal revenue when wage is lower, quantity demanded is higher.

Deadweight loss

How far economic surplus falls below the efficient outcome.Deadweight loss =Economic surplus at the efficient quantity- Actual economic surplus The costs of market failure can be measured by calculating how much it reduces economic surplus. That's the idea behind deadweight loss, which is the difference between the largest possible economic surplus (which occurs at the efficient quantity), and the actual level of economic surplus: The dead weight loss can be both when the actual quantity is greater or less than the equilibrium point. Notice that we calculated deadweight loss based on the marginal cost and benefit curves, and the actual quantity produced. None of our calculations depended on what happened to the price. That's because deadweight loss measures the consequences of producing a quantity that's larger or smaller than the efficient quantity. They ensure that each good or service is produced by the business that can do so at the lowest possible marginal cost (that's the idea of productive efficiency), that each good goes to the person who'll get the highest marginal benefit from it (that's the idea of allocative efficiency), and that we'll produce the quantity of each good that yields the largest possible economic surplus (that is, the efficient quantity). All told, well-functioning markets lead to the efficient outcome, which means they produce the largest possible economic surplus. This finding is the most persuasive case for organizing our society around markets.

3 steps for evaluating taxes

1.Is the supply or demand curve shifting? Remember that any change affecting buyers or their marginal benefits will shift the demand curve, while any change affecting sellers or their marginal costs will shift the supply curve. 2.Is that shift an increase in taxes, shifting the curve to the left?Or is it a decrease in taxes, shifting the curve to the right? Taxes will typically shift the supply or the demand curve to the left because they are a cost that reduces the marginal benefit for consumers when they are assigned the statutory burden of a tax and raises the marginal cost for sellers when they are the ones who are assigned to send in the tax. A decrease in marginal benefit is a decrease in demand (shifts to the left). On the supply side, an increase in marginal cost causes a decrease in supply (shift to the left). 3.How will prices and quantities change in the new equilibrium?

Marginal cost

= the extra cost from one

Substitutes-in-production

Alternative uses of your production capacity. Your supply of a good will decrease if the price of a substitute-in-production rises. Typically substitutes-in-production arise when you can use your production capacity to produce alternative goods (like gasoline and diesel).

Positive externality

An activity whose side effects benefit bystanders. Other activities involve positive externalities, which are activities whose side effects benefit bystanders. For instance, when you get a flu shot, it not only saves you from getting sick, but it also protects your classmates from catching the flu from you. Underproduction

Negative externality

An activity whose side effects harm bystanders. An activity whose side effects harm bystanders is called a negative externality. For instance, when factories emit greenhouse gases, their contribution to global warming is a negative externality harming you, me, and the other seven billion people on earth who have to live with the consequences. Overproduction

The Rational Rule for Buyers

Buy more of an item if its marginal benefit is greater than (or equal to) the price. example: The Rational Rule for Buyers is good advice. Why? If buying one more gallon of gas yields marginal benefits for Darren that exceed the price he pays, then he is better off. That is, he'll enjoy greater economic surplus—which is the difference between his total benefits and total costs—because this purchase will boost his total benefits by more than it boosts his total costs. And that's the reason why you'll want to follow the Rational Rule for Buyers in your own life.

The marginal principle

Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller decisions weighing marginal benefits and marginal costs. Whenever you face a decision about how many of something to choose ( such as, "How many workers should I hire?"), it is always easier to break it into a series of smaller decisions (such as, "Should I hire one more worker?"). The marginal principle suggests that you evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker. We call the extra benefit you get from one more worker the marginal benefit; the extra cost of that worker is called the marginal cost. Applying the cost-benefit principle to this marginal choice, you should hire one more worker only if the marginal benefit to you of doing so exceeds the marginal cost. *"one more?"*

Complements-in-production

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises. Consequently, if the price of asphalt rises, it becomes more profitable to operate a refinery, even if the price of gasoline remains unchanged. As a result, an increase in the price of complements-in-production, like asphalt, leads BP to increase its supply of gasoline. You can think of the extra revenues from asphalt as effectively lowering the marginal cost of producing gasoline, shifting the supply curve to the right.

Complementary Goods

Goods that go together. Your demand for a good will decrease if the price of complementary goods rises. example: hot dogs and buns, New phone and case, Cars and gas

Inferior Good

Higher income causes a decrease in demand for inferior goods. example: "Inferior" goods aren't bad; they're simply those goods you buy less of when your income is higher. For instance, when you're in college and struggling with a limited income, you might take the bus a lot, but when you get your first full‐time job, you might buy your own car. Since the higher income in your first job reduced your demand for bus rides, we conclude that bus rides are an inferior good. Typically inferior goods are those where you're "making do," and when your income rises, you'll shift to a higher‐quality but more expensive alternative, instead.

Normal Good

Higher income causes an increase in demand for normal goods.

The Rational Rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. The logic of this rule is straightforward. You know from the cost-benefit principle that whenever the benefits of a choice exceed the costs, it is a good choice.And when you apply the marginal principle, you don't analyze the "how many" choice all at once ("How many workers do I hire?"). I nstead, you analyze a series of simpler "either/or" choices ("Should I hire one more worker?"). And so the marginal principle tells you to keep hiring, as long as the marginal benefit of each worker exceeds the marginal cost. But you should stop hiring just before the marginal cost becomes larger than the marginal benefit. When does this occur? In most cases, this crossing point occurs right when the marginal benefit is equal to the marginal cost. (In the remaining cases—when the marginal benefit and marginal cost are never exactly equal—you should keep hiring as long as the marginal benefit exceeds the marginal cost.)

Willingness to Pay

In order to convert non-financial costs or benefits into their monetary equivalent, ask yourself: "What is the most I am willing to pay to get this benefit (or avoid that cost)?"

Market Failure

In reality, supply and demand don't always work as smoothly as we'd like. Market failure occurs when the forces of supply and demand lead to an inefficient outcome. Market failures are a common, and their frequency and severity should temper your enthusiasm for market forces. Types of market failure: 1.Market power 2.Externalities 3.Information problems 4.Irrationality 5.Government intervention

Pay-for-performance

Linking the income your workers earn to measures of their performance. Examples include commissions, piece rates, bonuses or promotions. If you simply offer your workers a weekly wage, do they really have an incentive to work hard?If they're not self-motivated, probably not; they get paid either way.Instead, you can offer a pay-for-performance plan, linking each worker's income to their performance on the job.

Marginal social benefit

Marginal private benefit plus marginal external benefit. The consequence is that your demand curve is your marginal private benefit curve. Since market demand curves are made up of individual demand curves, market demand curves reflect marginal private benefits. That means that in the presence of external benefits, the market demand curve understates marginal social benefits.

Substitution effect

Measures how people respond to a change in relative prices. A higher wage increases the returns to work relative to leisure, leading you to work more. The substitution effectmeasures how people respond to a change in relative prices. When your wage goes up, the cost of an hour of leisure goes up. A higher wage Rational Rule for WorkersWork more hours as long as the wage is at least as large as the marginal benefit of another hour of leisure.Substitution effectMeasures how people respond to a change in relative prices. A higher wage increases the returns to work relative to leisure, leading you to work more.Income effectMeasures how people's choices change when they have more income. A higher wage increases your income, leading you to choose more leisure and hence less work. 17increases the returns to work relative to leisure, leading you to work more.

Mid point part 2

Percent change in quantity demanded = Price elasticity of demand × Percent change in price

Tax incidence

The division of the economic burden of a tax between consumers and producers. Tax incidence describes the division of the economic burden of a tax between consumers and producers. To see this, let's change the soda tax and see what would happen if the statutory burden was instead assigned to buyers. It doesn't matter whether the buyer or seller is assigned by the government to send in the tax; the end result is exactly the same. How is it the same if your and your employer split/ dont split social security payments? Sellers bear a smaller share of the economic burden when supply is relatively elastic

Law of Demand

The tendency for quantity demanded to be higher when the price is lower.

Law of supply

The tendency for quantity supplied to be higher when the price is higher.

The Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change. This is the interdependence principle, which recognizes that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change. There are four types of interdependencies you'll need to think about: i)Dependencies between each of your individual choices; ii)Dependencies between people or businesses in the same market; iii)Dependencies between markets iv)Dependencies through time.

Supply Curve

Your firm's individual supply curve is also its marginal cost curve.

Applying the Marginal Principle

Once you have broken a problem in to a series of marginal choices, apply the cost-benefit principle.The marginal principle is useful for "how many" decisions, but not for "either-or" choices.

Marginal benefit

= the extra benefit from one extra unit (of goods purchased, hours studied, etc).

