Micro Economics Terms

Front 1

Economics

Back 1

the study of how people allocate scarce resources for production, exchange, or consumption.

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Scarce Resource

Back 2

a resource where the amount desired by people exceeds the amount available.

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Model

Back 3

a simple representation of some aspect of reality.

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Positive Economics

Back 4

the study of what is or what will occur in the economy.

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Normative Economics

Back 5

the study of what should be or what we want to have occur in the economy.

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Microeconomics

Back 6

the study of the economy at the level of the individual consumer, firm, or market

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Macroeconomics

Back 7

the study of all consumers, firms, and aggregated markets. monetary and fiscal policy, business cycles, aggregate unemployment, and the gross domestic product aggregated markets.

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Marginal Analysis

Back 8

a technique that examines what happens when there are small changes from the current state of affairs. helps compare the marginal costs and benefits of small changes.

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Production Possibilities Frontier (PPF)

Back 9

shows the maximum attainable combinations of two products that may be produced with the available resources in the economy.

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Opportunity Cost

Back 10

the cost of giving up the highest valued alternative when a decision is made.

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Principle of increasing marginal opportunity costs

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as you choose to produce more of good X, the opportunity cost of X increases. That is, you must sacrifice more units of Y for each unit of X as the total amount of X increases.

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Attainable production combinations

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can be produced with our given technology and resources.

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Unattainable production combinations

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cannot be produced, even when technology and resources are being fully used.

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Technologically efficient

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When any other production combination that produces more of one good will have to produce less of another good.

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Absolute Advantage

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When someone can produce more of that good using the same amount of resources than another person or country.

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Comparative Advantage

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When someone can produce a good at a lower opportunity cost than another person or country.

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Specialization

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Focusing productive activities towards one good

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Gains from trade

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When a country or individual can obtain more of both goods with trade if each individual or country specializes in producing the good in which he/she/it has a comparative advantage.

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Price

Back 19

the amount of money or other goods you must give up in order to obtain one unit of a good.

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Quantity Demanded

Back 20

the amount of a good you are willing and able to buy at a given price, all other things being constant.

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Law of Demand

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holding everything else constant, when price (P) falls, the quantity demanded (Qd) increases, and when the price (P) of a good increases, the quantity demanded (Qd) decreases.

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Demand

Back 22

the relationship between price and quantity demanded.

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Demand schedule

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a table showing the quantity demanded of a good at several different prices

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Demand curve

Back 24

The graph of a demand schedule

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Change in quantity demanded

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occurs when the price of a good changes, but other factors do not.

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Change in demand

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occurs when a factor other than the good's price changes, and it results in a change in the quantity demanded at every price.

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Normal goods

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as you earn more money, you will purchase more of them.

If the income elasticity is greater than zero

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Inferior goods

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as your income increases, you buy less of them.

If the income elasticity is less than zero

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Substitutes

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Two goods that perform similar functions (and thus can replace one another).

If the cross-price elasticity is greater than zero

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Complements

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Two goods that are more useful when used together.

If the cross-price elasticity is less than zero

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Market Demand

Back 31

the sum of all the individual demand curves for a particular good.

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Quantity supplied

Back 32

the amount of a good you want to sell at a given price, all other things being constant.

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Law of supply

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as the price (P) increases, the quantity supplied (Qs) increases. Likewise, if P decreases, then Qs decreases.

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Supply schedule

Back 34

a table that lists the quantity supplied at several different prices.

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Supply

Back 35

the relationship between price and quantity supplied.

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Change in quantity supplied

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a movement along a supply curve, from one point to another, caused by a change in price.

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Change in supply

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occurs when a factor other than the good's price changes, and it results in a change in the quantity supplied at every price.

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Complements in production

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Goods that are naturally produced together

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Substitutes in production

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Goods that compete for the same inputs

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Market supply

Back 40

the sum of the quantities supplied at each price

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Market

Back 41

any arrangement that brings together buyers and sellers for the purpose of exchange

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Externalities

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the outcomes of market activity that are ignored by the market. For example, pollution is a big externality problem.

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Price takers

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no one buyer or seller can control the market price.

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Perfect information

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all participants can easily learn what the price is, where the good can be bought, and so forth.

