Key terms Flashcards
Absolute advantage
The ability to produce a good using fewer inputs than another producer
Comparative advantage
The ability to produce a good at a lower opportunity cost than another producer
Gains from trade
The increase in total production due to specialization allowed by trade
Opportunity cost
Whatever is given up to obtain some item
Imports
Goods produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Market
A group of buyers and sellers of a particular good or service
Competitive market
A market in which there are many buyers and sellers so that each has a negligible impact on the market price
Monopoly
Market with only one seller
Quantity demanded
The amount of a good that buyers are willing and able to purchase
Law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good
rises
Demand schedule
A table that shows the relationship between the price
of a good and the quantity demanded
Demand curve
A graph of the relationship between the price of a good and the quantity demanded
Normal good
A good for which, other equal, an increase in
income leads to an increase in demand
Inferior good
A good for other things an increase in income leads to a decrease in demand
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements
Two goods for which an increase in the price of one
leads to a decrease in the demand for the other
Quantity supplied
The amount of a good that sellers are willing and able to sell
Law of supply
The claim that. other things equal, the quantity supplied of a good rises when the price of the good rIses
Supply schedule
A table that shows the relationship between the price of a good and the quantity supplied
Supply curve
A good for which, other equal, an increase in income leads to an increase in demand
Equilibrium
A situation in which the has reached the level where quantity supplied equals quantity demanded
Equilibrium price
The price that balances quantity supplied and quantity demanded
Equilibrium quantity
The quantity supplied and the quantity demanded at
the equilibrium price
Surplus
A situation in which quantity supplied is greater than
quantity demanded
Shortage
A situation in which quantity demanded is greater than quantity supplied
Law of supply and demand
The claim that the price of any good adjusts to bring
the quantity supplied and quantity demanded for that
good into balance
Elasticity
A measure of the responsiveness of the quantity demanded or quantity supplied to one of its determinants
Price elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
Elastic
When the quantity demanded or supplied responds substantially to a change in one of its determinants.
Inelastic
When the quantity demanded or supplied responds only slightly to a change in one of its determinants.
Total revenue
The amount paid by buyers and received by sellers of a good computed as P x Q.
Income elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in consumers’ income
Cross-price elasticity of demand
A measure of how much the quantity demanded of one good respond to a change in the price of another good.
Price elasticity of supply
A measure of how much the quantity supplied of a good responds to a change in the price of that good.
Normal good
A good characterized by a positive income elasticity.
Inferior good
A good characterized by a negative income elasticity.
Price ceiling
A legal maximum on the price at which a good can be sold
Price floor
A legal minimum on the price at which a good can be sold
Tax incidence
The manner in which the burden of a tax is shared among participants in a market
Tax wedge
The difference between what the buyer pays and the seller receives after a tax has been imposed
Welfare economics
The study ofhow the allocation of resources affects economic well being
Willingness to pay
The maximum amount that a buyer will pay for a good
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Cost
The value of everything a seller must give up to produce a good
Producer surplus
The amount a seller is paid for a good minus the seller’s cost of providing it
Efficiency
The property ofa resource allocation of maximizing the total surplus
Equality
The property of distributing prosperity uniformly among the members of society
Market failure
The inability ofsome unregulated markets to allocate resources efficiently
Tax wedge
The difference between what the buyer pays and the seller receives when a tax is placed in a market
Deadweight loss
The reduction in total surplus that results from a tax
Laffer curve
A graph showing the relationship between the size of a tax and the tax revenue collected
Total revenue
The amount a firm receives for the sale of its output
Total cost
The market value ofthe inputs a firm uses in production
Profit
Total revenue minus total cost
Explicit costs
Input costs that require an outlay of money by the firm
Implicit costs
Input costs that do not require an outlay of money by the firm
Economic profit
Total revenue minus total cost, including both explicit and implicit costs
Accounting profit
Total revenue minus total explicit cost
Production function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
The increase in output that arises from an additional unit of input
Diminishing marginal product
The property whereby the marginal product of an input declines as the quantity of the input Increases
Fixed costs
Costs that do not vary with the quantity of output produced
Variable costs
Costs that vary with the quantity of output produced
Average total cost
Total cost divided by the quantity of output
Average fixed cost
Fixed costs divided by the quantity of output
Average variable cost
Variable costs divided by the quantity of output
Marginal cost
The increase in total cost that arises from an extra unit of production
Efficient scale
The quantity of output that minimizes average total cost
Economies of scale
The property whereby long-run average total cost falls as the quantity of output increases
Diseconomies of scale
The property whereby long run average total cost rises
as the quantity ofoutput increases
Constant returns to scale
The property whereby long run average total cost stays the same as the quantity of output changes
Price takers
Buyers and sellers in a competitive market that must
accept the price that the market determInes
Competitive market
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
Average revenue
Total revenue divided by the quantity sold
Marginal revenue
The change in total revenue from an additiobal unit sold
Shut down
A short-run decision to temporarily cease production during a specific period of time due to current market conditions
Exit
A long-run decision to permanently cease production and leave the market
Sunk cost
A cost to which one is already committed and is not recoverable
Monopoly
A firm that is the sole seller ofa product without close substitutes
Natural monopoly
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
Price discrimination
The business practice ofselling the same good at different prices to different customers
Arbitrage
The process ofbuying a good in one market at a low price and selling it in another market at a higher price
Perfect price discrimination
A situation in which the monopolist is able to charge each customer precisely his willingness to pay
