Microeconomics Terms

absolute advantage

the ability to produce the same good using fewer resources than another producer

production possibilites frontier

all the combinations of goods that a country can produce given its productivity and supply of inputs

comparative advantage

the ability to produce a good or service at a lower opportunity cost than another producer

opportunity cost

the value of what you give up when you choose one option over another

demand curve

a function that shows the quantity demanded at different prices

quantity demanded

the quantity that buyers are willing and able to buy at a particular price

demand shifters

income

population

price of substitutes

price of complements

expectations

tastes

consumer surplus

the difference between what you are willing to pay and the actual price

total consumer surplus

the quantity measured by the area beneath the demand curve and above the price

normal good

a good that experiences an increase in demand as consumer incomes increase

normal good examples

cars, electronics, and restaurant meals

inferior good

goods that are not consumed as much when income increases

inferior good examples

ramen noodles and public transportation

substitutes

two goods where a decrease in the price of one leads to a decrease in demand for the other

complements

two goods where a decrease in the price of one leads an increase in demand for the other

supply curve

a function that shows the quantity supplied at different prices

quantity supplied

the quantity that sellers are willing and able to sell at a particular price

producer surplus

the producer’s gain from exchange

the difference between the market price and the minimum price at which a producer would be willing to sell

total producer surplus

the amount measured by the area above the supply curve and below the price

supply shifters

technological innovations

taxes and subsidies

expectations

entry or exit of producers

changes in opportunity costs

surplus

a situation where the quantity supplied is greater than the quantity demanded

shortage

a situation where the quantity demanded is greater than the quantity supplied

equilibrium price

the price where the quantity demanded is equal to the quantity supplied

equilibrium quantity

the quantity where the quantity demanded is equal to the quantity supplied

elasticity of demand

a measure of how responsive the quantity demanded is to a change in price

inelastic

when the absolute value of the elasticity is less than 1

elastic

when the absolute value of the elasticity is greater than 1

unit elastic

when the absolute value of the elasticity is exactly equal to 1

elasticity of supply

a measure of how responsive the quantity supplied is to a change in price

deadweight loss

reduced gains from trade (waste)

great economic problem

how to arrange our scarce resources to satisfy as many of our wants as possible

arbitrage

buying low and selling high

speculation

the attempt to proft from future price changes

futures

counting on the price to go up in the future

prediction market

a speculative market designed so prices can be interpreted as probabilities and used to make predictions

price ceiling

a maximum price allowed by law

rent control

a price ceiling on rental housing

price floor

a minimum price allowed by law

private cost

a cost paid by the consumer or the producer (not external)

external cost

a cost borne by people other than the consumer or the producer tradinf in the market

social cost

the cost to society

private cost plus external cost

externalities

positive or negative effect occurring from some transaction

social surplus

consumer surplus plus producer surplus plus everyone else’s surplus

efficient equilibrium

the price and quantity that maximizes social surplus

Pigouvian tax

a tax on a good with external costs

external benefit

a benefit received by people other than the consumers or producers trading in the market

Pigouvian subsidy

a subsidy on a good with external benefits

internalizing an externality

adjusting incentives so that decision makers take into account all the benefits and costs of their actions, private and social

transaction costs

the costs necessary to reach an agreement

Coase theorem

coming to an agreement when transaction costs are too high and property rights are not clearly defined

long run

the time after all exit or entry has occurred

short run

the time period before exit or entry can occur

sunk cost

a cost that cannot be recovered

fixed cost

a cost that does not vary with the quantity produced

explicit cost

a cost that requires a money outlay

explicit cost examples

lemonade stand - sugar, lemons, cups

implicit cost

a cost that does not require an outlay of money

accounting profit

total revenue minus explicit costs

economic profit

total revenue minus total costs including implicit opportunity costs

total revenue

price x quantity sold

total cost

the costs of producing a given quantity of output

variable costs

costs that vary with output

marginal revenue MR

the change in total revenue from selling an additional unit

for a firm in a competitive industry, MR = price

marginal cost MC

the change in total cost from producing an additional unit

average cost

the cost per unit; the total cost of production a given quantity divided by that quantity, AC = total cost / quantity

zero profits

the condition when P = AC; the price is not enough to pay labor and capital their opportunity costs

increasing cost industry

an industry in which the costs of production increase with greater output;

upward-sloped supply curve

constant cost industry

an industry in which costs of production do not change with greater industry output

flat supply curve

decreasing cost industry

an industry in which the costs of production decrease with and increase in industry output;

downward-sloped supply curve

elimination principle

above-normal profits are eliminated by entry and below-normal profits are eliminated by exit

market power

the power to raise price above marginal cost without fear that other firms will enter the market

monopoly

one seller with market power

marginal revenue in monopoly

to maximize profits, produce until MR = MC

economies of scale

the advantages of large-scale production that reduce average cost as quantity increases

natural monopoly

a situation when a single firm can supply the entire market at a lower cost than two or more firms

barriers to entry

factors that increase the cost to new firms of entering an industry

antitrust laws

laws that give the federal government legal authority to prosecute monopolies or attempts to monopolize

price discrimination

the selling of the same product at different prices to different customers

arbitrage

taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another

perfect price discrimination

when each customer is charged his or her maximum willingness to pay

tying

form of price discrimination

one good is tied to a second good

tying example

printer and ink

bundling

the requirement that products be bought together in a bundle or package

bundling example

car (engine, wheels, steering wheel)

shoes (left and right)

monopolistic competition

a market with a large number of firms selling similar but not identical products

nonexcludable

people who don’t pay cannot be prevented from using the good

nonexcludable example

asteroid deflection

nonrival

one person’s consumption of the good does not limit another person’s consumption

nonrival example

jeans

private good

goods that are excludable and rival

private good examples

hamburgers, jeans, contact lenses

public good

goods that are nonexcludable and nonrival

public good examples

asteroid deflection, national defense, mosquito control

free rider

someone who enjoys the benefits of a public good without paying a share of the costs

forced rider

someone who pays a share of the costs of a public good but does not enjoy the benefits

club good

goods that are excludable but nonrival

club good examples

cable tv, wifi, digital music

common resources

goods that are nonexcludable but rival

common resources examples

tuna in the ocean, the environment, public roads

tragedy of the commons

the tendency of any unowned and nonexcludable resource to be overused and undermaintained