Choice in a World of Scarcity
Economists use this term to indicate what people must give up to obtain what they desire, also indicates the forgone value of the next best alternative.
Opportunity Cost
The situation where quantity demanded equals quantity supplied
Equilibrium
The “price” of borrowing in the financial market; a rate of return on an investment
Interest Rate
An economics concept that measures responsiveness of one variable to changes in another variable
Elasticity
Satisfaction derived from consumer choices
Utility
Cost of production that increases with the quantity produced; the cost of the variable inputs
Variable Costs
This term describes a firm in a perfectly competitive market where it must take the prevailing market price as given.
Price Taker
The legal, technological, or market forces that may discourage or prevent potential competitors from entering a market
Barriers to Entry
Any action that firms do to make consumers think their products are different from their competitors'
Product Differentiation
All possible consumption combinations of goods that someone can afford, given the prices of goods when all income is spent; the boundary of the opportunity set.
Budget Constraint
For this type of good, the quantity demanded falls as income rises and conversely, quantity demanded rises as income falls
Inferior Good
A price floor that makes it illegal for an employer to pay employees less than a certain hourly rate
Minimum Wage
When the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
Inelastic Supply
A branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation
Behavioral Economics
General rule that as a firm employs more labor, eventually the amount of additional output produced declines
Diminishing Marginal Productivity
Level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits
Break Even Point
A government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
Patent
Many firms competing to sell similar but differentiated products
Monopolistic Competition
Examination of decisions on the margin, meaning a little more of a little less from the status quo.
Marginal Analysis
This economic "law" indicates that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
Law of Supply
Improvements in the productivity of labor will tend to..
Increase Wages
The relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
Price Elasticity
A higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
Income Effect
The additional cost of producing one more unit; mathematically, MC=ΔTC/ΔL
Marginal Cost
Each firm faces many competitors that sell identical products
Perfect Competition
When an existing firm uses sharp but temporary price cuts to discourage new competition
Predatory Pricing
When firms act together to reduce output and keep prices high
Collusion
A diagram that shows the productively efficient combination of two products that an economy can produce given the resources it has available.
Production Possibilities Frontier
The resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs
Factors of Production
The imposition of a price ceiling on a market often results in...
A Shortage
The extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
Infinite or Perfect Elasticity
The additional utility provided by one additional unit of consumption
Marginal Utility
A firm as achieved this when he long-run average cost of producing output decreases as total output increases
Economies of Scale
The additional revenue gained from selling one more unit
Marginal Revenue
Removing government controls over setting prices and quantities in certain industries
Deregulation
When a few large firms have all or most of the sales in an industry
Oligopoly
The economic "law" that indicates as we consume more of a good or service the utility we get from additional units of the good or service tends to be less or smaller than what we received from earlier units
Law of Diminishing Marginal Utility
When a change in some economic factor (other than price) causes a different quantity to be demanded at every price
Shift in Demand
Laws that impose an upper limit on the interest rate that lenders can charge
Usury Laws
The percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B
Cross-Price Elasticity of Demand
When a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
Substitution Effect
Period of time during which all of a firm’s inputs are variable
Long Run
Level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
Shutdown Point
Economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
Natural Monopoly
A branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make
Game Theory