# Economics 101

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UNC. Professor Conway. Exam 1 (chapters1-7)

### economics

the study of how people make choices under conditions of scarcity and of the results of those choices for society

### rational person

someone with well-defined goals who tries to fulfill those goals as best he or she can

### economic surplus

the economic surplus from taking any action is the benefit of taking that action minus its cost

### opportunity cost

the opportunity cost of an activity is the value of what must be forgone in order to undertake the activity

### sunk cost

a cost that is beyond recovery at the moment a decision must be made

### marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

### marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity

### average cost

the total cost of undertaking n units of an activity divided by n

### average benefit

the total benefit of undertaking n units of an activity divided by n

### normative economic principle

one that says how people should behave

### positive economic principle

one that predicts how people will behave

### 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 economics and the policies that governments use to try to improve that performance

### equation

a mathematical expression that describes the relationship between two or more variables

### variable

a quantity that is free to take a range of different values

### dependent variable

a variable in an equation whose value is determined by the value taken by another variable in the equation

### independent variable

a variable in an equation whose value determines the value taken by another variable in the equation

### constant (or parameter)

a quantity that is fixed in value

### vertical intercept

in a straight line, the value taken by the dependent variable when the independent variable equals zero

### slope

in a straight line, the ratio of the vertical distance distance the straight line travels between any two point (rise) to the corresponding horizontal distance (run)

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

### production possibilities curves

a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

### attainable point

any combination of goods that can be produced using currently available resources

### unattainable point

any combination of goods that cannot be produced using currently available resources

### inefficient point

any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

### outsourcing

a term increasingly used to connote having services performed by low-wage workers overseas

### market

the market for any good consists of all buyers or sellers of that good

### demand curve

a schedule or graph showing the quantity of a god that buyers wish to buy at each price

### substitution effects

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

### income effect

the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

the largest dollar amount the buyer would be willing to pay for a good

### supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price

### seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

### equilibrium

a system is in equilibrium when there is no tendency for it to change

### equilibrium price and equilibrium quantity

the price and quantity for which quantity supplied and quantity demanded are equal

### market equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

### excess supply

the amount by which quantity supplied exceeds quantity demand when the price of a good exceeds the equilibrium price

### excess demand

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

### price ceiling

a maximum allowable price, specified by law

### change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

### change in demand

a shift of the entire demand curve

### change in supply

a shift of the entire supply curve

### change in the quantity supplied

a movement along the supply curve that occurs in response to a change in price

### complements

two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

### Substitutes

two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

### normal good

one whose demand curve shifts rightward when the incomes of buyers increase and the leftward when the incomes of buyers decrease.

### inferior good

one whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease

the difference between the buyer's reservation price he or she actually pays

### seller's surplus

the difference between the price received by the seller and his or her reservation price

### total surplus

the difference between the buyer's reservation price and the seller's reservation price

### cash on the table

economic metaphor for unexploited gains from exchange

### socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

### efficiency (aka economic efficiency)

occurs when all goods and services are produced and consumed at their respective socially optimal levels

### marginal utility

the additional utility gained from consuming an additional unit of a good

### law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

### optimal combination of goods

the affordable combination that yields the highest total utility

### real price

the dollar price of a good relative to the average dollar price of all other goods

### nominal price

the absolute price of a good in dollar terms

### consumer surplus

the difference between a buyer's reservation price for a product and the price actually paid

### profit

the total revenue a firm receives from the sale of its product minus all costs- explicit and implicit- incurred in producing it

### profit-maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

### perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

### price taker

a firm that has no influence over the price at which it sells its product

### imperfectly competitive firm

a firm that has at least some control over the market price of its product

### factor of production

an input used in the production of a good or service

### short run

a period of time sufficiently short that at least some of the firm's factors of production are fixed

### long run

a period of time of sufficient length that all the firm's factors of production are variable

### law of diminishing returns

a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; it says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor

### fixed factor of production

an input whose quantity cannot be altered in the short run

### variable factor of production

an input whose quantity can be altered in the short run

### fixed cost

the sum of all payments made to the firm's fixed factors of production

### variable cost

the sum of all payments made to the firm's variable factors of production

### total cost

the sum of all payments made to the firm's fixed and variable factors of production

### marginal cost

as output changes from one level to another; the change in total cost divided by the corresponding change in output

### average variable cost (AVC)

variable cost divided by total output

### average total cost (ATC)

total cost divided by total output

### profitable firm

a firm whose total revenue exceeds its total cost

### producer surplus

the amount by which price exceeds the seller's reservation price

### efficient (or Pareto efficient)

a situation is efficient if no change is possible that will help some people without harming others

the reduction in total economic surplus that results from the adoption of a policy

Example: