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Economics 101

UNC. Professor Conway. Exam 1 (chapters1-7)
STUDY
PLAY
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)
absolute advantage
one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person
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
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
buyer's reservation price
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
buyer's surplus
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
deadweight loss
the reduction in total economic surplus that results from the adoption of a policy