"Holding other things constant"

A commonly-used qualifier noting your conclusions may change if some factor that you haven't analyzed changes. example: if you lose your job or get a more fuel efficient car.

Signal

An action taken to credibly convey information that is hard for someone else to verify. The idea is that actions speak louder than words—you can't simply tell your potential boss how hard-working and tenacious you are, because shouldn't everyone make that claim in an interview? Education serves as a signal—a costly action that you take to convey credibly information that would otherwise be hard for someone else—like a potential employer—to verify. A useful signal helps employers differentiate more productive workers from less productive workers. When interviewing and they ask you "what do you like to do in you free time?" Answer the question with things that help your case, for example: tutoring

bang for your buck

Bang‐for‐your‐buck = Marginal product of an input / Price of input

Midpoint

But what if you need to calculate the percent change in quantity demanded and the percent change in price? It seems easy enough, but you'll quickly notice an annoying problem—the normal way you think about calculating the percent change depends on where you start. For instance, when quantity goes from 100 to 150, it's a 50 percent increase. But if it goes from 150 to 100 it's a 33 percent decrease. That's an annoying problem because if the percent change depends on the starting point, then elasticity will depend on the starting point. Since we want a consistent measure of elasticity between two points, we need a measure that doesn't depend on the starting point.

Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs. This principle suggests that before you make any decision, you should: •Evaluate the full set of costs and benefits associated with that choice. •Pursue that choice, only if the benefits are at least as large as the costs. Money is simply a common measuring stick that allows you to compare a wide variety of costs and benefits, taking account of both financial and non-financial aspects of a decision. Economists are no more obsessed with money than architects are obsessed with inches; these are just how we take our measurements. How much are you willing to pay so that your friend can enjoy a coffee? The more you enjoy doing nice things like this, the more you are willing to pay for it. Similarly, the benefit of donating time or money to a non-profit will be high if the cause means a lot to you. You need to include these unselfish motivations in your cost-benefit calculations. *is cost ≥ benefit*

Diminishing Marginal Benefit

Each additional item yields a smaller marginal benefit than the previous item. example: Let's get delicious about this, and focus on ice cream. (Yum!) One or two scoops are scrumptious. A third scoop still tastes pretty good. By the fourth, you're getting tired of all that sugar. And a fifth scoop will make you feel sick. (Believe me.) Point is, as you eat more ice cream, the marginal benefit of another scoop keeps getting smaller.

Market economy

Each individual makes their own production and consumption decisions, buying and selling in markets. For instance, if you really want a hybrid car, you'll be willing to pay a higher price for one. In turn, the prospect of selling hybrid cars for more money than a non-hybrid alternative provides an incentive for Toyota to produce the Prius, their best-selling hybrid. Markets transform your desires into a price that you're willing to pay. This price provides a profit signal that motivates firms to produce and supply desired products.

Demand elasticity factors

Factor 1:More competing products mean greater elasticity The more competing products there are, the more likely you are to find a close substitute. As a result, you'll be more price sensitive when you are shopping at a Walmart Super center than at a small corner store. Why? A typical Walmart Super center stocks roughly 150,000 different goods. ll of those different products mean that you'll be more likely to find a good substitute if the price of your first choice has gone up. factor #2: Specific brands tend to have more elastic demand than categories of goods Specific brands typically have more close substitutes, and therefore demand for these goods is typically more elastic than demand for categories of goods. For example, there are many close substitutes for Honey Nut Cheerios, and so when the price goes up many people will substitute to a different breakfast cereal (or other breakfast item). factor #3: Necessities have less elastic demand Things that you really can't do without are things that you will keep buying even as the price rises. What makes something a necessity? A necessity is something where there isn't a good substitute available and doing without isn't a good option. Food is a necessity. factor #4: Consumer search makes demand more elastic When consumers are willing to search a lot for a low-cost alternative for a good, demand for that good is more elastic. Why? Because the more you search for a good price, the more likely you are to find an acceptable, lower-priced substitute. factor #5: Demand gets more elastic over time On any given day, many of your decisions about what to purchase are difficult to change. For instance, if you take a road-trip and the price of gas goes up when you are headed home, you're probably going to buy the gas you need to get home regardless of the price change (even if it's large!). But if gas prices stay higher, you'll adjust your plans over time so you drive less. You might figure out a new car pool plan. Eventually, you may replace your car with a more fuel-efficient one. You may even consider moving closer to work or school or public transportation so that you drive less. Over time, you will tend to have more options to choose from, which is another way of saying that more substitutes become available over time. More substitutes mean more elastic demand, so over time, demand tends to become more elastic.

Club goods

Goods that are excludable, but non‐rival in consumption. Roads are not really public goods. After all, you could buy some land, build a road on it, set up a tollbooth, and only let people pass if they pay you. The road is excludable. But how much should you charge? The problem is that roads are a bit non‐rivalrous. Sure, there's wear and tear on the road and too many people could cause congestion. But the marginal cost of a car when there isn't much traffic is close to zero. But if you charge zero how will you cover your costs? Economists call these kinds of goods—ones that are excludable, but non‐rival in consumption—club goods. They are a type of natural monopoly and just like all monopolies left to their own devices the quantity that they sell will be lower than the socially efficient quantity. Why? Because there will be people whose marginal benefit of using the club good is higher than their marginal cost, but they'll be charged a price above marginal cost.

Common Resources

Goods that are rival and also non‐excludable. Goods that are rival and also non‐excludable are common resources. Common resources have private gains but shared costs. Once you catch a fish, you privately benefit from consuming or selling it, but the cost—the reduced number of fish left—is shared by everyone. By imposing a cost that falls on others, your consumption involves a negative externality. Let's explore the problems with common resources through a simple parable that remains relevant today.

Substitute Goods

Goods that replace each other. Your demand for a good will increase if the price of substitute goods rises. example: walking, riding bike, and taking the bus can replace driving

Coase Theorem

If bargaining is costless, property rights are clearly established and enforced, then externality problems can be solved by private bargains. She discovered that during the summer the street performers who set up on the nearby sidewalk generate extra foot traffic in the area, which increases her profits by $120 per week. That extra profit is a positive externality from the efforts of the performers. Unfortunately, for Tatiana, during the winter, there are fewer tourists in town to watch these street performers Solutions to the externality problem rely on "internalizing the externality." 1.Private bargaining 2.Fix the price: Corrective taxes and subsidies 3.Fix the quantity: Cap and trade 4.Laws, rules and regulations 5.Government provision of public goods 6.Assign ownership 14 and leave tips. Because this cuts the street performers' income by $40 per week, they usually quit for the season. What should Tatiana do? Here's Tatiana's solution: She offered to pay the street performers $40 per week in the winter to offset their lost tips. They agree to stay through the winter, and so Tatiana's business continued to benefit from the positive externality generated by the street performers. The private bargain that Tatiana proposed effectively led the street performers to internalize the externality, leading to a better outcome.

Marginal revenue product

Measures the marginal revenue from hiring an additional worker. The marginal revenue product is equal to:The marginal product of labor multiplied by the price of that product. Gabriela has calculated how many haircuts she can sell if she hires another stylist, but in order to decide whether hiring another stylist is worth it, she wants to measure this marginal benefit in terms of extra dollars of revenue, rather than extra haircuts. S o she focuses on the marginal revenue product, which is the marginal product of labor (the extra output due to hiring one more worker), multiplied by the price she can sell it for. MRP= P × MP The marginal benefit is the marginal revenue product, which is the marginal product times the price. The marginal cost is the wage. Thus, she should hire one more worker if the marginal revenue product of labor is greater than (or equal to) the wage.

Disequilibrium

Parking spaces demonstrate the three symptoms of a market out of equilibrium, which is also known as disequilibrium: 1.Queuing: When you're driving around looking for a spot, you're effectively queueing for the next available spot. The extra time you spend in the queue raises the effective price you're paying because it'll cost you both time and money to get a spot. 2.Bundling of extras: When you bought dinner just so you could get the valet to park your car, you were effectively buying extras (that dinner) so you could get the thing you wanted (the parking spot), and this effectively raises the price you're paying to park. 3.A secondary market: When you parked in someone else's driveway, you've found a way around the "official" market for parking spots.

Normative analysis

Prescribes what should happen, which involves value judgments. What should be done? Whenever you opine on what should happen —whenever you use words like "should" or "ought" — you're doing normative analysis, because your conclusions rest on normative, or value judgments.

