Econ 3 Berkeley Terms

Front 1

Opportunity cost

Back 1

Economists usually consider the cost of a decision to be what we give up as a consequence, not just how much something costs in dollars (This is sometimes expressed by saying that the value of a resource is what it would have been worth in its best alternative use).

Front 2

Resources

Back 2

Things provided by nature or produced by people that can be used to create goods or services that we want. Note that we can define a resource in terms of how much material physically exists, or in terms of how much we can find and economically extract. Examples of resources: labor, capital, land, environmental quality (e.g., clean water).

Front 3

Capital good

Back 3

A good that can be used to produce something else (e.g., a bread-making machine)

Front 4

Production Possibilities Frontier

Back 4

A mapping of the decision space for an individual or a society in its assignment of resources between two competing objectives. The frontier shows the maximum of any one good or objective you can enjoy while simultaneously enjoying a given level of some other good or objective.

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Efficiency

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(1) Outputs are produced efficiently when there is no way to produce larger amounts of any output without using larger input amounts or giving up some quantity of another output, given current technology. (2) A society is producing efficiently if it is located on its PPF.

Front 6

Demand Curve

Back 6

the quantity of a good that consumers are willing and able to buy in a given period as a function of price, or equivalently, as the price at which consumers can be expected to purchase a given quantity of a good.

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Supply Curve

Back 7

the quantity of a good that producers are willing and able to sell in a given period as a function of price – or equivalently, as the price at which producers can be expected to deliver a given quantity of a good to the market.

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Equilibrium

Back 8

A situation in which there are no inherent forces that produce change.

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Complements

Back 9

(1) Goods that are consumed together. (2) Goods for which the cross-price elasticity of demand is negative.

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Substitutes

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(1) Goods that satisfy the same basic need. (2) Goods for which the cross-price elasticity of demand is positive.

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Total Monetary Utility

Back 11

The maximum amount of money that consumer is willing and able to give up to consume a particular quantity of a good.

Front 12

Marginal Utility

Back 12

The additional amount of money a consumer is willing to give up to be able to consumer one additional unit of a good.

Front 13

Law of Diminishing Marginal Utility

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As a consumer’s consumption of a good increases, additional units of a good are worth less and less to him or her.

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Consumer Surplus

Back 14

The sum of the marginal net utilities for all units of a good consumed.

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Normal Good

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When a consumer’s income increases but the price of a good remains unchanged, he or she will consume more of that good if it is a normal good.

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Inferior Good

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When a consumer’s income increases but the price of a good remains unchanged, he or she will consume less of that good if it is an inferior good.

Front 17

Law of Demand

Back 17

The inverse relationship that generally exists in a market between price and quantity demanded.

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Conspicuous Consumption

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Consumer behavior that motivated by satisfaction derived not as much from the inherent qualities of a good as by the general knowledge that it is expensive.

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Consumption Indifference Curve (CIC)

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A line connecting all combinations of two consumer goods between which the consumer is indifferent.

Front 20

Production Indifference Curve (PIC)

Back 20

shows the combinations of two inputs that can be used by a firm to produce a certain level of output.

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Budget Line

Back 21

For a consumer, the budget line identifies all combinations of two goods that can be purchased for a given set of prices given a budget. For a firm, the budget (or isocost) line that shows all combinations of two inputs that can be obtained for a given cost.

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Consumption Curve

Back 22

The set of optimal combinations of two goods that a consumer will choose as his/her budget increases. The optimal combination of goods for any budget is given by the tangency of the budget line and a CIC.

Front 23

Expansion Path

Back 23

The set of optimal combinations of two inputs that a firm will use as its budget (cost) increases. The optimal combination of inputs for any output is given by the tangency of the budget (isocost) line and a PIC.

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Price Elasticity of Demand

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Percent change in quantity demanded of a good divided by percent change in that good’s price. Calculated as [ΔQd/Qd] / [ΔP/P] or [%ΔQd] / [%ΔP].

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Perfectly Inelastic

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No change in quantity demanded for a change in price. Graphs as a vertical line.

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Perfectly Elastic

Back 26

Infinite change in quantity demanded for any change in price. Graphs as a horizontal line.

Front 27

Price Elasticity of Supply

Back 27

Percent change in quantity supplied of a good divided by percent change in that good’s price. Calculated as [ΔQs/Qs] / [ΔP/P] or [%ΔQs] / [%ΔP].

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Cross-Price Elasticity of Demand

Back 28

Percent change in quantity demanded of good i divided by percent change in the price of good j. Calculated as [ΔQi/Qi] / [ΔPj/Pj] or [%ΔQi] / [%ΔPj].

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Total Physical Product (TPP)

Back 29

The relationship between the quantity of the input used and the output produced, holding the use of all other inputs constant.

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Average Physical Product (APP)

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The average output produced by one unit of input. APP = TPP/QI where QI is the amount of input used.

Front 31

Marginal Physical Product (MPP)

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The additional output produced by using one more unit of one input (holding other inputs constant).

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Law of diminishing marginal returns

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As we increase the usage of any one input while holding the use of all other inputs constant, the marginal returns to that input will eventually diminish, and may even become negative.

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Marginal Revenue Product (MRP)

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The additional revenue obtained from the use of an additional unit of input. MRP = MPP * PriceOutput

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Total Revenue (TR)

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The product of a firm’s output times the price of that output. TR = P*Q

Front 35

Average Revenue (AR)

Back 35

The average revenue earned from selling one unit of output. AR = TR/Q = P*Q/Q = P. Since AR = P, a firm’s demand curve is sometimes called an average revenue curve.

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Marginal Revenue (MR)

Back 36

The additional revenue generated by producing an additional unit of output

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Total Cost (TC)

Back 37

The total cost, including opportunity cost, of producing a given level of output.

Front 38

Average Cost (AC)

Back 38

The average cost of producing one unit of output. AC = TC/QOutput

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Marginal Cost (MC)

Back 39

The additional cost of producing one more unit of output.

Front 40

Total Fixed Costs (TFC)

Back 40

Costs that do not change with output – these are the pre-committed costs that a firm incurs regardless of whether it produces any output or not.

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Total variable costs (TVC)

Back 41

Costs that vary with output, e.g., the costs of raw materials and labor.

Front 42

Average Fixed Costs (AFC)

Back 42

The average fixed cost of producing one unit of output. AFC = TFC/QOutput

Front 43

Average variable costs (AVC)

Back 43

The average variable cost of producing one unit of output. AVC = TVC/QOutput

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Short-Run

Back 44

The period within which sunk costs affect a firm's decision making.

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Long-Run

Back 45

The period beyond which sunk costs affect a firm's decision making.

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Total Profit (TP)

Back 46

The difference between revenues and costs. TR-TC

Front 47

Marginal Profit (MP)

Back 47

The additional profit resulting from producing another unit of output

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Zero Economic Profit

Back 48

A firm is making zero economic profit when it earns what it needs to earn to justify using the resources it is using, including capital.

Front 49

Constant Returns to Scale (CRS)

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When all inputs to a production process are increased, and output increases proportionately.

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Decreasing Returns to Scale (DRTS)

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When all inputs to a production process are increased, and output increases less than proportionately.

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Increasing Returns to Scale (IRTS)

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When all inputs to a production process are increased, and output increases more than proportionately.

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Price-taker

Back 52

A firm that takes the market price as given (i.e., faces a horizontal demand curve).

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Price-maker

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A firm that faces a downward-sloping supply curve.

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Perfectly Competitive Market

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A perfectly competitive market is defined by (1) Many buyers and sellers; (2) Product homogeneity; (3) Free entry and exit; and (4) Perfect information.

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Monopolistic Competition

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A monopolistically competitive market is defined by (1) Many buyers and sellers; (2) Product heterogeneity; (3) Free entry and exit; and (4) Perfect information.

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Oligopoly

Back 56

An oligopoly occurs when there are a few large sellers, each large enough to affect market price.

Front 57

Monopoly

Back 57

A monopoly occurs when a market is defined by: (1) Only one firm; (2) No close substitutes; (3) Barriers to entry.

