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Microeconomics Vocab Test #1

Terms in this set (112)

Microeconomics
the study of the economy at the small-scale level, examining individuals and specific markets
aggregate
total
macroeconomics
the study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures of the economy
resources
anything used to produce a good or service, whether it is provided by nature or is manufactured
land
all natural resources used in production
labor
all physical and mental activity devoted to producing goods and services
capital
the tools, machinery, infrastructure, and knowledge used to produce goods and services
entrepreneurial ability
the talent/ability to combine land, labor, and capital to produce goods and services
scarcity
the inability of limited resources to satisfy unlimited wants
allocation
assigning a good ,service, or resource to one use instead of another
opportunity cost
the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another
self-interest
the idea that people choose to do the things that interest them
to make a good decision
marginal benefit > marginal cost
marginal decision making
making choices in increments by evaluating the marginal benefit and the marginal costs
optimization
people make choices to maximize their overall benefit
marginal benefit
the additional benefit associated with one more unit of an activity
marginal cost
the additional cost associated with one more unit of an activity
decreasing marginal benefit
the more of a good/service is consumed, the lower the marginal benefit associated with each additional unit (negative relationship)
increasing marginal cost
the more a good/service is produced, the higher the marginal cost associated with each additional unit (positive relationship)
marginal cost formula
change in total cost
------------------------------------
change in quantity
marginal benefit formula
change in total benefit
--------------------------------------
change in quantity
circular flow model
describes how goods, services, resources, and money flow back and forth in an economy
market
any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources
good
a tangible product that consumers, firms, or governments wish to purchase
service
an intangible product or action that consumers, firms, or governments wish to purchase
resource
any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services
law of demand
a law in economics that states that as the price of a good, service, or resource rises, the quantity demanded will fall, and vice versa, all else held constant

Price Increases, Quantity Decreases
demand schedule
a tabular representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant
demand curve
a graphical representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant
quantity demanded
the quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy at a given price, all else held constant
change in quantity demanded
dependent on price
income effect
the effect that a change in the price of a good, service, or resource has on the purchasing power of income
substitution effect
the effect that a change in the price of one good, service, or resource has on the demand of another
diminishing marginal utility (demand)
the negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time
3 Reasons for the inverse relationship between prices and quantities demanded
1) Income Effect
2) Substitution Effect
3) Diminishing Marginal Utility
market demand
the overall or total demand for a good, service, or resource. It represents the summation of individual demand curves, whether they represent individuals, communities, states, or nations
graphical shift to the right for demand curve
increase in demand
graphical shift to the left for demand curve
decrease in demand
normal good
a good for which there is a direct relationship between the demand for the good and income

As Income Increases, Demand Increases (ex: lobster)
inferior good
a good for which there is an inverse relationship between the demand for the good and income

As Income Increases, Demand Decreases (ex: rice)
tastes and preference
the perception of the desirability associated with consuming a good, service, or resource
buyers
market participants who seek to obtain goods, services, and resources
expectations
the anticipation by individuals and firms of costs and benefits that lie in the future
substitutes
goods, services, or resources that are viewed as replacements for one another (coke vs. pepsi)
complements
goods, services, or resources that are used or consumed with one another (peanut butter & jelly)
law of supply
as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant

Price Increases, Quantity Increases
diminishing marginal utility (supply)
if at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant
supply schedule
a tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply
supply curve
a graphical representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply
Increases in Production
1) purchase additional resources
2) use existing resources more intensively
3) shift resources form one good to another
market supply
the overall, or total, supply of a good, service, or resource
graphical shift to the right for supply curve
increase in supply
graphical shift to the left for supply curve
decrease in supply
subsidy
a payment made by the government that doesn't require an exchange of economic activity in return

increase in subsidy, shift to the right
(supply curve)
tax
a payment made to the government that is the result of economic activity

increase in tax, shift to the left
(supply curve)
technology
the knowledge, inventions, and innovations that can increase resource productivity
sellers
market participants who are willing/able to sell goods, services, or resources
seller expectations
the anticipated future outcomes, including prices that sellers associate with the production of a good, service, or resource
equilibrium price
the price at which the quantity supplied of a good, service, or resource equals the quantity demanded
equilibrium quantity
the quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded
shortage
the quantity of an output demanded is greater than the quantity of output supplied at the current market price
surplus
a situation in which the quantity of output supplied is greater than the quantity of output demanded at the current market price
nonprice determinant of demand
a characteristic of the demand for a good, service, or resource other than its own market price
change in demand
an increase or decrease in the quantity demanded of a good, service, or resource at every price (shift)
nonprice determinant of supply
a characteristic 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 (shift)
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 veiling, the ceiling has no effect on the market and is said to be nonbinding
binding price ceiling
a maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling restricts trade and is said to be binding
price floor
a mnimum legal price at which a good, service, or resource an be sold
nonbinding price floor
market equilibrium price > price floor
binding price floor
market equilibrium price < price floor
minimum wage
the lowest wage firms can legally pay employees in the labor market
exercise tax
a tax on a good or service that depends on the units sold, not on the price of the good or service
consumer suprlus
the difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay
welfare economics
a branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being
producer surplus
the difference between the price producers receive for a good or service and the minimum price they are willing and able to accept
economic surplus
the sum of consumer and producer surplus
deadweight loss
the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium
productive efficiency
producing output at the lowest possible average total cost of production; uses the fewest resources possible
allocative efficiency
producing the goods/services that are the most wanted by consumers in such a way that their marginal benefit = marginal cost
imports
goods, services, or resources produced abroad and sold domestically
exports
goods, services, or resources produced domestically and sold abroad
Benefits of International Trade
1) lower-cost alternatives
2) increased diversity of choices
3) access to resources
quota rent
the income earned by whoever has the right to import the good at the world price and sell it in the domestic market at the higher quota price
autarky
a situation in which a country is closed to any international trade
absolute advantage
the ability to produce more output, given similar resources, than another producer
gains from trade
the benefit of one good, service, or resource in terms of another
small-country model
a model of international trade in which the production or consumption of a good, service, or resource in the domestic country is small relative to global markets
price takers
firms that take or accept the market price and have no ability to influence that price
domestic price
the price of a good, service, or resource that prevails in the domestic market
world price
the price of a good, service, or resource that prevails in the world market
welfare effects
the effects that a change in market conditions, usually price, has on the welfare, or economic well-being, of market participants
barrier to trade
any policy that is designed to reduce the competitiveness of foreign producers that wish to sell their goods or services in the domestic market, there by reducing the imports of foreign goods and services
tariff
a tax or fee that must be paid on goods imported from other countries
quota
a numerical limit on the amount of a good that can be imported
free trade
trade between nations that is free from barriers such as regulations, tariffs, or quotas
exchange rate
the rate, or price, at which one currency can be exchanged for another
foreign exchange market
a market in which people exchange one currency for another currency
domestic currency
the currency or money used in the domestic country
foreign country
the currency or money used in foreign countries
flexible exchange rate
an exchange rate that changes as demand and supply for the currency change
reduction in exchange rate
fewer dollars to purchase each euro -> goods in euros are cheaper for people with $US -> more willing/able to buy -> increasing quantity demand of euros
higher exchange rate
people with euros receive more $/euro -> goods in $US are cheaper for people with euros -> more willing/able to buy -> increasing quantity supplied of euros
appreciation
an increase in the value, or price, of one currency relative to another
depreciation
a decrease in the value, or price, of one currency relative to another
Nonprice determinants of exchange market for single shifts
* expectations
* income
* tastes and preferences
* barriers to trade
nonprice determinants of exchange market for double shifts
* interest rates
* inflation rates
fixed exchange rate
an exchange rate that is set at a specific value and maintained over time
foreign reserves
government holdings of foreign currencies; generally used to settle international transactions and conduct exchange rate policy
expansionary monetary policy
the actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment ("easy money"
contractionary monetary policy
the actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation ("tight money")
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