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128 Cards in this Set
- Front
- Back
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welfare economics
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the study of how the allocation of resources affects economic well-being
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willingness to pay
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how much a buyer values the good, the max he is willing to pay
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consumer surplus
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amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
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marginal buyer
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the buyer who would leave the market first if the price were any higher
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cost
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the value of everything a seller must give up to produce a good
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producer surplus
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the amount a seller is paid minus the cost of production, measures the benefit sellers recieve from participating in market
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marginal seller
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the seller who would leave the markt first if the price were any lower
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total surplus
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sum of consumer and producer surplus, (Value of Buyers) -- (Cost to Sellers)
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efficiency
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allocation of resources maximizes total surplus
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equality
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whether the various buyers and sellers in the market have a similar level of economic well-being
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laissez faire
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"allow them to do", the policy of leaving the market alone and letting it naturally play out
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market power
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ability to influence prices in a market, can be inefficient because keeps market away from equilibrium
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externalities
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side effects of using or making a product, they cause welfare in a market to depend on more than just the values to buyers and cost to sellers
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market failure
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the inability of some unregulated markets to allocate resources efficiently, market power and externalities are examples of this
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deadweight loss
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the fall in total surplus that results from a market distortion, such as a tax
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Laffer Curve
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tax revenue first rises with the size of the tax, but as the tax gets larger, the market shrinks so much that tax revenue starts to fall
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industrial organization
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the study of how firms' decisions about prices and quantities depend on the market conditions they face
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total revenue
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the amount a firm receives for the sale of its output
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total cost
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the market value of the inputs a firm uses in production
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profit
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total revenue - total cost
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explicit costs
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input costs that require an outlay of money by the firm
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implicit costs
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input costs that do not require an outlay of money by the firm
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economic profit
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total revenue minus total cost (including both explicit and implicit costs)
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accounting profit
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total revenue minus total explicit cost
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production function
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the relationship between quantity inputs (workers) used to make a good and the quantity of output of that good (cookies)
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marginal product
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the increase in output that arises from an additional unit of input
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diminishing marginal product
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the property whereby the marginal product of an input declines as the quantity of the input increases
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fixed costs
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costs that do not vary with the quantity of output produced, incurred even if company produces nothing at all
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variable costs
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costs that vary with the quantity of output produced
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average total cost
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total cost divided by the quantity of output, also is the sum of AFC and AVC
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AFC
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fixed cost / quantity of output
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AVC
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VC / quantity of output
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marginal cost
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amount the total cost rises when firm increases production by 1 unit of output, MC = Change in TC / Change in Q
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efficient scale
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the quantity of output that minimizes ATC
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economies of scale
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the property whereby long-run ATC falls as the Quantity of output increases
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diseconomies of scale
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the property whereby long-run ATC rises as the Quantity of output increases
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constant returns to scale
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long run ATC does not vary with the level of output
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competitive market (perfectly competitive market)
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many buyers and sellers (price takers), goods offered are largely the same, firms can freely enter or exit the market
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shutdown
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short-run decision not to produce anything during a specific period of time because of current market conditions, IF P<AVC
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exit
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long-run decision to leave market, IF P<ATC
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sunk cost
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a cost that has already been committed and cannot be recovered, you can ignore them when making decisions about various aspects of life, including business strategy
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profit equation
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(P-ATC) x Q
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monopoly
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a firm that is the sole seller of a product without close substitutes, the fundamental cause is "barriers to entry"
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barriers to entry for monopolies
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monopoly resources, government regulation, and production process
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natural monopoly
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monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms...Ex) distribution of water
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price discrimination
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the business practice of selling the same good at different prices to different customers
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imperfect competition
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industries that fall between perfect competition and monopoly
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oligopoly
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only a few sellers offer similar or identical products
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concentration ratio
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percentage of total output in market supplied by four largest firms, most industries in US are less than 50%, largest is cigarettes (95%)
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monopolistic competition
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many firms sell products that are similar but not identical: many sellers, product differentiation, and free entry and exit
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efficiency (societal)
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the property of society getting the most it can from its scarce resources
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equality
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the property of distributing economic prosperity uniformly among the members of society
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externality
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the uncompensated impact of one person's actions on the well-being of a bystander
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incentive
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something that induces a person to act
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inflation
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increase in the overall level of prices in the economy
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marginal change
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a small incremental adjustment to a plan of action
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market economy
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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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market failure
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a situation in which a market is left on its own fails to allocate resources efficiently
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market power
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ability of a single economic actor to have a substantial influence on market prices
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opportunity cost
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whatever must be given up to obtain some item
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productivity
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the quantity of goods and services produced from each unit of labor input
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property rights
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the ability of an individual to own and exercise control over scarce resources
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rational people
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people who systematically and purposefully do the best they can to achieve their objectives
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scarcity
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the limited nature of society's resources
