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206 Cards in this Set
- Front
- Back
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absolute advantage
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the ability of one person or nation to produce a product at a lower resource cost than another person or nation
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accounting cost
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the explicit costs of production
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accounting profit
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total revenue minus accounting cost
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adverse-selection problem
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a situation in which the uninformed side of the market must choose from an undesirable or adverse selection of goods
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asymmetric information
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a situation in which one side of the market - either buyers or sellers - has better information than the other
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average fixed cost (AFC)
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fixed cost divided by the quantity produced
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average variable cost (AVC)
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variable cost divided by the quantity produced
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barrier to entry
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something that prevents firms from entering a profitable market
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break-even price
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the price at which economic profit is zero; price equals average total cost
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budget line
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the line connecting all the combinations of two goods that exhaust a consumer's budget
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budget set
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a set of points that includes all the combinations of two goods that a consumer can afford, given the consumer's income and the prices of the goods
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cartel
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a group of firms that act in unison, coordinating their price and quantity decisions
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centrally planned economy
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an economy in which a government bureaucracy decides how much of each good to produce, how to produce the good, and who gets them
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ceteris paribus
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the latin expression meaning other variables being held fixed
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change in demand
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a shift of the demand curve caused by a change in a variable other than the price of the product
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change in quantity demanded
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a change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curve
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change in quantity supplied
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a change in the quantity firms are willing and able to sell when the price changes; represented graphically by movement along the supply curve
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change in supply
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a shift of the supply curve caused by a change in a variable other than the price of the product
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collective bargaining
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negotiations between a union and a firm over wages, fringe benefits, job security, and working conditions
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comparative advantage
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the ability of one person or nation to produce a good at a lower opportunity cost than another person or nation
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complements
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two goods for which a decrease in the price of one good increases the demand for the other good
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concentration ratio
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the percentage of the market output produced by the largest firms
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constant returns to scale
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a situation in which the long-run total cost increases proportionately with output, so average cost is constant
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constant-cost industry
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an industry in which the average cost of production is constant; the long-run supply curve is horizontal
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consumer surplus
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the amount a consumer is willing to pay for a product minus the price the consumer actually pays
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consumption possibilities curve
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a curve showing the combinations of two goods that can be consumed when a nation specializes in a particular good and trades with another nation
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contestable market
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a market with low entry and exit costs
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craft union
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a labor organization that includes workers from a particular occupation, for example, plumbers, bakers, or electricians
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cross-price elasticity of demand
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a measure of the responsiveness of demand to changes in the price of another good; equal to the percentage change in the quantity demanded of one good (X) divided by the percentage change in the price of another good (Y).
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deadweight loss
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the decrease in the total surplus of the market that results from a policy such as rent control
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deadweight loss from monopoly
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a measure of the inefficiency from monopoly; equal to the decrease in the market surplus
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deadweight loss from taxation
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the difference between the total burden of a tax and the amount of revenue collected by the government
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demand schedule
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a table that shows the relationship between the price of a product and the quantity demanded, ceteris paribus
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diminishing returns
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as one input increases while the other inputs are held fixed, output increases at a decreasing rate
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diseconomies of scale
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a situation in which the long-run average cost of production increases as output increases
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dominant strategy
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an action that is the best choice for a player, no matter what the other player does
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dumping
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a situation in which the price a firm charges in a foreign market is lower than either the price it charges in its home markets or the production cost
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duopolists' dilemma
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a situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price
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duopoly
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a market with two firms
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economic cost
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the opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost
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economic model
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a simplified representation of an economic environment, often employing a graph
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economic profit
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total revenue minus economic cost
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economics
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the study of choices when there is scarcity
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economies of scale
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a situation in which the long-run average cost of production decreases as output increases