The Rational Rule for Markets

Produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost. Let's start by figuring out the efficient quantity of tomatoes: How many tomatoes will produce the largest possible economic surplus for society as a whole?Since this is a "how many" question, the marginal principle says to focus on the simpler question: "Should we produce one more tomato?" Next, apply the cost-benefit principle, which says that yes, an extra tomato will increase economic surplus, as long as the marginal benefit is at least as large as the marginal cost. Put the pieces together, and we get the following very helpful rule: The Rational Rule for Markets: To increase economic surplus, produce more of a good if its marginal benefit is greater than (or equal to) its marginal cost. It follows that we'll get the largest possible economic surplus if the market keeps producing until marginal benefit equals marginal cost. That is, the efficient quantity occurs where: Marginal benefit = Marginal cost

The Rational Rule for Society

Produce more of a good if its marginal social benefit is greater than (or equal to) the marginal social cost. The logic here should be familiar—it's just an application of The Equi‐Marginal Rule: "If something is worth doing, keep doing it until your marginal benefits equal your marginal costs." But this time, we've applied it to thinking about production from society's perspective rather than just the perspectives of buyers and sellers.

Domestic Demand Curve

Shows the quantity of a good that domestic consumers—taken as a whole—plan to buy, at each price. The domestic demand curve illustrates the quantity of goods that domestic buyers—that is, all Americans taken as a whole—plan to buy at each price. ONLY to american buyers and sellers.

Private benefit

The benefit enjoyed by the buyer. Your marginal benefits are the extra benefits that you'll enjoy, which we call your private benefit.

Economic burden

The burden created by the change in after‐tax prices faced by buyers and sellers. However, the economic burden shows that buyers and sellers each bear some of the economic burden. Even though the tax is $0.30, the price sellers get to keep after they send in the tax payment is only $0.10 less than the pre‐tax equilibrium price of $1.10. Buyers of soda—like you—make up the difference because you pay $0.20 more per soda than you would without the tax.

Statutory burden

The burden of being assigned by the government to send a tax payment. In Philadelphia, the statutory burden suggests that this is entirely a tax on sellers—after all, they are responsible for sending in the full payment to the government.

Intrinsic motivation

The desire to do something for the enjoyment of the activity itself. But psychologists have also documented the importance of intrinsic motivation, which is the desire to do something for internal reasons, such Pay-for-performance will:1.Provide incentives for effort2.Help select hard-working employees3.Distort effortExtrinsic motivationThe desire to do something for its external rewards such as higher pay.Intrinsic motivationThe desire to do something for the enjoyment of the activity itself.You can motivate your workers with either carrots or sticks as the enjoyment and pride you get from doing a good job. A firm which lives up to a core set of ideals that workers identify with will be rewarded with employees who work hard, help each other out, and try to help the company succeed.When people believe in what they are doing, they do it better.

Marginal product

The increase in output that arises from an additional unit of an input, like labor. Expanding your production requires increasing your use of inputs, like labor. The extra output you get from an additional unit of input—like hiring one more worker—is called the marginal product of that input.

Globalization

The increasing economic, political and cultural integration of different countries. The interdependence principle reminds us that all your economic life depends on decisions made by others, including those made by people all around the world. The increasing global integration—of economies, cultures, political institutions and ideas—is called globalization. Trade costs have declined because of lower trade barriers, closer political integration, improved telecommunications, electronic banking, the internet, and improved rail, sea, and air transportation. And this has led our lives to become increasingly connected with those of folks living in other countries. But as much as globalization is a trendy buzzword today, it's not actually new: International trade has been with us, and growing, for centuries. In fact, Christopher Columbus first bumped into America while trying to find a trade route from Portugal to Asia.

Socially optimal

The outcome that is in society's best interests, accounting for the costs and benefits to buyers and sellers, as well as bystanders.

Equilibrium

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded. Equilibrium price - The price at which the market is in equilibrium. Equilibrium quantity - The quantity demanded and supplied in equilibrium. The same idea applies in economics. A market is in equilibrium when the quantity supplied is equal to the quantity demanded. In equilibrium, every seller who wants to sell an item can find a buyer, and every buyer can find a potential seller. Because of this balancing, there's no tendency for the market price to change when a market is in supply-equals-demand equilibrium.

World Price

The price that a product sells for in the global market. World supply is the total quantity of shirts produced by all manufacturers in the world at each price. Similarly, world demand is the total quantity of shirts demanded across all shirt buyers in every country, at each price. Figure 9‐1 illustrates how world demand and world supply jointly determine the world price, which is the price that a traded good sells at in the world market. This world price is the price that consumers pay to buy imported shirts, and the price that producers can get for exporting their shirts.

Scarcity

The problem that resources are limited.

Tragedy of the commons

The tendency to over‐consume a common resource. he "tragedy of the commons" dates back to when most towns had a central grassed area called the "commons." Shepherds who bring their sheep to graze on the commons benefit from this grass, but don't pay for the privilege. The problem is that when it costs nothing to graze your sheep on the town commons, each shepherd will do a lot of it. The result is a tragedy: The commons will be overgrazed and the grass will never grow back. This tragedy of the commons occurs because people over‐consume common resources. Just as with other negative externalities, we get too much of those activities where people don't pay for the full social cost of their actions. What makes this a tragedy is that everyone would be better off if we could agree to limit consumption of common resources.

Total revenue

The total amount you receive from buyers, which is calculated as price × quantity. Total revenue =Price X Quantity Total revenue is shown graphically in Figure 6-4. It's the rectangle given by price times quantity. So in the example shown, if at a price of $3 a coffee shop sells 100 cups of coffee, their total revenue is equal to $3×100=$300.

Economic Surplus

The total benefits minus total costs flowing from a decision. example: Sony Music might offer you a job paying $45,000 per year, but you love the music industry so much that you would have accepted the job even if it paid only $35,000. If so, your new job yields you an economic surplus of $10,000. Of course, if Sony Music is following the cost-benefit principle, they offered you the job because they believe that you will generate benefits for them that exceed the $45,000 per year that they are offering to pay you. Perhaps by finding some great new bands, you are expected to generate an extra $75,000 per year in new revenue, generating $30,000 in economic surplus for them.The cost-benefit principle ensures that both you and Sony Music make choices that generate additional economic surplus, and avoid those that reduce your economic surplus.

Export

To sell goods or services to foreign buyers. The most obvious reason to buy goods from abroad is that you can get a better deal. You will choose to import—that is, buy goods or services from foreign sellers—when foreign products are cheaper than their American‐made equivalents. Whenever you face a trade‐related question, first think about what will happen to the price. If you get this right, the rest should be straightforward. Supply‐and‐ 23 demand analysis tells you that higher prices lead domestic buyers to demand less and domestic sellers to supply more. (Lower prices lead to the opposite.) And the changes in consumer and producer surplus make sense if you simply remember that consumers like low prices while producers prefer high prices.

Framing Effect

When a decision is affected by how a choice is described, or framed. You should seek to avoid framing effects altering your own decisions.

Congestion Effect

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease. example: if many people start driving on the road you drive on, the road becomes less effective

Network Effects

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase. example: many American students use snapchat and instagram for social media while foreign students don't

Statistical Discrimination

When employers use a characteristic of a group—like race, gender, ethnicity—to make inferences about an individuals' skills. Another possibility is that when employers don't have a lot of information about job applications, they might rely on stereotypes. Why? Often these stereotypes are statistically accurate on average, even if they are inaccurate for specific people. This is called statistical discrimination—using the characteristics of a group like race, gender, or ethnicity to make inferences about an individual's skills. For instance, consider an employer looking to hire a competitive worker. Your competitiveness is difficult to observe. If the employer believes that women are typically less competitive than men, then they'll hire only men.

Perfectly inelastic

When the percent change in quantity is zero for any percent change in price. When the demand curve is completely vertical it means that the price elasticity of demand is zero—no matter what the change is in price, the total quantity demand is unchanged. Economists call this perfectly inelastic demand.

Perfectly elastic supply

When the percent change in quantity supplied is infinite for any change in price. When the supply curve is completely horizontal it means that the price elasticity of supply is infinite—any change in price leads to an infinite change in quantity supplied.

Taxing sellers

example:In 2017, Philadelphia introduced a tax on sellers of sugar‐sweetened beverages of 1.5 cents per ounce. The way the tax works is that when you buy a 20‐ounce soda, you'll pay whatever price the seller posts and you don't have to worry about the tax. The seller keeps whatever you pay, minus the new tax since they're responsible for sending the tax to the government. This is a tax on sellers because, if you buy a 20‐ounce soda, the seller needs to send 30 cents (1.5 cents per ounce x 20 ounces) to the government. Thus, a tax leads to an increase in your marginal cost equal to the tax, and therefore shifts the supply curve to the left to reflect the new, higher marginal costs.

Supply Elastic Factors

factor #1: Inventories make supply more elastic If your business's product is easily stored, then you can use inventories to provide the flexibility to respond quickly to price changes. For instance, oil refineries can immediately dial up supply by selling stored inventories of gas when the price is high. T hey can also dial it back down by stockpiling inventories when the price is low. As a result, the quantity supplied can respond rapidly to price changes, yielding more elastic demand. factor #2: Easily available variable inputs make supply elastic If the variable inputs you need to expand production are easily available, then your supply will be more elastic. This is because you'll be able to increase production swiftly in response to a price rise. For instance, Marcus' catering company can easily hire more workers and buy more supplies when the price of catered events rises. As a result, he has the flexibility to increase the quantity he supplies in response to a price rise. By contrast, while it's easy for airlines to buy more fuel, it's harder to get more pilots or more planes. The problem is not that these inputs are impossible to get, but rather that the extra cost involved makes expanding production not worthwhile. factor #3: Extra capacity makes supply elastic Sometimes businesses have fixed inputs, like a factory in which they manufacturer goods, or an office space for their workers. Marcus' catering business has a kitchen in which his workers prepare meals. In the short run, these fixed inputs provide a constraint on a business' ability to expand production. That means that if they are already using their fixed input at full capacity it will be hard to respond even if they can easily access more of their variable inputs. If, on the other hand, they have extra capacity in their fixed resources then their supply will be more elastic. factor #4: Easy entry and exit make supply more elastic So far, we have focused on how existing businesses can change production in response to changing prices. However, the quantity supplied in the market is also a function of the number of businesses. When prices rise, new businesses may enter the market, and when they fall some businesses may exit. Market supply will be more elastic when it is easier for businesses to enter or exit a market.The flexibility to freely enter the catering market is one of the key reasons that supply is quite elastic. If you want to start a catering company, you'll need cooking skills, business know-how, a kitchen, and around $100,000 to cover startup costs. It's not easy, but there are enough people with these skills and assets that when prices rise, you'll see people start new catering companies. The entry of new firms leads to an increase in the total quantity supplied at a higher price. factor #5: Over time, supply becomes more elastic Supply adjustments often take time, and so the quantity supplied will adjust by a lot more over a period of several years than several days. As a result, the price elasticity of supply is typically larger when you're looking over a longer time horizon.

Efficiency wage

A higher wage paid to encourage greater workers productivity, by increasing worker effort and reducing worker turnover. By paying you a wage that is higher than what you could earn elsewhere. A higher wage means a bigger cost of losing your job, because you know that your next job isn't likely to pay as much. Highly-paid workers are also more likely to feel valued, inspiring them to give back to their employer in the form of greater effort. Economists refer to this as an efficiency wage—a higher wage paid to encourage greater worker productivity, by increasing worker effort and reducing worker turnover.

Free‐Rider Problem

When someone can enjoy the benefits of a good without bearing the costs. The free‐rider problem occurs whenever someone can enjoy the benefits of consumption without bearing all of the costs. For instance, if you enjoy beautiful architecture, breathing clean air, or living free from the risk of smallpox, you are likely free‐riding on the work of others. Because free riders don't pay for the benefits they receive, they are "bystanders," enjoying positive externalities.

Five Factors Shifting the Supply Curve

1) Input prices For instance, refineries have two key inputs: crude oil and labor. A rise in the price of either of these inputs will increase BP's marginal cost of each additional gallon of gas it produces. And that in turn lowers the quantity BP is willing to supply at any given price. This change is a leftward (or upward) shift in BP's supply curve. Likewise, a decline in input costs will shift BPs supply curve to the right (or downward). 2) Productivity and technology Productivity growth—when businesses figure out how to produce more output with fewer inputs—is a key force reducing marginal costs through time. This productivity growth is often driven by technological change, including the invention of new types of machinery or the adoption of new management techniques. 3) Other opportunities: prices of other outputs The interdependence principle also emphasizes the connections between different markets. As a supplier, your decisions are interdependent because there are many different lines of business you could engage in. For instance, BP can use its oil refineries to produce gasoline, or alternative products such as diesel fuel. If the price of diesel fuel rises enough, it will be more profitable for BP to produce diesel than gasoline. 4) Expectations In the short run, if you expect the price of your product to rise next year, you can increase your profits by storing it and selling it next year. This will decrease your supply this year (shifting your supply curve to the left) and increase your supply next year (shifting next year's supply curve to the right). You can see this as an application of the opportunity cost principle, as the alternative to selling your goods this year is selling them next year. And so expectations of higher gas prices in the future raises the opportunity cost of supplying gas this year, leading to a decrease in this year's supply. 5) The number and type of sellers So far, we've reviewed the factors that might shift your business' individual supply curves. Each factor that leads your business to increase supply will likely also lead your competitors to increase supply. And because the market supply curve is simply the sum of individual supply curves, each of these factors will also shift the market supply curve.

Six Factors Shifting Demand Curve

1. Income example: Money you spend on gas is money that you can't spend on clothes. But when your income is higher, you can afford to buy a larger quantity of both. Thus, at each and every price level, you can buy a larger quantity of gas (and clothes), causing your demand curve to shift to the right—which we call an increase in demand. If your income were to fall, then you would probably choose to buy less gas at each and every price, shifting your demand curve to the left—and that's called a decrease in demand. 2.Preferences example: Companies spend billions of dollars each year attempting to influence our preferences through advertising. If Pepsi somehow convinces you that it is better than Coke, this will increase your demand for Pepsi and decrease your demand for Coke. Social pressure can also shift your demand curve. For instance, rising environmental awareness has decreased demand for gas‐guzzlers (farewell, Hummer), shifting the demand curve to the left. 3.Prices of related goods example: For instance, your demand for hot dogs is closely related to your demand for hot dog buns. If the price of hot dog buns rises, you'll buy fewer hot dog buns and fewer hot dogs. Consequently, the higher cost of hot dog buns causes a decrease in your demand for hot dogs, shifting your demand curve for hot dogs to the left. When the higher price of one good decreases your demand for another good, we call them complementary goods. Employers want their workers to focus at work, so they strategically provide free coffee, which is a complement to focused work, and they often block access to Facebook, which is a substitute. 4.Expectations This insight is really an example of the logic of substitutes: Gas purchased tomorrow is a substitute for gas purchased today, and a higher price for this substitute increases demand for gas purchased today, while a lower price decreases it. our expectations about a lower price later tonight leads to a decline in your demand for Ubers right now. That's because a ride home later tonight is a substitute for a ride home right now, and a lower price of the substitute decreases your demand. It's an example of a more general idea: You can save a few bucks by making sure you think about future prices before you buy. 5.Congestion and network effects The types of cars that people buy are also interdependent. City‐dwellers sometimes buy SUVs, but not because they plan to go off‐road driving. Instead, they worry that because there are so many other large cars on the road, they now need to drive a large car to stand a reasonable chance of surviving an accident. 6.The number and type of buyers *and not a change in price* The U.S. population is expected to increase by nearly a third between 2016 and 2060. Another critical factor increasing market size is international trade and the opening of new foreign markets. For instance, the opening of the Chinese economy means that there are now more than one billion Chinese consumers for exporters to serve, which potentially represents an enormous shift in demand.

External benefit

A benefit enjoyed by someone other than the buyer or seller. But if others also benefit from your decision there might be external benefits that you are overlooking. External benefits are the benefits enjoyed by someone other than the buyer or seller. In Chapter [2\Demand] we discovered that your demand curve is also your marginal benefit curve. For example, most people decide whether to get a flu shot by considering whether the marginal private benefit they'll enjoy is high enough to make it worth buying at a given price.

Sunk costs

A cost that has been incurred, and cannot be reversed.A sunk cost exists whether you make your choice, or not, and hence it is not an opportunity cost. Good decisions ignore yesterday's sunk costs. Sometimes when you've spent a lot of time or money on a project, you may think: "I can't stop now; I've already put so much into this project." But this is a mistake. When the time, effort, and other costs you put into the project cannot be reversed, they are referred to as "sunk costs." And good decision-makers ignore sunk costs. Why? The opportunity cost principle asks you to compare the consequences of your choice with the consequences of the next best alternative.Since sunk costs can't be reversed, you'll incur that cost under either scenario, which means that they are not opportunity costs. Thus, you should ignore sunk costs. There's another way to say this: Let bygones be bygones.

Non-rival

A good for which one person's use doesn't subtract from another's. Importantly, note that in each of these examples, the benefits enjoyed by the free‐rider don't actually hurt you. You still get to enjoy your clean home, even if your roommate also enjoys it. Your new mathematical breakthrough will be useful to you, even if others also use it. And better economic policy helps you, even if it also helps others. That is, consumption of clean homes, mathematical formulas, and better economic policy are non‐rival, which means that one person's enjoyment or use of them doesn't subtract from another's.

Rival

A good for which your use of it comes at someone else's expense. A rival good is one for which your use of it comes at someone else's expense. For instance, if you eat the cookie on the table, I can't. For businesses with rival and easily excludable goods, the free‐rider problem is never an issue. A cookie shop, for instance, simply won't give you a cookie if you don't pay. Because cookie shops can easily exclude those who don't pay from benefitting from their goods, they don't need to worry about free riders.

Individual supply curve

A graph plotting the quantity of an item that a business plans to sell at each price. While Shannon has written the plan up as a memo, economists find it more convenient to represent these plans in a simple graph, called an individual supply curve. An individual supply curve is a graph of the quantity that a business plans to sell at each price; it summarizes a business' selling plans. You can graph an individual supply curve for anything that you might sell—goods, services, your time, anything!—you just need to think about the quantity you'd sell at each price. The supply curve shown in Figure 4-2 plots the amount of gas BP will supply at different prices, given current economic conditions. But if something important were to change—say, the price of oil rose, or the wages of refinery workers fell—BP would change its plans, and those new plans would result in a new supply curve. It is upward-sloping because at higher gas prices, BP plans to supply a larger quantity. This makes sense—if each gallon brings a higher price, selling extra gallons of gas will be more profitable, and so BP should do more of it.

Market Demand Curve

A graph plotting the total quantity of an item demanded by the entire market, at each price. This means you'll need to figure out the total quantity demanded when the price is $1, then $2, then $3, and so on. At each specific price, the total quantity of gas demanded is simply the sum of the quantity that each potential consumer will demand at that price. There's a simple four‐step process that many managers follow to estimate the market demand curve for their products: *Be careful not to get confused: To add up demand, you add the quantity demanded by each individual at each price (and not the price each individual pays at each quantity).* 1) Survey your customers, asking each person the quantity they will buy at each price. (see figure 2-5) 2) For each price, add up the total quantity demanded by your customers. 3)Scale up the quantities demanded by the survey respondents so that they represent the whole market. 4)Plot the total quantity demanded by the market at each price, yielding the market demand dcurve.

Market supply curve

A graph plotting the total quantity of an item supplied by the entire market, at each price. Just as your firm's individual supply curve illustrates the quantity that an individual business will supply at each price, the market supply curve plots the total quantity that the entire market—including all producers—will supply, at each price.

Individual Demand Curve

A graph, plotting the quantity of an item that someone plans to buy, at each price. example: gas prices: $1 = 7 gal, $2 = 5 gal, $3 = 3 gal, $4 = 2 gal, $5 = 1 gal. Plot those to make a demand curve.

Quota

A limit on the maximum quantity of a good that can be sold. These limits are designed to reduce the quantity sold by reducing demand. Quotas however are more frequently placed on suppliers. For instance, New York City has a taxi quota, a cab is legal only if its owner holds a "medallion," and only 13,600 of these have ever been issued.

Import quota

A limit on the quantity of a good that can be imported. Tariffs and red tape affect trade because they raise the price of imports, reducing the quantity of shirts imported. However, setting an import quota would also have the same impact. An importquota limits the quantity of a good that can be imported. For instance, the $4 tariff on shirts in Figure 9‐7 reduces imports to a quantity equal to the width of rectangle E.

Price ceiling

A maximum price that sellers can charge. The rent is too high! It's a common rallying cry that leads residents to pressure policy‐makers to do something to control housing prices. Many large cities have some form of rent control—price regulations to set an upper limit on the amount some landlords can charge in monthly rent or the amount by which they can raise the rent for an existing tenant. The landlord may then allocate the apartment on some arbitrary basis, perhaps renting it only to family or friends, or those who share their political beliefs or have some other connection to the landlord. Some landlords may even illegally reject tenants based on race, ethnicity, family status, religion, or sex.

Price elasticity of demand

A measure of how responsive buyers are to price changes. It measures the percentage change in quantity demanded that follows from a one percent price increase. Price elasticity of demand = Percent change in quantity demanded / Percent change in price. Notice that the price elasticity of demand is a negative number because cutting the price raises the quantity demanded.

Price elasticity of supply

A measure of how responsive sellers are to price changes. It measures the percentage change in quantity supplied that follows from a one percent price change.Price elasticity of supply = Percent change in quantity supplied /Percent change in price The price elasticity of supply measures how responsive sellers are to price changes. Specifically, it measures by what percent the quantity supplied will increase following a one-percent price rise. The larger this percentage change in quantity supplied, the more responsive sellers are to price changes. Price elasticity of supply is positive. Quantity is fairly unresponsive when supply is inelastic. Airports, not airlines, control how many flights can go out of each gate, and there are a limited number of gates available. Just as with the price elasticity of demand, we say that supply is inelastic whenever the percent change in quantity supplied is smaller than the percent change in price.

Income Elasticity of Demand

A measure of how responsive the demand for a good is to changes in income. It measures the percentage change in quantity demanded that follows from a one-percent rise in income. = Percent change in quantity demanded / Percent change in income For example, my guess is that you will spend more on housing after you graduate and land a full-time job than you are spending today as a student. The reason is that housing is the kind of thing that people tend to spend more on when their income increases. This shouldn't be a surprise. After all, housing is a normal good, and you've already learned that demand increases for normal goods when income increases. Specifically, it measures by what percent the quantity demanded will change following a one-percent rise in income.

Cross-Price Elasticity of Demand

A measure of how responsive the demand of one good is to price changes of another. It measures the percentage change in quantity demanded that follows from a one-percent price rise in another good. = Percent change in quantity demanded / Percent change in price of another good Specifically, it measures by what percent the quantity demanded will rise following a one-percent increase in the price of another good. example: In 2015, Taylor Swift pulled her music from Spotify, arguing that the streaming service wasn't fairly compensating musicians. She believes that when fans stream music, they buy fewer CDs and downloads, leading musicians to earn less. Defenders of streaming services argue that Ms. Swift has it all wrong. They say that streaming is like the radio, and letting people hear the songs via streaming leads to more sales of CDs and paid downloads. So who's right? Researchers examining Spotify concluded that Ms. Swift is right—the cross-price elasticity of demand between Spotify and paid downloads or CDs is positive. So they are substitutes—people buy fewer downloads and CDs when they have access to Spotify. However, she's wrong about artists earning less. The cross-price elasticity of demand is small, meaning that the losses from displaced sales are small. It turns out that the losses are roughly offset by the fees that streaming services like Spotify pay to musicians, so overall earnings aren't lower.

Quantity regulation

A minimum or maximum quantity that can be sold.

Price floor

A minimum price that sellers can charge.

Shift in the Demand Curve

A movement of the demand curve itself. An INCREASE in demand is a shift to the RIGHT. A DECREASE in demand is a shift to the LIFT.

Shift in the supply curve

A movement of the supply curve itself. An increase in supply is a shift to the right. A decrease in supply is a shift to the left.

Public good

A non‐rival good that is subject to the free‐rider problem. A non‐rival good that is subject to the free‐rider problem is sufficiently important to have its own name: It's called a public good. The example of the national military gives you a hint as to why we call these public goods. Imagine that instead of a public (government‐run) military, a private company offered to provide national security—keeping your country safe from foreign invaders—for the low price of $20 per person per month. This company would quickly discover that they couldn't exclude people who didn't pay from enjoying the benefits of living in a safe nation. As such, few people would choose to pay, and most would free ride instead. The free‐rider problem is so severe that it's unlikely that any private company would find it profitable to provide national security. National security is also non‐rival—my enjoyment of our safety doesn't subtract from your enjoyment of it. Consequently, national security is a public good. The problem is that even though we all benefit from national security, the market will fail to provide it.

Subsidy

A payment made by the government to those who make a specific choice. For example, a Pell Grant is a subsidy that the government gives lower‐income people who choose to go to college. The government uses subsidies to try to encourage the consumption of certain goods like education. It turns out that you can use the same three‐step recipe you just learned to analyze a tax to understand how the quantity demanded, quantity supplied, and price will change in a market when the government offers a subsidy.

Binding price ceiling

A price ceiling that prevents the market from reaching the market equilibrium price, meaning that the highest price sellers can charge is set below the equilibrium price. Economists refer to a binding price ceiling when a price ceiling prevents the market from reaching the equilibrium price because the highest price that sellers can charge is set below the equilibrium price.

