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FNCE 5151 E.1 Terms
Exam 1 Terms
| Term | Definition |
|---|---|
| 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 benefit of taking an action minus its cost |
| opportunity cost | the value of what must be forgone to undertake an 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 (or descriptive) 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 economies and the policies that governments use to try to improve that performance |
| 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 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 |
| 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 with-out a reduction in the production of the other |
| efficient point | any combination of goods for which currently available resources do not allow an increase in the production of one good with-out 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 good that buyers wish to buy at each price |
| substitution effect | 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 balanced or unchanging situation in which all forces at work within a system are canceled by others |
| equilibrium price and equilibrium quantity | the price and quantity at the intersection of the supply and demand curves for the good |
| market equilibrium | occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price |
| excess supply (or surplus) | the amount by which quantity supplied exceeds quantity demanded when the price of the good exceeds the equilibrium price |
| excess demand (or shortage) | 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 | a good whose demand curve shifts right-ward when the incomes of buyers increase and leftward when the incomes of buyers decrease |
| inferior good | a good 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 and the 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 | an 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 (or economic efficiency) | a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels |
| price elasticity of demand | the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price |
| elastic | the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1 |
| inelastic | the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1 |
| unit elastic | the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1 |
| perfectly elastic demand | demand is perfectly elastic with respect to price if price elasticity of demand is infinite |
| perfectly inelastic demand | demand is perfectly inelastic with respect to price if price elasticity of demand is zero |
| total expenditure (total revenue) | the dollar amount that consumers spend on a product (P × Q) is equal to the dollar amount that sellers receive |
| cross-price elasticity of demand | the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second |
| income elasticity of demand | the percentage by which a good’s quantity demanded changes in response to a 1 percent change in income |
| price elasticity of supply | the percentage change in quantity supplied that occurs in response to a 1 percent change in price |
| perfectly inelastic supply | supply is perfectly inelastic with respect to price if elasticity is zero |
| perfectly elastic supply | supply is perfectly elastic with respect to price if elasticity of supply is infinite |
Created by:
westwood15