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circular flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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microeconomics
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the study of how households and firms make decisions and how they interact in markets
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normative statements
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claims that attempt to prescribe how the world should be
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positive statements
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claims that attempt to describe the world as it is
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production possibilities frontier
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graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
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absolute advantage
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ability to produce a good using fewer inputs than another producer
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comparative advantage
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ability to produce a good at a lower opportunity cost than another producer
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exports
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goods and services that are produced domestically and sold abroad
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imports
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goods and services that are produced abroad and sold domestically
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opportunity cost
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whatever must be given up to obtain some item
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competitive market
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a market with many buyers and sellers trading identical products so that each buyer and seller is a PRICE TAKER
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complements
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
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demand curve
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a graph of the relationship between the price of a good and the quantity demanded
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demand schedule
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table that shows relationship between the price of a good and the quantity demanded
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equilibrium
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situation where the market price has reached the level at which quantity supplied equals quantity demanded
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equilibrium price
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price that balances quantity supplied and quantity demanded
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equilibrium quantity
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quantity supplied and quantity demanded at the equilibrium price
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inferior good
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a good where an increase in income leads to a decrease in demand
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law of demand
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claim that the quantity demanded of a good falls when the price of the good rises
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law of supply
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claim that the quantity supplied of a good rises when the price of the good rises
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law of supply and demand
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claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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market
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group of buyers and seller of a particular good or service
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normal good
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a good for which an increase in income leads to an increase in demand
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shortage
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situation in which quantity demanded is greater than quantity supplied
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substitutes
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two goods for which an increase in the price of one leads to an increase in demand for the other
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supply schedule
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table that shows the relationship between the price of a good and the quantity supplied
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surplus
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a situation in which quantity supplied is greater than quantity demanded
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cross-price elasticity of demand
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measure of how much the quantity demanded of one good responds to the change of price of another good...computed as a percentage change in quantity demanded of first good, divided by percentage change in price of second good
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elasticity
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measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
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income elasticity of demand
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a measure of how much the quantity demanded of a good responds to a change in consumer's income, computed as the % change in quantity demanded divided by the % change in income
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price elasticity of demand
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measure of how much the Qd of a good responds to a change in the price of that good, copmuted as the % change in Qd / by the % change in P
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price elasticity of supply
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measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the % Change in Qs / % change in price
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total revenue (in a market)
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the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
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price ceiling
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legal maximum on the price at which a good can be sold
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price floor
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legal minimum on the price at which a good can be sold
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tax incidence
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manner in which the burden of a tax is shared among participants in a market
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internalizing the externality
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altering incentives so that people take account of the social effects of their actions
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Coase theorem
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private economic actors can potentially solve the problem of externalities among themselves
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transaction costs
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costs that parties incur in the process of agreeing to and following through on a bargain
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cost/benefit analysis
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compares the costs and benefits of providing a public good
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collusion
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an agreement among firms in a market about quantites to produce or prices to charge
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cartel
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group of firms acting in unison
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Nash equilibrium
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economic actors interacting with another, each choose their best strategy given the strategies that all the other actors have chosen
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Prisoner's dilemma
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demonstrates why cooperation is difficult to maintain even when it is mutually beneficial
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dominant strategy
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strategy that is best for a player in a game regardless of strategies chosen by others
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vale of marginal product
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MPL x Market Price of Output (Demand Curve for Labor Market)
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capital
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the equipment and structures used to produce goods and services
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compensating differential
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difference in wages that arises to offset the non-monetary characteristics of different jobs
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human capital
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accumulation of investments in people, such as education and on-the-job training
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union
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worker association that bargains with employers over wages, benefits, and working conditions
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efficiency wages
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above-equilibrium wages paid by firms to increase worker productivity
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discrimination
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offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age
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poverty rate
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% of population whose family income falls below an absolute level called the poverty line
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poverty line
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absolute level of income set by federal government for each family size below which a family is deemed to be in poverty
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in-kind transfers
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transfers to the poor given in the form of goods and services rather than cash (food stamps)
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life cycle
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regular cycle a of income variation over a person's life
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permanent income
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person's normal income, does not include random and transitory forces
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utilitarianism
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political philosophy according to which the government should choose policies to maximize the total utility of everyone in society
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utility
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measure of happiness or satisfaction
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liberalism
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political philosophy according to which the government should choose policies deemed just, as evaluated by impartial observer behind a "veil of ignorance", should use the maximin criterion
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libertarian
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government should punish crimes and enforce voluntary agreements but not redistribute income
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welfare
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government programs that supplement the incomes of the needy
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negative income tax
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tax system that collects revenue from high-income households and gives subsidies to low-income households
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