Movement Along the Demand Curve

A price change causes movement from one point on a fixed demand curve to another point on the same curve. A change in price causes a movement along the demand curve, yielding a change in the quantity demanded. Change in the quantity demanded - The change in quantity associated with movement along a fixed demand curve.

Movement along the supply curve

A price change causes movement from one point on a fixed supply curve to another point on the same curve. Notice that a price change led to a movement from one point on the market supply curve to another point along the same curve. That is, a price change causes movement from one point on a fixed supply curve to another point on the same curve. We use very specific terminology to keep this clear: a change in prices causes movement along the supply curve yielding a change in the quantity supplied. (This is just like demand, where a change in price yields a movement along the demand curve, and a change in the quantity demanded.) That covers the effects of price changes. Our next task is to evaluate how other changes will shift the supply curve.

Binding price floor

A price floor that prevents the market from reaching the equilibrium price, meaning that the lowest price that sellers can charge is above the equilibrium price. Sometimes they are trying to raise prices in order to help sellers. For example, the minimum wage is a price floor—it's a minimum price that can be charged for an hour of work. Governments typically set minimum wages in order to raise the wages received by the lowest wage workers.

Cap and Trade

A quantity regulation implemented by allocating a fixed number of permits, which can then be traded. Combining these insights has led to policy proposals in which the government regulates the quantity of the negative externality directly—setting a maximum or "cap" on the amount of pollution that is produced. The government issues permits (which are sometimes called tradable emissions permits), that allow their holders to produce a negative externality, such as a certain amount of sulfur dioxide emissions. By controlling how many permits it issues, the government can set a limit on the total quantity that the market as a whole can produce. A quantity regulation implemented by allocating a fixed number of permits, which can then be traded is called cap and trade. It leads to businesses producing the quantity where their marginal costs of production including pollution costs are equal to the marginal benefit of the units that they produce. However, those businesses that produce gas with fewer emissions will be more profitable because they can sell their permits, while others are buying permits.

Mandate

A requirement to buy or sell a minimum amount of a good. A health insurance mandate requires consumers to purchase health insurance. A housing mandate occurs when developers want to build new housing and they are told that they must also build (hence supply) a certain amount of low‐income housing.

Market

A setting bringing together potential buyers and sellers. We often refer to sellers as "suppliers" and buyers as "demanders." Armed with this definition, you'll see that markets are everywhere, organizing most of what we do. Modern economists believe that markets play an even larger role in your life beyond simply the "stuff" you buy and sell. This expansive view of economics requires a creative understanding of what the relevant "prices" are. For instance, as a voter, you're a supplier in the market for votes. These votes aren't literally bought and sold, but you're more likely to vote for the politician who promises the policies you want. And so the price in the market for votes is the set of policies that a politician promises. The higher this price—that is, the better the set of promises that a politician makes—then the more likely it is that you'll supply your vote for that politician.

Externality

A side effect of an activity that affects bystanders whose interests aren't taken into account. Economists call this an externality—a side effect of an activity that affects bystanders whose interests aren't taken into account. Externalities are just one source of market failure, and in future chapters, we'll examine how market power and information problems also lead to market failure. Solutions to the externality problem rely on "internalizing the externality." 1.Private bargaining 2.Fix the price: Corrective taxes and subsidies 3.Fix the quantity: Cap and trade 4.Laws, rules and regulations 5.Government provision of public goods 6.Assign ownership

Corrective tax

A tax designed to induce people to take account of the external costs due to the negative externalities they cause. A corrective tax can be designed to induce people to take account of the external costs of the negative externalities they create. The idea is that even if people ignore external costs because they accrue to bystanders, they can be assigned to pay those costs through a tax. Recall that a tax on sellers increases the seller's marginal cost by the amount of the tax.

Tarrif

A tax imposed on imported goods. A tariff is a tax on imported products. As such, tariffs increase the trade costs on imports. We can use our domestic demand and supply curves to figure out the consequences of this higher trade cost. Let's use our three‐step recipe to see the effects of adding a $4 tariff: First, what will the new price be? This tariff adds $4 to the trade costs of importers. Because the world price of $12 is fixed, importers have to pay the world price of $12 plus the tariff of $4. Therefore, the price of shirts rises by $4, to $16. Second, consult the domestic demand and supply curves to figure out what happens to quantities. These outcomes are shown in Figure 9‐7 in red: At the new higher price, the quantity demanded by domestic buyers is lower, while the quantity supplied by domestic suppliers is higher. Third, recall that imports make up the gap between the quantities demanded and supplied. Because this gap shrinks, imports fall.

Efficient allocation

Allocating goods to create the largest economic surplus, which requires that each good goes to the person who'll get the highest marginal benefit from it. An efficient allocation occurs when goods are allocated to create the largest economic surplus from them, which requires that each good goes to the person who gets the highest marginal benefit from it (at least as measured by how much they are willing to pay).

Economic efficiency

An outcome is more economically efficient if it yields more economic surplus. Economists often evaluate policies using the criterion of economic efficiency which says that the more economic surplus that's generated, the better the outcome. economic efficiency simply assesses whether economic surplus rises, and this can only occur if the gains in economic surplus to those who are helped are larger than the declines in surplus among those who are harmed.

Equity

An outcome yields greater equity if it results in a fairer distribution of economic benefits. They also focus on equity, which is about assessing whether a policy will yield a fair distribution of economic benefits. When you evaluate both efficiency and equity, you'll account for both the size of the pie, and how it's sliced.

Shift in demand effecting Equilibrium graph

Any change that leads you (or others) to buy a larger quantity at each price is an increase in demand, shifting the demand curve to the right. And if the change leads people to buy a smaller quantity at each price, it's a decrease in demand, shifting the demand curve to the left. Again, don't confuse these shifts in the demand curve with a movement along the demand curve due to a change in price, which is referred to as a change in the quantity demanded.

Voluntary exchange

Buyers and sellers exchange money for goods only if they both want to.

Planned economy

Centralized decisions are made about what is produced, how, by whom, and who gets what. example: Cuba and the former Soviet Union (and to a lesser degree, China)

Positive analysis

Describes what is happening, explaining why, or predicting what will happen. You can use it to forecast the number of people who'll get a pay rise, to estimate how much their pay will increase, to assess the effects on the profitability of employers, and to predict how many jobs businesses will eliminate due to these higher wages. An in-depth analysis might even detail the characteristics of those who'll gain and lose from such a policy. This type of inquiry—an assessment that describes, explains or predicts—is called positive analysis.

Perfectly competitive market

Markets in which: i. All firms in an industry sell an identical good, and ii. There are many buyers and sellers, each of whom is small relative to the size of the market. When you're operating in a perfectly competitive market, your best strategy is to charge a price that is pretty much identical to whatever your competitors are charging. Don't up-charge and do not down charge.

income effect

Measures how people's choices change when they have more income. A higher wage increases your income, leading you to choose more leisure and hence less work. The income effect measures how people's choices change when they have more income. A higher wage means that you have more income, and therefore you don't have to work as many hours to buy the things you were purchasing before the higher wage.

Efficient production

Producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost. Efficient production occurs when we produce a given level of output at the lowest possible cost. This requires allocating production so that each item is produced at the lowest marginal cost.

Rational Rule for Sellers in Competitive Markets

Sell one more item if the price is greater than (or is equal to) the marginal cost.

Domestic Supply Curves

Shows the quantity of a good that domestic suppliers—taken as a whole—plan to sell, at each price. Likewise, the domestic supply curve illustrates the quantity of goods that domestic sellers plan to sell at each price. These curves, which are shown in Figure 9‐2, will be familiar from our earlier study of supply and demand. ONLY to american buyers and sellers.

Job-specific skills

Skills only useful in your current job. Contrast this with job-specific skills.Examples include the skills an economist needs to use their firm's forecasting model, the skills a factory worker needs to operate the equipment specific to that factory, or the knowledge a human resources manager needs to learn about the firm's employment procedures.Because there's little chance that you'll find workers on the outside market who have these exact skills—after all, why would they know these things?—you'll need to provide such training internally.

General Skills

Skills useful to many employers. General skillsare skills that would be useful to many different employers.For instance, most of what you are learning in college would be categorized as general skills.It'sprecisely because these skills are portable to other firms that it General skillsSkills useful to many employers.Job-specific skillsSkillsonly useful in your current job. 18rarely makes sense for a firm to offer general skills training.Why?If you provided your star employees with, say, the skills you learn in an economics class, they could then use those skills to get an even better job at another firm.And so you would pay the cost of the training, but get none of the benefits.

