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Test1 Microeconomics

Principles of Microeconomics

TermDefinition
Economics the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of society.
Macroeconomics the part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy.
Microeconomics the part of economics concerned with decision making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices
Marginal cost/ Marginal benefit the extra cost of producing when 1 more unit of output/the extra benefit of consuming 1 more unit of some good or service
self-interest that which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
four factors of production land, capital, labor, and entrepreneurial ability
opportunity cost/scarcity the amount of other products that must be forgone or sacrificed to produce a unit of a product/restricts options and demand choices
creative destruction the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies
command system a method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism
market system an economy in which the private decisions of consumers, resource suppliers, and firms determine how resources are allocated; the market system
law of demand the principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price
law of supply the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease
demand curve a curve illustrating demand
supply curve a curve illustrating supply
determinants of demand factors other than the price that determine the quantities demanded of a good or service
determinants of supply factors other than price that determine the quantities supplied of a good or service
shortage the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular price
surplus the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price
prospect theory a behavioral economics theory of preferences having three main features: 1 people ecaluate options on the basis of whether they generate gains or losses relative to the status quo; 2 gains are subject to diminishing marginal utility, while losses are subj
endowment effect the tendency people have to place higher values on items they own
law of diminishing marginal utility the increase in consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases
complement goods products and resources that are used together
substitute goods products or services that can be used in place of each other
normal goods a good or service whose consumption increases and falls when income decreases, price remaining constant
inferior goods a good or service whose consumption declines as income rises, prices held constant
utility the want-satisfying power of a good or service; the satisfaction or pleasure from a good or service
Price Elasticity of demand the ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price
price elasticity of supply the ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price
cross elasticity of demand the ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good
income elasticity of demand the ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income
economic cost a payment that must be made to obtain and retain the services of a resoource
explicit cost the monetary payment a firm must make to an outsider to obtain a resource
implicit cost the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market
fixed cost any cost that in total does not change when the firm changes its output
variable cost a cost that in total increases when the firm increases its output and decreases its output and decreases when the firm reduces its output
economic profit the total revenue of a firm less its economic costs; also called "pure profit" and "above-normal profit"
law of diminishing returns as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease
economies of scale reductions in the average total cost of producing a product as the firm expands the size of plant(its output) in the long run
diseconomies of scale increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
pure competition a market structure in which a very large number firms sells a standardized product, which the individual seller has no control over the product price, which there is no price competition
pure monopoly a market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable
monopolistic competition a market structure in which many firms sell a differentiated product, into which entry is relatively easy, which there is considerable non price competition
oligopoly a market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult product, which entry is difficult
productive efficiency the production of a good in the least costly way
allocative efficiency the apportionment of resources among firms and industries to obtain the production of the products most wanted by society
X-efficiency the production of output at higher average cost than is necessary for producing that level of output
four firm concentration ratio the percentage of total industry sales accounted for by the top four firms in the industry
collusion a situation which firms act together and in agreement to fix prices, divide a market, or otherwise restrict competition
cartels a formal agreement among firms in an industry to set the price of a product and establish the outputs of individual firms or to divide the market for the product geographically
Created by: Corlandise32