Micro midterm

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.

Macroeconomics

The study of the performance of national economies, and of the policies that governments use to try to improve that performance.

Resource

anything that can be used to produce something else.

Scarce

situation when there is not enough of the resource available to satisfy all the various ways a society wants to use it.

Opportunity cost

what you must give up in order to get something

Trade-off

comparison of the costs and the benefits of doing something.

Marginal decision

decision made at the margin of an activity about whether to do a bit more or a bit less of that activity

Marginal analysis

the study of marginal decisions.

Incentive

anything that offers rewards to people who change their behavior

Economic Surplus

the benefit of taking any action minus its cost

Corn Laws

high tariffs on imported grain that protected British landowners.

Specialization

situation in which each person/countries specializes in the task that he or she is good at performing

factors of production (increase of it causes economic growth)

resources used to produce goods and services

technology (increase of it causes economic growth)

the technical means for producing goods and services

Land

natural resources, such as mineral deposits, oil, natural gas, water, and actual land acreage

Labor

the mental and physical abilities of the workforce

Physical capital

manufactured items used to produce other goods and services

Human capital

the educational achievements and skills of the labor force (which increase labor productivity)

Equilibrium

an economic situation in which no individual would be better off doing something different

Efficient

taking all opportunities to make some people better off without making other people worse off

Equity

a condition in which everyone gets his or her “fair share.”

competitive market

many buyers and sellers of the same good or service, none of whom can influence the price

supply and demand model

model of how a competitive market behaves

demand curve

shows the quantity demanded at various prices

Demand

represents the behavior of buyers.

quantity demanded

the quantity that buyers are willing (and able) to purchase at a particular price.

The Law of demand

a higher price for a good or service leads people to demand a smaller quantity

substitutes

a decrease in Pa leads to a decrease in demand of b

complements

a decrease in Pa that leads to an increase in demand of product b

Changes in income and nature of goods — Normal

an increase in income leads to an increase in demand

Changes in income and nature of goods — Inferior

an increase in income leads to a decrease in demand

supply curve

shows the quantity supplied at various prices

quantity supplied

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

qs = qd

equilibrium

surplus

when the quantity supplied exceeds the quantity demanded.

shortage

The quantity demanded exceeds the quantity supplied. It occur when the price is below its equilibrium level.

A demand curve is elastic

when an increase in price reduces the quantity demanded a lot (and vice versa).

A demand curve is inelastic

when an increase in price reduces the quantity demanded just a little

Price elasticity of demand

the percentage change in quantity demanded divided by the percentage change in price.

if |Ed| < 1

the demand curve is inelastic

If the |Ed| > 1

the demand curve is elastic

If the |Ed| = 1

the demand curve is unit elastic.

Perfectly inelastic supply

price elasticity of supply = 0

Perfectly elastic supply

price elasticity of supply = ∞

A supply curve is elastic

if a rise in price increases the quantity supplied a lot

A supply curve is inelastic

if a rise in price increases the quantity supplied just a little

Consumer surplus

the difference between market price and what consumers (as individuals or the market) would be willing to pay

willingness to pay for a good

the maximum price at which he or she would buy that good

Producer surplus

the difference between market price and the price at which firms are willing to supply the product.

Inefficient

Opportunities are missed. Some people could be made better off without making other people worse off.

Price controls

legal restrictions on how high or low a market price may go.

Price ceiling

a maximum price sellers are allowed to charge for a good or service (usually set BELOW equilibrium).

Price floor

a minimum price buyers are required to pay for a good or service (usually set ABOVE equilibrium).

Deadweight loss

the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity.

Quota

an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity control

Quota limit

the total amount of a good under a quota or quantity control that can be legally transacted

License

the right, conferred by the government, to supply a good.

The benefits principle

Those who benefit from public spending should bear the burden of the tax that pays for that spending.

The ability-to-pay principle (principles of tax fairness)

Non excludable

if the supplier of that good can not prevent people who do not pay from consuming it. People who don’t pay cannot be easily prevented from using a good.

Excludable

situation where the supplier of a good can prevent people who do not pay from consuming it. In other words, People who don’t pay can be easily prevented from using a good.

Non rival

More than one person can consume the same unit of the good at the same time

Rival

The same unit of the good cannot be consumed by more than one person at a time (or at all)

Private goods

excludable and rival in consumption

Public goods

non excludable and non rival in consumption

Artificially scarce goods

are excludable but non rival in consumption

Common resources

goods that are non excludable but rival in consumption

free-rider problem

Many individuals are unwilling to pay for their own consumption and instead will take a free ride on anyone who does pay.

Externalities (spillovers)

the impact on third parties of a transaction between others

Market failure

free-market equilibrium that is not providing the socially optimal amount of a good

The marginal social cost

the total cost society pays for the production of another unit or for taking further action in the economy.

The marginal social benefit

the satisfaction experienced by consumers of a specific good plus or minus the overall environmental and social costs or benefits

The socially optimal quantity

The amount of production that optimizes society's overall benefit

Transaction costs

all of the costs to individuals of making a deal

A Pigouvian subsidy

a payment designed to encourage activities that yield external benefits

a payment designed to encourage activities that yield external benefits (equal to the marginal social benefit at the optimal quantity.)

Pigouvian subsidy

External benefit

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

Utility

value or satisfaction from consumption

Marginal utility (MU)

the change in utility from consuming an additional unit.

Diminishing marginal utility

Each additional unit of a good adds less to utility than the previous unit

The budget constraint

all of the consumption bundles that a consumer can afford given his or her income and the prices.

The substitution effect

the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

The income effect

The change in the quantity consumed of a good that results from a change in the consumer’s purchasing power due to the change in the price of the good.

The income effect — Normal goods

Decrease in income causes consumers’ purchasing power to drop and reduces consumption (and vice versa).

The income effect — Inferior goods

Decrease in income causes consumers’ purchasing power to drop and increases consumption (and vice versa).