Price taker

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price. Likewise, when you're a buyer in a perfectly competitive market—say, when you're buying gas—you're acting as a price-taker, because you take the price as given, and decide what quantity to buy.

Comparative advantage

The ability to do a task at a lower opportunity cost. To get the most output with your given inputs, you should allocate each task to the person with the lowest opportunity cost. That's such an important point that I'm going to say it again: You should allocate each task to the person with the lowest opportunity cost. This seemingly straightforward idea is so important that economists have a specific term for it: The person with the lower opportunity cost of completing a particular task has a comparative advantage at that task. comparative because opportunity cost compares what you can produce if assigned one task with what you would produce if you spent that time on another task. Sources of comparative advantage: 1: Abundant inputs 2: Specialized skills 3: Mass production

Absolute advantage

The ability to do a task using fewer inputs. If we measured costs in terms of time spent, she's got a point—each chore costs Jamie less or equal time than it costs Helen. Helen's argument is based on the idea that economists call absolute advantage, which is the ability of one person to do a task using fewer inputs. But Helen's conclusion is dead wrong because she's not thinking about costs the way an economist would. it's an advantage, because a lower opportunity cost means that you give up less to get a task done and so it's more efficient for you to do that task. Notice that, in an absolute sense, Helen is better at neither cooking nor vacuuming than Jamie. That is, Helen lacks an absolute advantage at any task. But even though Helen is slow at every household task, she can still help her household produce more.

Human capital

The accumulated knowledge and skills that make a worker more productive. Most nights after work,Imani heads out with her friends, while Brianna hits the books—she's been pursuing an MBA in the evenings. An opportunity arises to head up a new group, and you've got to choose who to promote.Who will you pick? I'm sure you would pick Brianna, reasoning that the knowledge and skills that she has learned in her MBA make her a more productive manager. Economists refer to these accumulated productive skills as your stock of human capital. Because greater human capital can raise your productivity, workers with more human capital tend to get paid more.

Gains from Trades

The benefits that come from reallocating resources, goods and services to better uses. What exactly is it that markets do? Here's the big idea. You have some stuff. Other people have other stuff. They want some of your stuff more than you do. You want some of their stuff more than they do. So you swap some of your stuff for some of their stuff. Hey, presto! You're both better off, because now you both have stuff you want more. These benefits you get from reallocating stuff to its better uses are called the gains from trade. Obviously I've simplified quite a bit, so let's connect the dots a bit more. Of course you don't directly trade your stuff for someone else's stuff. Instead, you buy and sell stuff using money. But money is just a convenience that allows you to engage in more complicated trades. In fact, everyone gains. Your employer gains because the work you did for her boosted her profits and now she can buy more stuff, just as the grocery store owner that sold you the food also gains, because he can spend your $20 to buy goods that he values more highly.

Change in the quantity supplied

The change in quantity associated with movement along a fixed supply curve. Notice that a price change led to a movement from one point on the market supply curve to another point along the same curve. That is, a price change causes movement from one point on a fixed supply curve to another point on the same curve. We use very specific terminology to keep this clear: a change in prices causes movement along the supply curve yielding a change in the quantity supplied. (This is just like demand, where a change in price yields a movement along the demand curve, and a change in the quantity demanded.) That covers the effects of price changes. Our next task is to evaluate how other changes will shift the supply curve.

Opportunity Cost

The cost of something is the next best alternative you have to give up to get it. *"or what?"* The poem the road not taken by Robert Frost is an example of opportunity cost. So, if you want to make sure that you are evaluating your opportunity cost correctly, you should ask yourself just two questions: 1.What happens if you pursue your choice? 2.What happens under your next best alternative?

Derived demand

The demand for an input derives from the demand for the stuff that input produces. In other words, unlike goods and services that you consume, demand for labor is not based on the desire to consume labor. Instead it is a result of the demand that your customers have for the stuff that your workers make. Economists call it a derived demand—the demand for labor is derived from the demand for the stuff you sell. Gabriela's salon is translating her customers' demand for haircuts into her demand for hair stylists.

Extrinsic motivation

The desire to do something for its external rewards such as higher pay. Economic thinking about financial incentives is useful for appealing to the extrinsic motivation of your workers—motivating them to gain external rewards, such as higher pay. Thus, higher wages can yield more productivity as workers try to return the favor.Also, because people can slack off when they feel they're being treated unfairly, your personnel policy should include clear and transparent procedures for promotions and pay raises.And remember, praise is free, but helps boosts productivity in your workers—we all like to feel valued.

Compensating differential

The differences in wages required to offset the desirable or undesirable aspects of a job. Morticians and cosmetologists require similar training—a vocational degree is required for both. So the reason morticians are paid so much more is not because of higher human capital, it's because it is unpleasant to spend your days looking after corpses.After all, why would you—or anyone—accept such an unpleasant job unless you were paid a bit more?The extra wage boost that you would earn as a mortician is called a compensating differential—a difference in wages required to offset the undesirable(or desirable) aspects of the job. It's compensating, because it compensates you for the adverse attributes of the job.And it's a differential, because it leads morticians to earn more than cosmologists. Real estate agents face great uncertainty, because they don't know how many houses they will sell, and hence how much commission they will earn.Investment bankers and corporate lawyers often work upwards of 80 hours per week.Management consultants often travel every week. Chefs typically work most nights, leaving little time for a social life.Miners literally risk their lives every day when they go to work.The impact of undesirableness on labor supply is what leads these jobs to be paid more. Many people simply wouldn't be willing to supply their labor at lower wages. For example, nurses who work nights earn more than those who work during the day. Why? Because working nights can wreak havoc on your family life and your physical health.

Consumer surplus

The economic surplus you get from buying something = Marginal benefit - Price When you gain economic surplus from buying something, economists refer to it as consumer surplus, because you're earning that surplus in your role as a consumer. You gain consumer surplus when you buy something for a cheaper price than the marginal benefit you get from it. The same idea applies to healthcare. Antibiotics that sell for only a few dollars can prevent a simple infection from becoming life-threatening. The vaccinations you got as a baby protect you from polio, tetanus, and hepatitis, yet they cost your parents very little. And if you've ever had a friend or relative survive a life-saving operation, you've probably enjoyed a lot of surgery-related consumer surplus. Even if the surgery cost thousands, that price is small relative to the benefit of saving a loved one.

Producer surplus

The economic surplus you get from selling something = Marginal cost - Price. Next time you go shopping, pay attention to how polite everyone is. When I last bought a pair of jeans, I handed over my $50 and said to the seller, "thank you," and the seller said to me "thank you." We now understand why. I said thank you, because the store gave me a pair of jeans that I valued at more than a $50 bill. I was grateful to gain some consumer surplus. And the seller said thank you because I gave them money that they value more than the stitched denim they were handing over. They were grateful to gain some producer surplus.

Efficient outcome

The efficient outcome yields the largest possible economic surplus. When economists describe an outcome as more efficient, they mean that it yields more economic surplus. At the extreme, the efficient outcome yields the largest possible economic surplus.

Monopsony power

The extra bargaining power a buyer gets when they are the only—or perhaps a major—buyer. When a firm is one of the few key buyers of labor, it will have greater bargaining power, since workers have fewer options. For instance, in some mining towns, there's really only one employer in town.And so as a worker, your only choices are to accept whatever wage is being offered, to go without work, or to leave town.So even if your marginal revenue product is $1,000 per week, you might accept a job paying only $600 per week.This is an example of monopsony power—where the firm uses its power as a major buyer to buy labor at lower prices.

Trade costs

The extra costs incurred as a result of buying or selling overseas, rather than domestically.

Marginal product of labor

The extra production that occurs from hiring an extra worker. In Chapter [3\Supply] you learned that extra production requires increasing your use of inputs like labor and that the extra production from hiring an extra worker is called the marginal product of labor. You also learned that most businesses experience diminishing marginal product—meaning that at some point, hiring additional workers yields smaller and smaller increases in output.

Shifts in supply effecting Equilibrium graph

The left panel shows an increase in supply, when the supply curve shifts to the right. The new equilibrium occurs at the point where this new supply curve cuts the demand curve, and it results in a new equilibrium price (of $2), and quantity (of 2.4 billion gallons). This new equilibrium price is lower than in the old equilibrium ($2, compared with $3), and the new quantity is larger (2.4 billion gallons, compared with 2 billion).

