Term
| partial equilibrium analysis |
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Definition
| Determination of equilibrium prices and quantities in a market independent of effects from other markets. |
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Term
| general equilibrium analysis |
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Definition
| Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account. |
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Term
| When markets are interdependent... |
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Definition
| the prices of all products must be simultaneously determined. |
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Term
| To find the general equilibrium prices (and quantities) in practice... |
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Definition
| we must simultaneously find two prices that equate quantity demanded and quantity supplied in all related markets. |
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Term
| If the goods in question are complements... |
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Definition
| a partial equilibrium analysis will overstate the impact of a tax. |
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Term
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Definition
| Market in which two or more consumers trade two goods among themselves. |
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Term
| efficient (or Pareto efficient) allocation |
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Definition
| Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account. |
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Term
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Definition
| Diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes. |
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Term
| an edgeworth box illustrates... |
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Definition
| ...the possibilities for both consumers to increase their satisfaction by trading goods. |
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Term
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Definition
| curve showing efficient allocations of goods between two consumers, or of two inputs between two production functions. |
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Term
| The contract curve contains... |
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Definition
| ... all allocations for which consumers’ indifference curves are tangent. |
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Term
| Every point on the curve is efficient because... |
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Definition
| ... one person cannot be made better off without making the other person worse off. |
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Term
| In a competitive market the prices of the two goods determine... |
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Definition
| ... the terms of exchange among consumers. |
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Term
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Definition
| When the quantity demanded of a good exceeds the quantity supplied. |
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Term
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Definition
| When the quantity supplied of a good exceeds the quantity demanded. |
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Term
| The utility possibilities frontier shows... |
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Definition
| the levels of satisfaction that each of two people achieve when they have traded to an efficient outcome on the contract curve. |
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Term
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Definition
| Normative evaluation of markets and economic policy |
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Term
| If everyone trades in the competitive marketplace... |
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Definition
| all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be economically efficient. |
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Term
| Because the indifference curves are tangent in competitive equilibrium... |
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Definition
| all marginal rates of substitution between consumers are equal. |
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Term
| Because each indifference curve is tangent to the price line... |
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Definition
| each person’s MRS of clothing for food is equal to the ratio of the prices of the two goods. |
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Term
| utility possibilities frontier |
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Definition
| Curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals. |
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Term
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Definition
| Measure describing the well-being of society as a whole in terms of the utilities of individual members. |
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Term
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Definition
1. egalitarian -- all members receive equal amounts of goods
2. rawlsian -- maximize the utility of the least-well-off person
3. utilitarian -- maximize the total utility of all members of society
4. market-oriented -- the market outcome is the most equitable |
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Term
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Definition
| Condition under which firms combine inputs to produce a given output as inexpensively as possible. |
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Term
| production possibilities frontier |
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Definition
| Curve showing the combinations of two goods that can be produced with fixed quantities of inputs. |
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Term
| The production possibilities frontier is concave because... |
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Definition
| ... its slope (the marginal rate of transformation) increases as the level of production of food increases. |
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Term
| marginal rate of transformation |
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Definition
| Amount of one good that must be given up to produce one additional unit of a second good. |
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Term
| An economy produces output efficiently only if, for each consumer... |
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Definition
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Term
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Definition
| The efficient combination of outputs is produced when the marginal rate of transformation between the two goods (which measures the cost of producing one good relative to the other) is equal to the consumer’s marginal rate of substitution (which measures the marginal benefit of consuming one good relative to the other). |
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Term
| When output markets are perfectly competitive, all consumers allocate their budgets so that... |
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Definition
| ...their marginal rates of substitution between two goods are equal to the price ratio. |
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Term
| each profit-maximizing firm will produce its output up to the point at which... |
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Definition
| ...price is equal to marginal cost. |
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Term
| the marginal rate of transformation is equal to... |
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Definition
| the ratio of the marginal costs of production, |
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Term
| In a competitive output market, people consume to the point where... |
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Definition
| their marginal rate of substitution is equal to the price ratio. |
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Term
| Producers choose outputs so that |
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Definition
| the marginal rate of transformation is equal to the price ratio. |
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Term
| Because the MRS equals the MRT... |
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Definition
| the competitive output market is efficient. |
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Term
| Any other price ratio will lead to ... |
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Definition
| an excess demand for one good and an excess supply of the other. |
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Term
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Definition
| Situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2. |
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Term
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Definition
| Situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1 is lower than the cost of producing it in 2. |
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Term
| What Happens when Nations Trade |
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Definition
The comparative advantage of each country determines what happens when they trade.
The outcome will depend on the price of each good relative to the other when trade occurs. |
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Term
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Definition
| An Expanded Production Possibilities Frontier |
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Term
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Definition
Market Power
Incomplete Information
Externalities
Public Goods |
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Term
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Definition
Suppose that unions gave workers market power over the supply of their labor in the production of food.
Too little labor would then be supplied to the food industry at too high a wage and too much labor to the clothing industry at too low a wage.
In the clothing industry, the input efficiency conditions would be satisfied. In the food industry, the wage paid would be greater than the wage paid in the clothing industry.
The result is input inefficiency because efficiency requires that the marginal rates of technical substitution be equal in the production of all goods. |
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Term
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Definition
If consumers do not have accurate information about market prices or product quality, the market system will not operate efficiently.
This lack of information may give producers an incentive to supply too much of some products and too little of others.
In other cases, while some consumers may not buy a product even though they would benefit from doing so, others buy products that leave them worse off. |
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Term
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Definition
Sometimes, however, market prices do not reflect the activities of either producers or consumers.
There is an externality when a consumption or production activity has an indirect effect on other consumption or production activities that is not reflected directly in market prices. |
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Term
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Definition
| Nonexclusive, nonrival good that can be made available cheaply but which, once available, is difficult to prevent others from consuming. |
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