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efficiency
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a situation in which people do the best they can, given their limited resources
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elastic demand
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the price elasticity of demand is greater than one
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entrepreneurship
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the effort used to coordinate the factors of production - natural resources, labor, physical capital, and human capital - to produce and sell products
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equimarginal rule
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pick the combination of two activities where the marginal benefit per dollar for the first activity equals the marginal benefit per dollar for the second activity
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excess burden of a tax
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another name for deadweight loss
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excess demand (shortage)
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a situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied
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excess supply (surplus)
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a situation in which at the prevailing price the quantity supplied exceeds the quantity demanded
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experience rating
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a situation in which insurance companies charge different prices for medical insurance to different firms depending on the past medical bills of a firm's employees
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explicit cost
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the actual monetary payment for inputs
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export
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a product produced in the home country and sold in another country
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external benefit
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a benefit from a good experienced by someone other than the person who buys the good
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external cost of production
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a cost incurred by someone other than the producer
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factors of production
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the resources used to produce goods and services; also known as production inputs
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featherbedding
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work rules that increase the amount of labor required to produce a given quantity output
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firm-specific demand curve
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a curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell
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fixed cost (FC)
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cost that does not vary with the quantity produced
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free rider
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a person who gets the benefit from a good but does not pay for it
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game theory
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the study of decision making in strategic situations
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game tree
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a graphical representation of the consequences of different actions in a strategic setting
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General Agreement on Tariffs and Trade (GATT)
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an international agreement established in 1947 that has lowered trade barriers between the US and other nations
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grim-trigger strategy
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a strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit
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human capital
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the knowledge and skills acquired by a worker through education and experience
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implicit cost
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the opportunity cost of inputs that do not require a monetary payment
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import
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a product produced in a foreign country and purchased by residents of the home country
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import licenses
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rights, issued by a government, to import goods
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import quota
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a government-imposed limit on the quantity of a good that can be imported
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income effect
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the change in quantity consumed that is caused by a change in real income, with relative prices held constant
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income effect for leisure demand
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the change in leisure time resulting from a change in real income caused by a change in the wage
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income elasticity of demand
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a measure of the responsiveness of demand to changes in consumer income; equal to the percentage change in the quantity demanded divided by the percentage change in income
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increasing-cost industry
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an industry in which the average cost of production increases as the total output of the industry increases; the long-run supply curve is positively sloped
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indifference curve
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a curve showing the different combinations of two goods that generate the same level of utility or satisfaction
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indifference curve map
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a set if indifference curves, each with a different utility level
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individual demand curve
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a curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus
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individual supply curve
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a curve showing the relationship between price and quantity supplied by a single firm, ceteris paribus
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individual supply curve
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an input that cannot be scaled down to produce a smaller quantity of output
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industrial union
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a labor organization that includes all types of workers from a single industry, for example, steelworkers or autoworkers
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inelastic demand
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the price elasticity of demand is less than one
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infant industries
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industries that are at an early stage of development
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inferior good
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a good for which an increase in income decreases demand
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input-substitution effect
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the change in quantity of labor demanded resulting from an increase in the price of labor relative to the price of other inputs
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kinked demand curve model
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a model in which firms in an oligopoly match price cuts by other firms, but do not match price hikes
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labor
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the physical and mental effort people use to produce goods and services
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labor union
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a group of workers organized to increase job security, improve working conditions, and increase wages and fringe benefits
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law of demand
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there is a negative relationship between price and quantity demanded, ceteris paribus
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law of diminishing marginal utility
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as the consumption of a particular good increases, marginal utility decreases.