Diminishing marginal product

The marginal product of an input declines as you use more of that input. Most firms find that at some point, hiring additional workers yields smaller and smaller increases in output. That is, they experience diminishing marginal product, which occurs when the marginal product of an input declines as you use more of it. (Note that diminishing marginal product doesn't mean that extra inputs will reduce your output. Rather, it says that the extra output produced by the next worker you hire won't be quite as large as the extra output produced by the previous worker you hired.) example: You've probably experienced diminishing marginal product while writing a paper for a class. The first day's work might be super-productive; you gather your research, put your notes together, and start on a rough draft. On the second day, you expand on a few sections, improve your draft, and work out the inconsistencies. On the third day, you're starting with a pretty good paper, and while you can find ways to improve it, you're not making it much better. You could keep working on it forever, and each day you could probably find another small way to improve it. But you're experiencing diminishing marginal product, as the amount that each successive day's work will boost your grade gets smaller and smaller. At some point the marginal product of an additional day's work on the paper is so low that you're better off just handing it in, and catching up on your other subjects.

External cost

The negative side effects that accrue to people external to the exchange that generates them. The problem with negative externalities is that people make decisions without taking full account of the negative side effects they impose on others. These negative side effects are called external costs, because they accrue to people external to the exchange that generates them. For example, few people when they are shopping for an SUV consider that they'll make driving cars more dangerous for other people as a result of their decision to drive an SUV. If they did, they might not buy one. What this means is that negative externalities create incentives to do more of these activities than would be in society's best interests.

External benefit

The positive side effects that accrue to people external to the exchange that generates them. The positive side effects are called external benefits because they accrue to people external to the exchange that generates them.

Fixed Costs

Those costs which don't vary when you change the quantity of output you produce. Because you have to pay your fixed costs whether or not you expand your production, they're not part of the opportunity cost of producing more gas. Your fixed costs are irrelevant to your marginal cost.

Variable costs

Those costs — like labor and raw materials — which vary with the quantity of output you produce. Your variable costs are your marginal costs.

Import

To buy goods or services from foreign sellers. The most obvious reason to buy goods from abroad is that you can get a better deal. You will choose to import—that is, buy goods or services from foreign sellers—when foreign products are cheaper than their American‐made equivalents. Whenever you face a trade‐related question, first think about what will happen to the price. If you get this right, the rest should be straightforward. Supply‐and‐ 23 demand analysis tells you that higher prices lead domestic buyers to demand less and domestic sellers to supply more. (Lower prices lead to the opposite.) And the changes in consumer and producer surplus make sense if you simply remember that consumers like low prices while producers prefer high prices.

Government failure

When government policies lead to worse outcomes. The existence of market failure doesn't necessarily suggest that government will do a better job. That's because of another problem, government failure, which exists when government policies lead to worse outcomes. Often this arises because politicians and bureaucrats make choices that aren't in the public interest. Politicians are often more motivated to make the choices that will improve their re-election chances, rather than those that'll improve efficiency or equity. If the folks who head government agencies want to expand their empires, they'll often wind up creating a sprawling and bloated bureaucracy that fails to efficiently provide services.

Non‐excludable

When someone cannot be easily excluded from using a good. Our final task in this chapter is to analyze and solve externalities caused by the fact that sometimes it is hard to keep non‐paying customers from using a good. Economists call such goods non‐excludable because people cannot easily be excluded from using them. This problem can undermine an otherwise viable business plan and help explain why some industries are dominated by the government.

Market failure

When the forces of supply and demand lead to an inefficient outcome—one that does not maximize total economic surplus. Economists refer to this situation as market failure—when the forces of supply and demand lead to an inefficient outcome. When this happens, markets lead to an equilibrium quantity that does not maximize total economic surplus.

Perfectly elastic

When the percent change in quantity is infinite for any percent change in price. When the demand curve is completely horizontal it means that the price elasticity of demand is infinite—any change in price leads to an infinite change in quantity. Economists call this perfectly elastic demand.

Elastic

When the percent change in quantity is larger than the percent change in price, which means that the price elasticity is greater than one. What Uber found was that riders were very responsive to prices. When they cut prices, rides went up by an even greater percentage. When buyers are very responsive to price, economists describe their demand as elastic. Specifically, we say that demand is elastic whenever the absolute value of the percent change in quantity demanded is larger than the absolute value of the percent change in price. This also means that the absolute value of the price elasticity of demand is larger than one. When demand is elastic, price rises also lead to large changes in the quantity demanded. And she likes to take road trips on the weekend, to go hiking in a national park, or to spend a day at the beach, four hours away. When the price of gas rises, however, the cost of that day at the beach becomes a bit too high, and when the price of gas goes even higher, those other road trips start to look pretty expensive, too. After all, she can hang out with friends in her neighborhood, go for a run in her neighborhood or a swim at the community pool. All of this means that when the price of gas increases, the quantity of gas Matilda demands falls by a lot. The availability of substitutes determines the price elasticity of demand. We'll now take a look at five determinants of the price elasticity of demand, but you'll quickly see that these determinants are simply factors that help explain what kind of substitutes you are likely to have.

Inelastic

When the percent change in quantity is smaller than the percent change in price, which means that the price elasticity is less than one. Oliver needs his car to get to his job in the suburbs. He just doesn't use it for much else. When the price of gas rises, he doesn't really have much choice but to keep buying gas to get to work, and when the price falls, he doesn't feel the need to drive anywhere else. As such, the quantity of gas Oliver demands is quite unresponsive to changes in price. When buyers are not very responsive to price changes, economists describe their demand as inelastic. Specifically, we say that demand is inelastic whenever the absolute value of the percent change in quantity demanded is smaller than the absolute value of the percent change in price. This also means that the absolute value of the price elasticity of demand is smaller than one. The availability of substitutes determines the price elasticity of demand. We'll now take a look at five determinants of the price elasticity of demand, but you'll quickly see that these determinants are simply factors that help explain what kind of substitutes you are likely to have.

Perfectly inelastic supply

When the percent change in quantity supplied is zero for any change in price. When the supply curve is completely vertical it means that the price elasticity of supply is zero—no matter what the change is in price, the total quantity supplied is unchanged.

Shortage

When the quantity demanded exceeds the quantity supplied, a shortage will result. Figure 4-2 demonstrates that when gas is only $2 per gallon, a shortage will result the quantity of gas demanded (2.4 billion gallons per year) far exceeds the quantity supplied (1.5 billion gallons). There are too many people chasing too little gas, leading to shortages. As a result, individual gas stations find themselves selling out of gas, or facing long queues of desperate customers. Gas customers are also a critical part of the process of pushing prices toward equilibrium. If you're a customer who's worried about a gas shortage, you might tell a gas station owner that you're willing to pay 10 cents per gallon above her posted price of $2.20 to avoid missing out, and so the price rises to $2.30. As this process continues, prices will keep rising until the gas shortage is eliminated, which occurs when the price is $3. How can you tell whether a market is in a supply-equals-demand equilibrium? A simple diagnostic is to check whether prices are changing. Whenever the price is rising, that's a sign that at the current price, the quantity demanded exceeds the quantity supplied. And if prices are falling, it's likely that the quantity supplied exceeds the quantity demanded. If prices are free to adjust, then eventually these markets will be drawn to their equilibrium.

Surplus

When the quantity demanded is less than the quantity supplied, a surplus will result. figure 4-3 illustrates that when supply and demand are out of step, the forces of competition push markets toward the equilibrium price, thereby eliminating any shortages or surpluses. Economists emphasize this equilibrium point because it can help you figure out whether prices are headed up or down. And it's only when a market reaches equilibrium that supply and demand will be in balance, and so there'll be no tendency for prices to change. How can you tell whether a market is in a supply-equals-demand equilibrium? A simple diagnostic is to check whether prices are changing. Whenever the price is rising, that's a sign that at the current price, the quantity demanded exceeds the quantity supplied. And if prices are falling, it's likely that the quantity supplied exceeds the quantity demanded. If prices are free to adjust, then eventually these markets will be drawn to their equilibrium.

Distributional consequences

Who gets what. That's why in reality, most economists look beyond efficiency, and also analyze the distributional consequences of new policies—meaning who gets what—and assess whether that outcome seems fair or equitable. This critique says that it's not just the size of the pie that matters, but also how it's sliced.

Rational Rule for Workers

Work more hours as long as the wage is at least as large as the marginal benefit of another hour of leisure. The Rational Rule for Workers: Work more hours as long as the wage is at least as large as the marginal benefit of another hour of leisure.Now if you follow this rule, you'll keep choosing more work and less leisure until the marginal benefit of one more hour of leisure is equal to the wage. Bottom line: Just as labor demand is all about your marginal revenue product, your labor supply is all about the marginal benefit of leisure.