Module 2 Basic Economic Theory Flashcards
Utility
The total satisfaction received from consuming a good or service.
Total cost / demand
The sum of all values at a given quantity (total cost or total demand for X number of items)
Average cost / demand
The sum of all values divided by the quantity (average cost of X items or average demand for X items)
Marginal cost / demand
The incremental value of each additional unit (marginal cost of producing X units instead of X-1 units or the marginal demand of buying X units instead of X-1 units)
Law of diminishing marginal utility
For every additional unit you consume, your marginal utility decreases
Law of diminishing marginal productivity
For every additional unit you produce, the marginal cost increases (also called the law of diminishing returns)
Marginal willingness to pay
Based on marginal demand, the amount you are willing to pay for each additional unit
Individual demand curve
How much an individual is willing to pay for each unit of a product or service
Market demand curve
The sum of what all individuals are willing to pay for each unit of a product or service
Movement ALONG a demand curve
A change in how much you are willing to buy, but not how much you value a product or service, so your demand moves along the demand curve
Example: if the price goes up, you will buy less but you don’t value that item differently than before
SHIFT in a demand curve
A change in how much you value a product and therefore what you are willing to pay
Example: You learn of additional benefits and are willing to pay more for the same amount because you value it more
Normal good (2 interpretations)
A regular item / service that you buy
(as opposed to complimentary goods, substitute goods, status goods)
Relating to income elasticity of demand (YED) —A good where an increase in income causes an increase in demand (YED > 0), can be elastic or inelastic.
(as opposed to inferior goods, luxury goods)
Complementary goods
Goods that are used together / bought together more than they are bought alone
Example: when they sell limes at the liquor store right next to the tequila because if you want to buy tequila you are more likely to buy limes
(As opposed to normal goods, substitute goods, status goods)
Substitute goods
Goods that are alternatives for each other so you can swap between them
Example: Pepsi and Coke
(as opposed to normal goods, complementary goods, status goods)
Vablen / Status goods
Goods where an increase in price encourages people to buy more because they associate it with higher status
Example: Designer clothing, diamonds
(as opposed to normal goods, complementary goods, substitute goods)
Variable costs
Costs that can vary during a set amount of time
(as opposed to fixed costs)
Fixed costs
Costs that cannot be varied during the given time period
(as opposed to variable goods)
Short run
The period during which some inputs cannot be changed (mainly capital inputs) and new competing firms cannot be started
(as opposed to long run)
Long run
The period during which all inputs can be changed and new competing firms can enter the industry
(as opposed to short run)
Elasticity
Change in demand resulting from a change in price
E = % change in quantity demanded / % change in price
Elastic good
E > 1
Demand changes a lot based on a small change in price
Inelastic Good
E < 1
Demand changes a little based on price changes, but not much
Income Elasticity of Demand (YED)
Change in demand to a change in income, not price
Inferior good
Relating to income elasticity of demand (YED).
A good where an increase in income results in a decrease in demand
YED < 0
Example: A value / budget product at the grocery store
(as opposed to normal goods, luxury goods)
Luxury goods
Relating to income elasticity of demand (YED).
A good where an increase in income causes a larger proportional increase in demand (when your income increases, you spend a higher portion of it on these items)
Example: Designer clothes, big tech items
(as opposed to normal goods, inferior goods)
Market Equilibrium
When the price is set where the demand and supply curves intersect and the total surplus is at its maximum.
Market Failure
When one of the conditions of perfect competition is not met
Externality
Type of market failure
A cost of consumption or production that is not included in the market price
Well-defined property rights
Comprehensive: resources are privately or collectively owned, ownership is defined, well-known, and enforced
Exclusive: benefits and costs accrue only to the owners
Transferable: transferable from one owner to another
Secure: secure from involuntary seizure or encroachments
Open Access
Resources that don’t have well-defined property rights
(Natural) Monopoly
Only one firm that sets the price, demand is low relative to optimal firm size (example: public utilities)
Public Goods
Goods that are not exclusive or rivalrous (everyone can use them)
(as opposed to private goods, common pool goods, toll goods)
Common Pool Goods
Rivalrous but non-exclusive (you can divide it, but you can’t stop people from using it)
Example: common grazing lands
(as opposed to private goods, public goods, toll goods)
Toll Good
Exclusive but non-rivalrous (you can stop people from using it, but you can’t divide it)
Example: National Parks
(as opposed to private goods, public goods, common pool goods)
