Print › Economics 101

Coase theorem: if at no cost, people can negotiate the purchase and sale of the right to perform activites that cause externalities they can always arrive at efficient solutions to the problems caused by externalities
Nash equilibrium: any combination of strategies in which each player's strategy is his or her best choice, given the other players' strategies
Pareto-efficient: a situation is efficient if no change is possible that will help some people without harming others
The Cost-Benefit Principle: An individual will be better off taking an action if, and only if, the extra benefits from taking the action are greater than the extra costs
The Efficiency Principle: economic efficiency occurs when total economic surplus is maximized
The Equilibrium Principle: a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action
The Principle of Comparative Advantage: total output is largest when each person concentrates on the activities for which his or her opportunity cost is lowest
The Rational Spending Rule: to maximize utility, spending must be allocated across goods so that the marginal utility per dollar is the same for each good
The Scarcity Problem: Having to make a choice- more of one good thing means having less of another
absolute advantage: one person has an absolute advantage over another if he or she takes fewer hours to perfom a task than the other person
accounting profit: the difference between a firm's total revenue and its explicit costs
adverse selection: the parttern that occurs when, at any given cost of insurance, peole with a greater expectation of loss buy insurance while people with a lower expected value of claims choose not to buy insurance
allocative function of price: directs resources away from overcrowded markets and toward markets that are undeserved
arc elasticity of demand: elasticity calculated between the endpoints of a segment of a demand curve
asymmetric information: situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace
average benefit: total benefit of undertaking n units of an activity divided by n
average cost: total cost of undertaking n units of an activity divided by n
average product: total output divided by total units of the variable factor of production
barrier to entry: any force that prevents firms from entering a new market
better-than-fair gamble: a gamble whose expeceted value is positive
cartel: a coalition of firms that agree to restrict output for the purpose of earning an economic profit
collective good: a good or service that, to at least some degree, is nonrival but excludable
commitment device: a way of changing incentives so as to make otherwise empty threats or promises credible
commitment problem: a situation in which people cannot achieve their goals because of an inability to make credible threats or promises
commons good: one for which nonpayers cannot easily be excluded and for which each unit consumed by one person means one fewer unit is available for others
comparative advantage: 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
constant returns to scale: a situation in which long-run average cost does not change as scale changes
consumer surplus: the economic gain of the buyers of a product, as measured by the cumulative difference between their respective reservation prices and the price they actually paid
cost-plus regulation: a method of regulation under which the refulated firm is permitted to charge a price equal to its explicit costs of production plus a makrupto cover the oportunity cost of resources provided by the firm's owners
costly-to-fake principle: to communicate information credibly to a potential rival, a signal must be costly or difficult to fake
credible threat: a threat to take an action that is in the threatener's interest to carry out
cross-price elasticity of demand for two goods: the percentage change in the quantity demanded of one good in response to a 1 percent change in the price of a second good
deadweight loss: reduction in economic surplus that results from adoption of that policy
diseconomies of scale: a situation in which long-run average cost increases as a firm's output increase
dominant strategy: one that yields a higher payoff no matter what the other players in a game choose
dominated strategy: any other strategy available to a player who has a dominant strategy
economic efficiency: condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels
economic profit: the difference between a firm's total revenue and the sum of its explicit and implicit costs
economic rent: that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor
economic surplus: the benefit of taking any action minus its cost
economics: the study of how people make choices under conditions of scarcity and of the results of those choices for society
economies of scale: a situation in which long-run average cost decreases as a firm's output increases
efficient quantity: quantity that results in the maximum possible economic surplus from producing and consuming the good
elastic: the demand for a good is elastic with respect to price if its price elasticity of demand is greater than one
excess demand: he difference between the quantity supplied and the quantity demanded when the price of a good lies below the equilibrium price
excess supply: the difference between the quantity supplied and the quantity demanded when the price of a good exceeds the equilibrium price
expected value of a gamble: the sum of the possible outcomes of the gamble multiplied by their respective probabilities
external benefit (positive externality): a benefit received by others that arises from an activity undertaken by an individual, firm, or other eonomic agent for which the agent is not compensated in the market price paid for the good or service involved
external cost (negative externality): a cost that arises from an activity undertaken by an individual, firm, or other economic agent and that is borne by others because the cost is not incorporated in market prices the agent pays
fair gamble: a gamble whose expected value is zero
fixed cost: a cost that does not very with the level of an activity
free-rider problem: an incentive problem in which too little of a good or service is produced because non-payers canot be excluded from using it
head tax: a tax that collects the same amount from every taxpayer
hurdle method of price discrimination: the practice by whcih a seller offers a discount to all buyers who overcome some obstacle
income effect: the change in quantity demanded of a good that occurs because a change in the price of the good changes the real income of the person who purchases it
income elasticity of demand: the percentage change in the quantity demanded of a good in response to a 1 percent change in income
indivisible cost: the cost of an indivisible factor of production
indivisible factor of production: a factor of production that must be available in some minimum amount if a productive activity, even of minimal size, is to occur at all
inelastic: the demand for a good if its price elasticity of demand is less than one
inferior good: a good whose demand curve shifts leftward when the incomes of buyers increase
informational asymmetry: occurs when two parties in a relationship do not have the same level of knowledge of product quality