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law of supply
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there is a positive relationship between price and quantity supplied, ceteris paribus
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learning by doing
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knowledge and skills workers gain during production that increase productivity and lower cost
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learning effect
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the increase in a person's wage resulting from the learning of skills required for certain occupations
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limit pricing
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the strategy of reducing the price to deter entry
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long-run average cost (LAC)
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the long-run cost divided by the quantity produced
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long-run demand curve for labor
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a curve showing the relationship between the wage and the quantity of labor demanded over the long run, when the number of firms in the market can change and firms can modify their production facilities
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long-run marginal cost (LMC)
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the change in long-run cost resulting from a one-unit increase in output
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long-run market supply curve
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a curve showing the relationship between the market price and quantity supplied in the long run
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long-run total cost (LTC)
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the total cost of productionwhen a firm is perfectly flexible in choosing its inputs
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low-price guarantee
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a promise to match a lower price of a competitor
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Macroeconomics
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the study of the nation's economy as a whole; focuses on the issues of inflation, unemployment, and economic growth
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marginal benefit
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the additional benefit resulting from a small increase in some activity
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marginal change
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a small, one-unit change in value
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marginal cost
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the additional cost resulting from a small increase in some activity
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marginal labor cost
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the increase in a firm's total labor cost resulting from one more unit of labor
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marginal product of labor
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the change in output from one additional unit of labor
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marginal rate of substitution (MRS)
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the rate at which a consumer is willing to trade or substitute one good for another
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marginal revenue
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the change in total revenue from selling one more unit of output
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marginal utility
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the change in total utility from one additional unit of a good
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marginal-revenue product of labor (MRP)
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the extra revenue generated from one additional unit of labor; MRP is equal to the price of output times the marginal product of labor
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market demand curve
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a curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus
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market economy
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an economy in which people specialize and exchange goods and services in markets
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market equilibrium
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a situation in which the quantity demanded equals the quantity supplied at the prevailing market price
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market power
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the ability of a firm to affect the price of its product
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market supply curve
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a curve showing the relationship between the market price and quantity supplied by all firms, ceteris paribus
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market supply curve for labor
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a curve showing the relationship between the wage and quantity of labor supplied
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marketable pollution permits
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a system under which the government picks a target pollution level for a particular area, issues just enough pollution permits to meet the pollution target, and allows firms to buy and sell the permits; also known as cap-and-trade system
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means-tested program
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a government spending program that provides assistance to those whose income falls below a certain level
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median-voter rule
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the choices made by government will match the preferences of the median voter
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merger
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a process in which two or more firms combine their operations
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microeconomics
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the study of the choices made by households, firms, and government and how these choices affect the markets for goods and services
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minimum efficient scale
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the output at which scale economies are exhausted
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minimum supply price
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the lowest price at which a product will be supplied
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mixed market
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a market in which goods of different qualities are sold for the same price
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monopolistic competition
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a market served by many firms that sell slightly different products
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monopoly
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a market in which a single firm sells a product that does not have any close substitutes
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monopsony
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a market in which there is a single buyer of an input
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moral hazard
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a situation in which one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe
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Nash equilibrium
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an outcome of a game in which each player is doing the best he or she can, given the action of the other players
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natural monopoly
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a market in which the economies of scale in production are so large that only a single large firm can earn a profit
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natural resources
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resources provided by nature and used to produce goods and services
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negative relationship
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a relationship in which two variables move in opposite directions
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network externalities
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the value of a product to a consumer increases with the number of other consumers who use it
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nominal value
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the face value of an amount of money
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normal good
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a good for which an increase in income increases demand
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normative analysis
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answers the question, "what ought to be?"
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Oligopoly
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a market served by a few firms
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opportunity cost
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what you sacrifice to get something
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output effect
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the change in the quantity of labor demanded resulting from a change in the quantity of output produced
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outsourcing
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firms producing components of their goods and services in other countries
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Patent
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the exclusive right to sell a new good for some period of time
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paying efficiency wages
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the practice of paying a higher wage to increase the average productivity of the workforce
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payoff matrix
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a matrix or table that shows, for each possible outcome of a game, the consequences for each player
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perfectly elastic demand
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a market with so many buyers and sellers that no single buyer or seller can affect the market price
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perfectly elastic supply
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the price elasticity of supply is equal to infinity
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perfectly inelastic demand
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the price elasticity of demand is zero
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perfectly inelastic supply
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the price elasticity of supply equals zero
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physical capital
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the stock of equipment, machines, structures, and infrastructure that is used to produce goods and services
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pollution tax
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a tax or charge equal to the external cost per unit of pollution
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positive analysis
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answers the question "what is" or "what will be"
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positive relationship
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a relationship in which two variables move in the same direction
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predatory pricing
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a pricing scheme under which a firm decreases the price to drive rival firms out of business and increases the price when rival firms leave the market
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price ceiling
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a maximum price set by the government
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price elasticity of demand (E d)
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a measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded divided by the percentage change in price
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price elasticity of supply
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a measure of the responsiveness of the quantity supplied to changes in price; equal to the percentage change in quantity supplied divided by the percentage change in price
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price floor
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a minimum price set by the government
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price leadership
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a system under which one firm in an oligopoly takes the lead in setting prices
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price ratio
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the price of the good on the horizontal axis divided by the price of the good on the vertical axis
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price taker
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a buyer or seller that takes the market price as given
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price-fixing
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an arrangement in which firms conspire to fix prices
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private cost of production
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the production cost borne by a producer, which typically includes the costs of labor, capital, and materials
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private good
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a good that is consumed by a single person or household; a good that is rival in consumption and excludable
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producer surplus
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the price a producer receives for a product minus the marginal cost of production
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product differentiation
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the process used by firms to distinguish their products from the products of competing firms
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production possibilities curve
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a curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used
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public good
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a good that is available for everyone to consume, regardless of who pays and who doesn't; a good that is nonrival in consumption and nonexcludable
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public-choice economics
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a field of economics that uses models of rational choice to explore decision making in the public sector
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quantity demanded
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the amount of a product that consumers are willing and able to buy
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quantity supplied
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the amount of a product that firms are willing and able to sell
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real value
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the value of an amount of money in terms of what it can buy
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rent seeking
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the process of using public policy to gain economic profit
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right-to-work laws
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laws that prohibit union shops, where union membership is required as a condition of employment
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scarcity
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the resources we use to produce goods and services are limited
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short-run average total cost (ATC)
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Short-run total cost divided by the quantity of output; equal to AFC plus AVC
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short-run demand curve for labor
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a curve showing the relationship between the wage and the quantity of labor demanded over the short run, when the firm cannot change its production facility
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short-run marginal cost (MC)
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the change in short-run total cost resulting from a one-unit increase in output
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short-run market supply curve
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a curve showing the relationship between market price and the quantity supplied in the short run
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short-run supply curve
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a curve showing the relationship between the market price of a product and the quantity of output supplied by a firm in the short run
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short-run total cost (TC)
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the total cost of production when at least one input is fixed; equal to fixed cost plus variable cost
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shut-down price
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the price at which the firm is indifferent between operating and shutting down; equal to the minimum average variable cost
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signaling effect
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the information about a person's work skills conveyed by completing college
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slope of a curve
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the vertical difference between two points (the rise) divided by the horizontal difference (the run)
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social cost of production
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private cost plus external cost
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substitutes
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two goods for which an increase in the price of one good increases the demand for the other good
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substitution effect
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the change in quantity consumed that is caused by a change in the relative price of the good, with real income held constant
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substitution effect for leisure demand
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the change in leisure time resulting from a change in the wage (the price of leisure) relative to the price of other goods
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sunk cost
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a cost that a firm has already paid or committed to pay, so it cannot be recovered
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supply schedule
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a table that shows the relationship between the price of a product and quantity supplied, ceteris paribus
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tariff
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a tax on imported goods
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terms of trade
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the rate at which units of one product can be exchanged for units of another product
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thin market
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a market in which some high-quality goods are sold but fewer than would be sold in a market with perfect information
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tie-in sales
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a business practice under which a business requires a consumer of one product to purchase another product
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tit-for-tat
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a strategy where one firm chooses whatever price the other firm chose in the preceding period
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total revenue
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the money a firm generates from selling its product
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total surplus
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the sum of consumer surplus and producer surplus
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total-product curve
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a curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus
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trust
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an arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees
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unit elastic demand
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the price of elasticity of demand is one
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util
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one unit of utility
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utility
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the satisfaction experienced from consuming a good
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utility-maximizing rate
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pick the combination that makes marginal rate of substitution equal to the price ratio
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variable
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a measure of something that can take on different values
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variable cost (VC)
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cost that varies with the quantity produced
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voluntary export restraint (VER)
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a scheme under which an exporting country voluntarily decreases its exports
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willingness to accept
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the minimum amount a producer is willing to accept as payment for a product; equal to the marginal cost of production
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willingness to pay
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the maximum amount a consumer is willing to pay for a product
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World Trade Organization (WTO)
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an organization established in 1995 that oversees GATT and other international trade agreements, resolves trade disputes, and holds forums for further rounds of trade negotiations
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