Front 58

Natural Monopoly

Back 58

Occurs when the cost advantage of large scale production is so great that the total market output is most efficiently produced by one firm.

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Monopsony

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In factor or input markets, a condition similar to monopoly may exist in which there is only one buyer.

Front 60

Marginal Resource Cost (MRC)

Back 60

This is the cost of purchasing another unit of input. For a monopsonist, the MRC is greater than the average cost (AC) of obtaining that input.

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Cartel

Back 61

A group of firms that acts together (i.e., acts like a monopoly) to increase their profitability.

Front 62

Game Theory

Back 62

A way to model the decision making of firms in terms of the alternative strategies they may adopt, and the payoff to each of these strategies as a function of the strategies adopted by their rivals.

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Maximin Strategy

Back 63

In game theory, this strategy means you assume you that your competitor will adopt the worst possible strategy for you based on whatever strategy you adopt.

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Contestable Market

Back 64

A market in which the threat of new competitors may prevent the existing firms from exercising their market position to raise prices and earn an economic profit.

Front 65

Regulation

Back 65

Special agencies are charged with responsibility for interpreting and administering laws designed to regulate pricing and practices in some sector of the economy

Front 66

Marginal Cost Pricing

Back 66

When prices are set equal to marginal cost by a regulator.

Front 67

Average Cost Pricing

Back 67

When prices are set equal to average cost by a regulator.

Front 68

Ramsey Pricing Rule

Back 68

Using this rule, a regulator (1) Caps profits for a regulated firm as a whole; (2) Requires marginal cost (MC) pricing for most products; and (3) Allows prices above MC for the remaining products to subsidize those priced at MC.

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C4 Ratio

Back 69

Output of the four largest firms divided by industry output (a measure of market concentration).

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Herfindahl-Hirschman Index (HHI)

Back 70

Another measure of market concentration, computed by squaring the market share of each firm in an industry and adding these numbers together.

Front 71

Vertical Mergers

Back 71

Involve firms at different stages in the production process of some good.

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Conglomerate Mergers

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Involve firms in entirely separate lines of business, and are motivated by portfolio theory.

Front 73

Horizontal Mergers

Back 73

Involve firms producing essentially the same product.

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Negative Externality

Back 74

An activity is said to generate a detrimental (or negative) externality when it causes incidental damage to others who are not directly involved in the activity that need not be compensated for this damage.

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Positive Externality

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An activity is said to generate a beneficial (or positive) externality when it causes incidental benefits to others who are not directly involved in the activity that need not pay for this benefit.

Front 76

Marginal Private Cost (MPC)

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The additional cost of producing an additional unit of output, to the firm that produces the output.

Front 77

Marginal Social Cost (MSC)

Back 77

The additional cost to society of producing an additional unit of output.

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Excludable Good

Back 78

A good for which consumption can made contingent upon some kind of payment.

Front 79

Depletable Good

Back 79

A good for which joint consumption isn't possible.

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Public Good

Back 80

A good that is non-excludable, non-depletable, or both.

Front 81

Free Rider Problem

Back 81

Occurs for goods that are nonexcludable, because people have no reason to voluntarily reveal their willingness to pay for the good when they do not believe that their payment will affect whether or not the good will be supplied and therefore available for their consumption.

Front 82

Rent Seeking

Back 82

unproductive activity in pursuit of economic profit.

Front 83

Moral Hazard

Back 83

The tendency of insurance to discourage policyholders from protecting themselves from risk.

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Capital Gain

Back 84

When you buy something like a building or stock in a company, then sell it for more than you paid for it, the difference is called a capital gain. (If you sell it for less than you paid for it, the difference is a capital loss.)

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Benefits Principle

Back 85

The beneficiaries of a government program should pay for it.

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Use value

Back 86

The value an agent puts on using a good or service.

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Option value

Back 87

The value an agent puts on having the option to possibly use a good or service at some point in the future.

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Nonuse value

Back 88

The value an agent puts on using a good or service not associated with personal use of the good or service.

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Direct valuation

Back 89

Determining the value of a good or service by direct observation of the choices agents make in real or simulated markets for that good or service.

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Indirect valuation

Back 90

Determining the value of a good or service by observing decisions made by consumers that reflect the values they place on something.

Front 91

Travel cost valuation

Back 91

Determining the demand curve for a recreation site by observing the effects of distance on the frequency with which recreationists visit the site.

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Contingent valuation

Back 92

Using surveys to determine willingness-to-pay or willingness-to-accept values for some good or service.

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Hedonic valuation

Back 93

Determining the part of the value of a good or service associated with one of its characteristics.

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Avoidance expenditures

Back 94

Money or effort expended to avoid something.

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Willingness to pay

Back 95

The amount of money an agent is willing and able to pay for a good or service.

Front 96

Willingness to accept

Back 96

The amount of money an agent is willing to receive in compensation for a good or service.

Front 97

Net present value

Back 97

The difference between the discounted benefits and discounted costs
associated with a decision.

Front 98

Benefit-cost ratio

Back 98

The ratio of the net present value benefits to the net present value of costs associated with a decision.

Front 99

Cost effectiveness

Back 99

Achieving a given objective at the lowest possible cost.

Front 100

Property rights

Back 100

Rights with respect to resources, goods or services. For property rights to be complete, they must be exclusive, transferable, and enforceable.

Front 101

Scarcity rent

Back 101

Producer surplus that persists in the long run due to fixed supply or increasing costs.

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Cartel

Back 102

A group of firms that act collectively (i.e., like a monopoly) to restrict output in order to capture persistent economic profits.

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Surface water

Back 103

Water in streams, rivers, lakes, etc

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Ground water

Back 104

Water held in porous rock.

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Flow

Back 105

Something measured as a rate over time.

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Stock

Back 106

Something measured as an absolute quantity.

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Prior appropriation

Back 107

The type of water rights held in the arid Western U.S., to use a given amount of water for a specific beneficial use, with rights claimed earlier having priority over rights claimed later when sufficient water is not available to satisfy all rights.

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Riparian rights

Back 108

The type of water rights held in the Eastern U.S. or Europe, in which rights are established by ownership of land adjacent to surface water.

Front 109

Shortage

Back 109

When the quantity of some good or service supplied is less than the quantity demanded due to a price that is below the market equilibrium.

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Scarcity

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If a good or service is scarce, its opportunity cost is high. Increasing scarcity for a good or service is indicated by a rising real price (reflecting a rising opportunity cost).

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Comparative advantage

Back 111

The ability to produce a good at a lower cost, relative to other goods, compared to another country.

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Production Function

Back 112

A function that specifies the output in an industry for all combinations of inputs.

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Mean annual increment

Back 113

The volume of wood in a stand of trees per unit of area divided by how long the stand has been growing (i.e., the average product of time as a production input into growing wood).

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Biologically efficient rotation

Back 114

The rotation that maximizes the production of wood per unit time per unit area (i.e., the rotation that maximizes mean annual increment).

Front 115

Economically efficient rotation

Back 115

The rotation that maximizes the net present value of a stand of trees.

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Schaefer model

Back 116

A model of the growth in the stock (population) of a fishery as a function of the stock (population).

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Equilibrium

Back 117

In the Schaefer model, a level of stock at which growth is zero.

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Stable equilibrium

Back 118

In the Schaefer model, if the stock of fish moves slightly away from a stable equilibrium, the growth in fish stock causes the stock to return to the equilibrium.

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Unstable equilibrium

Back 119

In the Schaefer model, if the stock of fish moves slightly away from an unstable equilibrium, the growth in fish stock causes the stock to move farther and farther away from the equilibrium.

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Maximum sustained harvest (yield)

Back 120

The largest harvest (yield) from a fishery that can be sustainably removed.

Front 121

Natural Stock (AKA carrying capacity)

Back 121

The stock (population) that would be observed in an unexploited fishery.

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Minimum viable stock

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The stock (population) below which a fishery stock cannot sustain itself.

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Efficient harvest (yield)

Back 123

The sustainable harvest (yield) from a fishery that maximizes the difference between the value of the harvest and the cost of the effort to obtain that harvest.