law of diminishing marginal 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
lemons model: George Akerlof's explanation of how asymmetric information tends to reduce the average quality of goods offered for sale
long-run average cost: the lowest cost per unit that can be achieved for a given level of output when all factors of production, all costs , and the size of the firm are variable
macroeconomics: the study of the performance of national economies and the policies that governments use to try to improve that performance
marginal benefit: the increase in total benefit that results from carrying out one more unit of an activity
marginal cost: the increase in total cost that results from carrying out one additional unit of an activity
marginal product: the increase in total output caused by an increase of one unit in the variable factor of production, holding technology and all other inputs constant
market power: a firm's ability to raise the price of a good without losing all its sales
microeconomics: the study of individual choice under scarcity and its implications for the behaviour of prices and quantities in individual markets
minimum efficient quantity: the smallest quantity of output that will achieve minimum long-run average cost
monopolistic competition: a market structure in which a large number of firms sell slightly differentiated products that are reasonably close for one another
natural monopoly: a monopoly that results from economies of scale
nominal price: absoltue price of a good in dollar terms
nonexcludable good: a good that is difficult, or costly, to exclude nonpayers from consuming
nonrival good: a good whose consumption by one person does not diminish its availability for others
normal good: a good whose demand curve shifts rightward when the incomes of buyers increase
normal profit: the opportunity cost of the resources supplied by the firm's owners; accountin profit-economic profit
normative economics: economic statements that reflect subjective value judgments and are based on ethical positions
oligopoly: a market in which there are only a few rival sellers
opportunity cost: the value of the next-best alternative that must be foregone in order to undertake the activity
optimal combination of goods: the affordable combination that yields the highest total utility
perfect hurdle: one that completely segregates buyers whose reservation prices lie above some threshold from others whose reservatio prices lie below it, imposing no cost on those that jump the hurdle
perfectly discriminating monopolist: a firm that charges each buyer exactly his or her reservation price
point elasticity of demand: elasticity calculated at a specific point on a demand curve
positional arms control agreement: an agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement
positional arms race: a series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality
positional externality: occurs when an increase in one person's performance reduces the expected reward of another's in situations in which reward depends on relative performance
positive economics: economic analysis that offers cause-and-effect explanations of economic relationships; the propositions, or hypotheses, that emrege from positive economics can, in principle, be confirmed or refuted by data; in principle, data can also be used to measure the magnitude of effects predicted by positive economics
price ceiling: a maximum allowable price, specified by law
price discrimination: the practice of charging different buyers different prices for essentially the same good or service
price elasticity of demand: the percentage change in the quantity demanded of a good that results from a 1 percent change in its price
price floor: a minimum allowable price, specified by law
price setter (imperfectly competitve firm): a firm with at least some latitude to set its own price
price taker (perfectly competitive firm): a firm that has no influence over the price at which it sells its product
prisoner's dilemma: a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy
private good: one for which nonpayers can easily be excluded and for which each unit consumed by one person means one fewer unit is available for others
producer surplus: the economic gain of the sellers of a product as measured by the cumulative difference between the price received and their respective reservation prices
production function: a technological relationship between inputs and output
production possibilities curve: a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
progressive tax: a tax in which the proportion of income paid in taxes rises as income rises
proportional income tax: a tax under which all taxpayers pay the same proportion of their incomes in taxes
public good: a good or service that, to at least some degree, is both nonrival and nonexcludable
pure monopoly: a maket in which there is only one supplier of a unique product with no close substitutes
rational person: someone with well-defined goals who tries to fulfill those goals as best as he or she can
rationing function of price: distributes scarce goods to those consumers who value them most highly
real price: dollar price of a good relative to the average dollar price of all other goods and services
regressive tax: a tax u nder which the proportioin of income paid in taxes declines as income rises
rent-seeking: the socially unproductive efforts of people or firms to win a prize
risk-adverse person: someone who would refuse any fair gamble
risk-neutral person: someone who would accept any gamble that is fair or better than fair
scale: the size of a firm relative to other possible sizes of firms serving a particular market
short-run cost-minimizing quantity of output: the quantity of output at which a factory reaches minimum average total cost
short-run shutdown point: a firm's minimum average variable cost; if price drops below minimum average variable cost, the firm will minimize its losses by shutting down
side payments: a payment made by one party to another in compensation or an external cost or benefit
statistical discrimination: the practice of making judgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong
substitution effect: the change in quantity demanded of a good whose relative price has changed that occurs when a consumer's real income is held constant
sunk cost: a cost that is beyond recovery at the moment a decision must be made
technical efficiency in production: occurs when the least possible amount of inputs is used to produce a given level of output
time value of money: the fact that a given dollar amount today is equivalnet to a larger dollar amount in the future, because the money can be invested in an interest-bearing account in the meantime
tragedy of the commons: the tendency for a resource that has no price to be used until its marginal benefit falls to zero
ultimate barganing game: one in which the first player has the power to confront the second player with a take-it-or-leave-it offer
unit elastic: the demand for a good is unit elastic with respect to price if its price elasticity of demand is equal to one
utility: the sense of well-being, satisfaction, or pleasure a person derives from consuming a good or service
variable cost: a cost that varies with the level of activity