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Economics Test 2

Terms in this set (68)

equilibrium price
the price at which the quantity supplied of a good, service or resource equals the quantity demanded; the price at which the demand and supply curves intersect also known as market clearing price
equilibrium quantity
the quantity traded when the quantity supplied of a good, service or resource equals its quantity demanded
equilibrium equation
quantity supplied= quantity demanded
shortage
a situation in which the quantity demanded is greater than the quantity supplied at the current market price also called excess demand
surplus
a situation in which the quantity supplied is greater than the quantity demanded at the current market price also called excess supply
nonprice determinant (demand)
a characteristic of the demand of a good, service or resource other than its own market price. sometimes referred to as non-own price determinant
change in demand
an increase or decrease in the quantity demanded of a good, service or resource at every price, graphically, such changes are represented by a shift of the demand curve, changes in demand are caused by changes in the nonprice determinants of demand
nonprice determinants of supply
a charcteristic of the supply of a good, service or resource other than its own market price.
change in supply
an increase or decrease in the quantity supplied of a good, service, or resource at every price graphically such changes are represented by a shift in supply curve
price ceiling
a maximum legal price at which a good, service or resource can be sold
nonbinding price ceiling
a maximum legal price that is set above the existing equilibrium price, because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbiding
binding price ceiling
a maximum legal price that is set below the exisiting equilibrium price, because the market equilibrium is greater than the price ceiling, the ceiling restricts trade and is said to be binding
price floor
a minimum legal price at which a good, service, or resource can be sold
nonbinding price floor
a minimum legal price that is set below the existing equilibrium price
binding price floor
a minimum legal price that is set above the exisiting equilibrium price
minimum wage
the lowest wage firms can legally pay employees in the labor market
excise tax
a tax based on the number of units purchased, not on the price paid for a good or service
elasticity
a measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price
price elasticity of demand
a measure of how responsive quanitity demanded is to a change in price; calculated as the percentage change in quantity demanded divided by the percentage change in price
elastic demand
price elasticity of demand greater than 1 in absolute value; quantity demanded that is relatively more responsive to a change in price, such that if price changes by 1% quantity demanded changes by more than 1 %
inelastic demand
price elasticity of demand less than 1 in absolute value, quantity demanded that is relatively less responsive to a change in price, such that if price changes by 1%, quantity demanded changes by less than 1% as a result
unit-elastic demand
price elasticity of demand equal to 1 in absolute value; prices and quantities demanded change by equal percentages, such that if price changes by 1%, quantity demanded changes by 1% as a result
perfectly elastic demand
infinite price elasticity of demand, quantity demanded that is so responsive to a change in price that if price increases or decreases, quantity demanded decreases to zero
perfectly inelastic demand
price elasticity of demand equal to zero; quantity demanded is completely nonresponsive to price changes, such that any increase or decrease in price leave quantity demanded unchanged
cross price elasticity of demand
a measure of the effect of a change in the price of one product on the quantity demanded of another; calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
normal good
a good for which there is a direct relationship between the demand for the good and income, an increase in income increases demand, and a decrease in income decreases demand
inferior good
a good for which there is an inverse relationship between the demand for the good and income, an increase in income decreases demand and a decrease in income increases demand
price elasticity of supply
the measure of how responsive quantity supplied is to price changes; calculated as the percentage change in quantity supplied divided by the percentage change in price
immediate period
the time period in which producers cannot increase their use of economic resources to increase quantity supplied
short run
the time period in which at least one input of production is fixed but other inputs can be changed
long run
the time period in which all inputs of production can be changed
economic costs
the costs associated with the use of resources; the sum of explicit and implicit costs
explicit costs
monetary payments made by individuals, firms, or governments for the use of land, labor, capital and entrepreneurial ability owned by others also known as accounting costs
implicit costs
the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made
accounting profit
total revenue minus the explicit costs of production
economic profit
total revenue minus economic costs, which include both explicit and implicit costs of production
economic costs
the costs associated with the use of resources; the sum of explicit and implicit costs
total product
the total amount of output produced with a given amount of resources
marginal product
the additional output produced as a result of utilizing one more unit of a variable resource (labor or capital)
average product
the average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed
increasing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource
diminishing marginal return
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource
fixed costs
costs that do not change with the amount of output produced
variable costs
costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases
total cost
the sum of fixed and variable costs of production
average fixed cost
total fixed cost divided by the amount of output produced; fixed cosst per unit
average variable cost
total variable cost divided by the amount of output produced; variable cost per unit
average total cost
total cost divided by the amount of output produced; total cost per unit
marginal cost
the additional cost associated with one more unit of an activity, for production it is the change in total cost due to the production of one more unit of output
short run average total cost curve
a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity
long run average cost curve
the curve showing the lowest possible cost of producing each level of output when all inputs can be varied
economies of scale
a condition in which the long-run average total cost of production decreases as production increases
diseconomies of scale
a condition in which the long-run average total cost of production increases as production increases
constant returns to scale
a condition in which the long-run average total cost of production remains constant as production increases
minimum efficient scale
the lowest level of output at which the long run average total cost is minimized
perfect competition
a market structure characterized by the interaction of large numbers of buyers and sellers in which the sellers produce a standardized, homogeneous product, these sellers are price takers, can sell as much output as they choose to produce at the market price, and have the ability to easily enter or exit an industry
price takers
firms that take or accept the market price and have no ability to influence that price
marginal revenue
the change in a firm's total revenue that results from a one-unit change in output produced and sold
average revenue
revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold
loss
the level of profit that occurs when total revenue is less than total cost
shutdown point
the price below which a firm will choose not to operate in the short run, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost
short run supply curve
a supply curve that represents the short run relationship between price and quantity supplied, for the perfectly competitive firm, the portion of the marginal cost curve that is at or above the minimum point of the average variable cost curve
long run equilibrium
a market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit, generally occurs when the market price is equal to the minimum average total cost faced by firms
productive efficiency
producing output at the lowest possible average total cost of production, using the fewest resources possible to produce a good or service
allocative efficiency
producing the goods and services that are most wanted by consumers in such a way that thier marginal benefit equals their marginal cost
long run supply curve
a supply curve that represents the long run relationship between price and quantity supplied
constant cost industry
an industry in which the firms cost structures do not vary with changes in production
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