Economics Unit 2

Demand

the desire to own something and the ability to pay for it

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

Incentive

something that induces a person to act

Demand Curve

a curve that shows the relationship between the price of a product and the quantity of the product demanded

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Marginal Utility

satisfaction or usefulness obtained from acquiring one more unit of a product

Diminishing Marginal Utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

Price

Causes a change in demand

The Income Effect

the change in consumption that results when a price increase causes real income to decline

Substitution Effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Change in Demand

a shift of the demand curve, which changes the quantity demanded at any given price

Complementary Products

Items that are used in conjunction or bought together

Consumer Income, Future Expectations

What causes demand to change (rather than price)?

Elasticity of Demand

consumers' responsiveness or sensitivity to changes in price

Demand Elasticity

the extent to which a change in price causes a change in the quantity demanded

Elastic

describes demand that is very sensitive to a change in price

Inelastic

Describes demand that is not very sensitive to a change in price

Unit Elastic

a given change in price causes a proportional change in quantity demanded

Measure Elasticity

% of change in the quantity demanded/% of change in price

Expenditure

An amount of money spent.

Total Expenditures Test

it shows the impact of price change on total expenditures, determine elasticity. formula = p x qd

Capital Expenditure

money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Revenue Expenditure

The payment of an operating expense necessary to earn revenue

Supply

The amount of goods available

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Market Supply Curve

a graph of the quantity supplied of a good by all suppliers at different prices

Quantity Supplied

the amount of a good that sellers are willing and able to sell

Change in Quantity Supplied

the change in amount offered for sale in response to a change in price

Change in Supply

a shift of the supply curve, which changes the quantity supplied at any given price

Cost, Producing, Technology, Taxes

What factors cause a change in supply?

Supply Elasticity

responsiveness of quantity supplied to a change in price

Elastic Supply

Exists when a small change in price causes a major change in quantity supplied.

Inelastic Supply

exists when a change in a good's price has little impact on the quantity supplied

Unit Elastic Supply

when the percentage change in the quantity supplied equals the percentage change in price

Production Function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Short Run

the period of time during which at least one of a firm's inputs is fixed

Long Run

the time period in which all inputs can be varied

Total Product

total output produced by the firm

Stages Of Production

phases of production that consist of increasing, decreasing, and negative returns

Stage 1

Increasing marginal returns

Stage 2

Decreasing marginal returns

Stage 3

Negative marginal returns

Fixed Cost

a cost that does not change, no matter how much of a good is produced

Overhead

broad category of fixed costs that includes interest, rent, taxes, and executive salaries

Variable Cost

a cost that rises or falls depending on how much is produced

Total Cost

fixed costs plus variable costs

Marginal Cost

the cost of producing one more unit of a good

Average Revenue

total revenue divided by the quantity sold

Total Revenue

the total amount of money a firm receives by selling goods or services

Marginal Revenue

the additional income from selling one more unit of a good; sometimes equal to price

Profit Maximization

A method of setting prices that occurs when marginal revenue equals marginal cost.

Break Even Point

the point at which the costs of producing a product equal the revenue made from selling the product

E-Commerce

the buying and selling of goods over the internet

Price

The amount of money exchanged for a good or service

Price as a Signal

Price sends messages to consumers and producers about whether to enter or leave a market e.g. high prices signal to producers to enter and consumers to leave.

Neutrality

policy of supporting neither side in a war

Flexibility

The ability to move your body parts through their full range of motion

Familiarity

A general sense that a certain stimulus has been encountered before.

Efficiency

The percentage of the input work that is converted to output work

Rationing

A limited portion or allowance of food or goods; limitation of use

Surplus

A situation in which quantity supplied is greater than quantity demanded

Shortage

A situation in which quantity demanded is greater than quantity supplied

Economic Model

a simplified version of reality used to analyze real-world economic situations

Equilibrium Price

the price that balances quantity supplied and quantity demanded

Market Structure

The nature and degree of competition among firms operating in the same industry.

Pure Competition

the market structure that exists when there are many small businesses selling one standardized product

Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical

Product Differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

Non-price Competition

a way to attract customers through style, service, or location, but not a lower price

Oligopoly

A market structure in which a few large firms dominate a market

Collusion

secret agreement or cooperation

Price Fixing

an agreement among firms to charge one price for the same good

Monopoly

A market in which there are many buyers but only one seller.

Laissez Faire

Idea that government should play as small a role as possible in economic affairs.

Natural Monopoly

a market that runs most efficiently when one large firm supplies all of the output

Geographic Monopoly

a monopoly based on the absence of other sellers in a certain geographic area

Governmental Monopoly

When the government controls one, essential element of the economy.

Technological Monopoly

occurs when a firm controls a manufacturing method, invention, or type of technology

Market Failure

a situation in which a market left on its own fails to allocate resources efficiently

Five Main Causes of Market Failures

Not enough competition, not enough information, resources that cant or wont move, too few public goods, externalities or spillover effects

Not Enough Competition

Reduces efficient use of scarce resources

Not enough Information

Market cannot be efficient

Resources that can't or won't move

"Resource immobility" example supply chain issues

Too Few Public Goods

-public goods are produced by the gov. b/c in most cases the private sector will not/cannot produce them b/c there is not enough profit to be made in the production of those goods -examples: highways, police/fire protection, parks

Spillover Effects

uncompensated side effects that either benefit or harm a third party not involved in the activity that caused it

Externalities

A side effect of an action that affects a third party other than the buyer or seller.

Cost-Beneficial Analysis

a decision-making process in which you compare what you will sacrifice and gain by a specific action

2008 Financial Crisis

Occurred because of bad practices in the financial sector related to home mortgages. The government eventually bailed out the banks with over 700 billion dollars. the real estate bubble burst in the US, setting in motion a financial crisis of enormous proportions

Government Role in Market Structures

Ensure Competition, Protect Consumers, Regulation

Government Handling Monopolies

1. Breaking up monopolies 2. Preventing them from happening 3. Regulating existing monopolies

Trusts

Firms or corporations that combine for the purpose of reducing competition and controlling prices (establishing a monopoly). There are anti-trust laws to prevent these monopolies.

Sherman Antitrust Act

First federal action against monopolies, it was signed into law by Harrison and was extensively used by Theodore Roosevelt for trust-busting. However, it was initially misused against labor unions

Clayton Antitrust Act

1914 act designed to strengthen the Sherman Antitrust Act of 1890; certain activities previously committed by big businesses, such as not allowing unions in factories and not allowing strikes, were declared illegal.

Price Discrimination

the business practice of selling the same good at different prices to different customers

Cease and Desist Orders

Legally binding orders to stop a practice that would mislead the public

Economies of Scale

the property whereby long-run average total cost falls as the quantity of output increases

Public Disclosure

requirement forcing a business to reveal information about its products or its operations to the public

Consumer Financial Protection Bureau (CFPB)

A U.S. government agency that helps protect consumers by regulating financial products and services, like mortgages, credit cards, and student loans.