Chapter 2 Vocab Flashcards
Market
Any kind of arrangement where buyers and sellers of a particular good, service, or resource are linked together to carry out an exchange.
Competition
Occurs when there are many buyers and sellers acting independently so that no single entity has the ability to influence the price at which the product is sold in the market.
Demand
Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period, ceteris paribus
Demand Curve
A curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus.
Law of Demand
A law stating that there is a negative relationship between the price of a good and quantity of the good demanded over a particular time period, ceteris paribus. As the price of a good increases, the quantity of the good demanded falls.
Market Demand
Refers to the sum of all individual consumer demands for a good or service.
Non-Price Determinants of Demand
The variables (other than price) that can influence demand, and that determine the position of a demand curve. A change in any determinant shifts the demand curve.
Normal Good
A good whose demand varies directly with income; this means that as income increases the demand for the good increases.
Inferior Good
A good whose demand varies indirectly with income; this means that as income increases, the quantity demanded of the good falls.
Tastes and Preferences
If preferences and tastes change in favor of a product, demand increases, and the demand curve shifts to the right (and vice versa).
Prices of Substitutes
For any two substitute goods, X and Y, a decrease in the price of X produces a decrease in demand for Y, while an increase in the price of X produces an increase in demand for Y.
Prices of Complements
For any two complementary goods X and Y, a fall in the price of X leads to an increase in demand for Y, while an increase in the price of X leads to a decrease in demand for Y.
Number of Consumers
If there is an increase in the number of consumers demand increases (and vice versa).
Utility
It is a subjective concept; the satisfaction that consumers gain for consuming something.
Law of Diminishing Marginal Utility
As consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases which each additional unit consumed, therefore consumers will buy more only if the price falls; this underlies the law of demand.
Substitution Effect
Part of an explanation of the law of demand; there is an inverse relationship between price and quantity demanded because as price falls consumers substitute the now less expensive good for other products.
Income Effect
Part of an explanation of the law of demand; as price falls, real income increases causing the consumer to buy more of the good.
Supply
Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus.
Supply Curve
A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus.
Law of Supply
There is a direct relationship between the price of a good and the quantity of the good supplied, over a particular time period, ceteris paribus.
Market Supply
The sum of all individual firm supplies of a good or service.
Non-Price Determinants of Supply
The variables (other than price) that can influence supply, and that determines the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve.
Costs of Production
If a factor price rises, production costs increase production becomes less profitable and the firm produces less decreasing supply (and vice versa).
Technology
New, improved technology lowers costs of production, thus making production more profitable, and the firm produces more increasing supply (and vice versa)
Prices of Related Goods: Competitive Supply
In the case of two goods, refers to the production of one or the other by a firm, or when two goods compete with each other for the use of the same resources.
Prices of Related Goods: Joint Supply
Refers to the production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other.
Subsidy
An amount of money paid by the government to firms.
The number of firms (Supply Shift Factor)
An increase in the number of firms producing the good increases supply (and vice versa)
‘Shocks’
Sudden unpredictable events can affect supply such as weather conditions, war, or other catastrophes.
Short Run
A time period during which at least one input is fixed and cannot be changed by the firm.
Long Run
A time period in which all inputs can be changed.
Total Product
The total quantity of output produced by a firm
Marginal Product
The extra or additional output that results from one additional unit of a variable input.
Law of Diminishing Marginal Returns
A law stating that as more and more units of a variable input are added to one or more fixed products, the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease.
Total cost
The total costs incurred by a firm that undertakes production of something
Marginal Cost
The extra or additional cost of producing one more unit of output.
Excess Supply
In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus.
Surplus
The extra supply that results when the quantity supplied is greater than quantity demanded.
Excess Demand
In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good.
Shortage
The amount by which quantity demanded is greater than quantity supplied.
Equilibrium
A state of balance such that there is no tendency to change.
Market Equilibrium
Occurs where quantity demanded is equal to quantity supplied and there is no tendency for the price or quantity to change.
Equilibrium Price
The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change.
Equilibrium Quantity
The quantity that is bought and sold when a market is in equilibrium, when quantity demanded is equal to quantity supplied.
Competitive Market Equilibrium
The equilibrium that emerges at the point where the demand curve intersects the supply curve in a free competitive market.
Consumer Surplus
The extra benefit consumers get by paying less for a good than they are willing to pay.
Producer Surplus
The extra benefit producers get by receiving a higher price for the good they are selling than the price they are willing to receive.
Price Mechanism
The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers and sellers. These interactions determine the allocation of resources.
Signaling
In the event of asymmetric information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of good quality. For example use of warranties or establishment of brand names.
Allocative Efficiency
An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.
Marginal Benefit
The extra or additional benefit received from consuming one more unit of a good
Consumer Surplus
Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid.
Producer Surplus
The difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good.
Social surplus
The sum of consumer and producer surplus.
Welfare
In microeconomics, it is measured by the amount of social surplus generated in a market.
Welfare Loss
Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs due to market failure.
Rational Consumer Choice
In microeconomic theory of consumer behavior, consumers make choices about what goods and services to buy based on these assumptions: All consumers
have consistent tastes and preferences
have perfect information
try to maximize their utility.
Bias
A term from behavioral economics; it refers to systematic errors in thinking or evaluating.
Rules of Thumb
A term from behavioral economics; means that there are simple guidelines based on experience and common sense, which simplifies complicated decisions.
Anchoring
A term from behavioral economics; involves the use of irrelevant information to make decisions, which often occurs to to its being the first piece of information that the consumer happens to come across.
Framing
A term from behavioral economics; it deals with how choices are presented to decision makers, or how the products are framed.
Availability
A term from behavioral economics; refers to use of information that is most recently available, which people tend to rely on more heavily, though there is no reason that this information is any more reliable than previously available information.
Bounded Rationality
A term from behavioral economics; it is the idea that consumers are rational only within limits, as consumer rationality is limited by consumers’ insufficient information, the costliness of obtaining information and the limitations of the human mind to process large amounts of information.
Bounded Self-Control
A term from behavioral economics; it is the idea that people in reality exercise self-control only within limits lacking the self-control required of them to make rational decisions.
Bounded Selfishness
A term from behavioral economics; it is the idea that people are selfish only within limits; the assumption of self-interested behavior of the rational consumer cannot explain the numerous accounts of selfless behavior.
Nudge
A term from behavioral economics; it is a method designed to influence consumers’ choices in a predictable way, without offering financial incentives or imposing sanctions, and without limiting choice.
Choice Architecture
A term from behavioral economics; it is the design of particular ways or environments in which people make choices, based on the idea that consumers make decisions in a particular context and that choices of decision-makers are influenced by how options are presented to them.
Default Choice
A term from behavioral economics; it is a choice that is made by default, which means doing the option that results when one does not do anything.
Restricted Choice
A term from behavioral economics; it is a choice that is limited by the government or other authority.
Mandated Choice
A term from behavioral economics; it is a choice between alternatives that is made mandatory by the government or other authority.
Rational Producer Behavior
The basis of standard theory of the firm according to which firms try to maximize profit.
Corporate Social Responsibility
The practice of some corporations to avoid socially undesirable activities such as polluting activities, employing children, or employing workers under unhealthy conditions; as well as undertaking socially desirable activities.
Market Share
Refers to the percentage of total sales in a market that is earned by a single firm; it may be a goal of some firms to maximize market share, or to make it as large as possible.
Satisficing
A goal of firms is to achieve satisfactory results, rather than pursue a single maximizing objective, such as to maximize profits or revenues.