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Equilibrium point

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where the demand curve intersects the supply curve.

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Equilibrium for a market

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a price (P*) and a quantity (Q*), such that the quantity demanded (Qd) at P* equals the quantity supplied (Qs) at P*, and these quantities equal Q*.

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Surplus (Excess supply)

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where at this price, producers want to sell more units than consumers are willing to buy.

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Shortage (Excess demand)

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at this price, consumers want to buy more units than producers are willing to sell.

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Consumer surplus

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the difference between what consumers are willing to pay and what consumers are required to pay.

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Producer surplus

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the difference between what producers are willing to receive and what producers actually receive for their good or service.

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Pareto improvement

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an opportunity that will make every one of us strictly better off

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Allocatively efficient

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in a market when there does not exist a way to make one person better off in terms of benefit, without making somebody else worse off in terms of benefit

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Deadweight loss

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an area of potential benefit that essentially disappears and goes to nobody.

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Price ceiling

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the highest price allowed by law that sellers may charge.

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Price floor

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the lowest price allowed by law that sellers may receive.

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Binding

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Effective, as in price ceilings are only binding if they are below the market price

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Sales taxes (ad valorum taxes)

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a percentage tax on the price of a good.

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Unit taxes

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place a certain dollar amount of tax per unit of good.

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Statutory incidence

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the party who is responsible for turning in the tax, according to the law

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Tax revenue

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The number of units sold multiplied by the tax

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Consumer's burden of a tax

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the amount of tax revenue collected from consumers

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Producer's burden of a tax

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the amount of tax revenue collected from producers

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Negative externality

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when an economic agent imposes costs on others without compensating those who bear the costs. (such as pollution)

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Positive externality

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when an economic agent creates benefits for others, but the people who create this benefit do not receive compensation from those who receive it.

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Property rights

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they define the control of a resource

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Coase theorem

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if property rights are well defined, bargaining costs are low, and the number of people involved is small; then all externalities will be "internalized," meaning that the person creating the harm (or benefit) will personally feel the full cost (or benefit) of his or her choices

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MPB

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Marginal private benefit

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MSB

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Marginal social benefit (MEB + MPB)

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MEB

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Marginal external benefit (positive externality)

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MPC

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Marginal private cost

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MSC

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Marginal social cost (MEC + MPC)

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MEC

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Marginal external cost (negative externality)

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Pigouvian taxes and subsidies

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a system of taxes or subsidies that can be used to make the market take externalities into account

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Private good

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is a good that is rivalrous and excludable (bread, gas)

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Rivalrous good

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if your consumption of that good prevents somebody else from consuming it.

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Excludable good

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if it is possible to prevent somebody from consuming a good if they do not pay for it.

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Public good

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a good that is nonrivalrous and nonexcludable (TV broadcasts, National defense)

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Common resource good

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goods that are rivalrous and nonexcludable. (fishing in the ocean)

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Natural monopolies

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goods that are nonrivalrous and excludable. (cable TV, water, gas)

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tragedy of the commons

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a tendency for a common resource to be overused.

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Free-rider problem

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a situation in which somebody consuming a public good chooses not to pay for the good but lets others pay for it. Often with public goods like TV and commercials

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Privately provided good

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individuals purchase the good from private firms.

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Publicly provided good

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the government produces and distributes the good (with or without charging a fee to the user).

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Publicly financed good

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the government pays a private firm to produce the good.

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Elasticity

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the relative responsiveness of one variable due to a change in another variable.

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Elasticity of demand

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the relative responsiveness of a change in the quantity demanded due to a change in price.

____________ = percentage change in quantity demanded / percentage change in price

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Elasticity of supply

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the relative responsiveness of the quantity supplied due to a change in price.

_____________ = percentage change in quantity supplied / percentage change in price

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Perfectly elastic

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A horizontal line. No change in price, only quantity.

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Perfectly inelastic

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A vertical line. No change in quantity, only price.

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Income elasticity

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the relative responsiveness of a change in the quantity demanded due to a change in income.

_________= percentage change in quantity demanded / percentage change in income

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Cross-price elasticity

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the change in the quantity demanded of one good due to a change in the price of some related good.

____________ = percentage change in quantity of good X / percentage change in price of related good Y