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Stock pollutant

Back 124

A pollutant for which the environment has limited assimilative capacity – stock pollutants tend to accumulate over time.

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Fund pollutant

Back 125

A pollutant for which the environment has some assimilative capacity.

Front 126

Marginal cost of damage

Back 126

The damage done by increasing the level of pollution by one unit.

Front 127

Marginal cost of control

Back 127

The cost of reducing the level of pollution by one unit.

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Emission charge (tax)

Back 128

A charge assessed per unit of pollution emitted.

Front 129

Transferable emission permit (quota)

Back 129

Rights to emit a unit of pollution that can be bought and sold.

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Command and Control (CAC) approach

Back 130

Pursuing the goal of reducing air pollution from stationary-source conventional pollutants by setting emissions standards.

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Conventional pollutants

Back 131

Non-toxic pollutants; also, roughly corresponds to fund pollutants

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Criteria pollutants

Back 132

Conventional pollutants regulated under the Clean Air Act (exception: lead is toxic, but is a criteria pollutant).

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Ambient air quality standard

Back 133

A standard set by the Clean Air Act that mandates the maximum average allowable concentration of a criteria pollutant in outdoor air over some time period.

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Primary standard

Back 134

Standard designed to protect human health.

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Secondary standard

Back 135

Standard designed to protect aesthetics, vegetation, and infrastructure.

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Offset, bubble, and netting programs

Back 136

Various programs that allow an increase in emissions from one source as long as compensating decreases are made from other sources.

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Water pollution - consumptive removals

Back 137

A removal of water from waterway in which the water is not returned to the same location in the hydrological cycle.

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Water pollution - nonconsumptive removals

Back 138

A removal of water from a waterway in which the water is returned to the same location in the hydrological cycle with contaminants.

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Water pollution - Point source

Back 139

A stationary, easily identifiable location from which pollution is discharged.

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Non-point source

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A diffuse area of set of sources from which pollution is discharged.

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Toxic

Back 141

A chemical that is fatal or harmful in relatively small quantities.

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Acute toxicity

Back 142

Toxicity that manifests itself shortly after exposure.

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Chronic toxicity

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Toxicity resulting from exposure over a long time period.

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Dose-response assessment

Back 144

Quantitative assessment of toxicity.

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Exposure assessment

Back 145

Determination of how exposure to a toxic chemical occurs – by inhalation, eating, drinking, or skin absorption.

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Risk characterization

Back 146

Determining the magnitude of the risk posed by a toxic chemical.

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LD-50

Back 147

The dosage of a toxic chemical that is fatal to 50% of a population.

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Bio-concentration

Back 148

When a toxic chemical accumulates in living tissue.

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Direct Use Value

Back 149

the market value of consuming a biological resource (e.g., bush meat)

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Indirect Use Value

Back 150

the role an environmental resource plays in the production of a market commodity (e.g., of forests in the production of salmon, a positive economic externality)

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Option Value

Back 151

the value of opportunity to utilize a resource in the future

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Discovery Value

Back 152

the unknown value of presently undiscovered dimensions of a biological resource (e.g., yew as a cure for cancer)

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Bequest Value

Back 153

the value of preserving a resource for future generations

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Existence Value

Back 154

the value conferred by the survival of a biological resource

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Nonhuman Value (NHV)

Back 155

the value of biological species in their own right, distinct from their value to a human society (UNEP “Non-anthropocentric instrumental value”)

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Functional obsolescence

Back 156

means that we find a better way to do something (Transistors vs. vacuum tubes, integrated circuits (chips) vs. transistors, personal computers vs. mainframes, CDs vs. vinyl recordings)

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Fashion obsolescence

Back 157

referrers to the replacement of a consumer product with others that differ more in appearance rather than function

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Durability obsolescence

Back 158

depreciation in the value of a current product when its usefulness declines due to wear and tear

Front 159

How does one correct for externalities from using virgin materials in manufacture?

Back 159

can use a “take-back” policy, tax, subsidy, or command and control (CAC) policy

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Full cost principle

Back 160

all users of environmental goods and services should pay the full social cost of their use of those goods and services