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| Rewards for engaging in a particular activity |
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| Things used by people to produce goods and services |
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| what people would buy were their incomes unlimited |
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| the study of decision-making undertaken by individuals and by firms |
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| the study of an economy's behavior as a whole |
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| Total amounts or quantities |
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| Field of study directed at determining how the human brain makes choices |
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| The assumption that people do not intentionally make decisions that would leave them worse-offss |
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| Enlightened self-interest |
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| Individuals, in their quests to become better-off, also achieve the betterment of those around them |
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| Simplified representations of the real world used as the basis for predictions or expectations |
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| Define the array of circumstances in which our model is most likely to be applicable |
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| The Ceteris paribus Assumption |
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| "All things being equal." The assumption that nothing changes except the factor or factors being studied |
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| relying on real-world data in evaluating a model |
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| An approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision-making |
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| people are nearly, but not fully, rational, so they cannot examine every possible choice available to them |
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| Three unrealistic tendencies |
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Definition
Unbounded Selfishness- people interested only in their own satisfaction
Unbounded Willpower- their choices are always consistent with long-term goals
Unbounded Rationality- able to consider every relevant choice |
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| Because every possible choice cannot be considered, an individual will tend to fall back on methods of making choices that are similar |
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| Refers to statements such as "if A, then B." A statement of "what is," not a statement of value judgment or subjective feelings. A value-free approach to inquiry |
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| Analysis involving value judgments about economic policy; relates to whether things are good or bad. A statement of "what ought to be" |
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| A situation in which the ingredients for producing the things that people desire are insufficient to satisfy all wants at a zero price |
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| any activity that results in the conversion of resources into products that can be used in consumption |
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| The natural resources that are available from nature |
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| Productive contributions of people who work |
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| all manufactured resources used for production |
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| the accumulated training and education of workers |
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| The component of human resources that performs the functions of raising capital, organizing, managing, and assembling other factors of production, making basic policy decisions, and taking risks |
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| All things from which individuals derive satisfaction or happiness |
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| goods that are scarce- for which the quantity demanded exceeds the quantity supplied at a zero price |
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| From the economist's point of view, virtually undefinable |
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| The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want |
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| Production Possibilities Curve |
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| A curve representing all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quantity |
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| Society's pool of applied knowledge concerning how goods and services can be produced |
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| The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at a minimum cost. |
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| Any point below the PPC, at which the use of resources is not generating the maximum possible output |
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| Law of Increasing Relative Cost |
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| The fact that the opportunity coat of additional units of a good generally increases as society attempts to produce more of that good. This accounts for the bowed-out shape of the PPC. |
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| The use of goods and services for personal satisfaction |
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| The organization of economic activity so that what each person consumes is not identical to what that person produces. An individual may specialize, for example, in law or medicine. A nation may specialize in the production of coffee, computers, or digital cameras |
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| The ability to produce a good or service at a lower opportunity cost compared to other producers |
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| The ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs |
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| The segregation of resources into different specific tasks; for example, one automobile worker puts on bumpers, another doors, and so on |
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| All of the arrangements that individuals have for exchanging with one another. Thus, for example, we can speak of the labor market, the automobile market, and the credit market |
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| A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant |
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| The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant |
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| The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity |
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| The price that we observe today, expressed in today's dollars; also called the absolute or nominal price |
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| A graphical representation of the demand schedule; a negatively sloped line showing the inverse relationship between the price and the quantity demanded |
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Definition
| The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual |
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| Ceteris Paribus assumption |
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Definition
| Determinants of the relationship between price and quantity that are unchanged along a curve; changes in these factors cause the curve to shift |
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| Goods for which demand rises as income rises. Most goods are normal goods. |
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| Goods for which demand falls as income rises. |
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| Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. |
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| Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other |
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| A schedule showing the relationship between price and quantity supplied for a specific period of time, other things being equal. |
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| The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal |
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| The graphical representation of the supply schedule; a line showing the supply schedule, which generally slopes upward, other things being equal |
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| A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit. |
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| Market clearing (equilibrium) price |
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Definition
| The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve |
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| The situation when quantity supplied equals quantity demanded at a particular price |
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| A situation in which quantity demanded is greater than quantity suppled at a price below the market clearing rate |
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| A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price |
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| An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of these commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant |
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| An act of trading, done on an elective basis, in which both parties to the trade expect to be better off after the exchange. |
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| The conditions under which trading takes place. Usually, the terms of exchange are equal to the price at which a good is traded. |
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| All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract |
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| Govt-mandated minimum or maximum prices that may be charged for goods or services |
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| A legal maximum price that may be charged for a particular good or service |
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| A legal minimum price that may be charged for a particular good or service |
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| Nonprice rationing devices |
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Definition
| All methods used to ration scarce goods that are price-controlled. Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services |
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| A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold |
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| A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers |
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| A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the US more than the quantity specified in the import quota |
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| A situation in which the market economy leads to too few or too many resources going to a specific economic activity |
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| A consequence of an economic activity that spills over to affect third parties. Pollution is an example |
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| Parties who are not directly involved in a given activity or transaction |
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| The rights of an owner to use and to exchange property |
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| A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax |
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| Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices |
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| A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service |
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Definition
| Goods that can be consumed by only one individual at a time. Subject to the principle of rival consumption |
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| Principle of rival consumption |
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Definition
| The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume |
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Definition
| Goods for which the principle of rival consumption does not apply; they can be jointly consumed by many simultaneously at no additional cost and with no reduction in quality or quantity. Also, no one who fails to help pay for the good can be denied the benefit of the good. |
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| A problem that arises when individuals presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production |
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| Government-sponsored good |
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| A good that has been deemed socially desirable through the political process. |
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| Money payments made by govts to individuals for which no services or goods are rendered in return |
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| A collective decision-making system in which group decisions are made on the basis of a 50%+ vote. |
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Definition
| Decision-making system in which actions are based on the proportion of "votes" cast and are in proportion to them. |
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| Price Elasticity of Demand |
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Definition
| The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price |
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| Unit elasticity of demand |
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Definition
| A demand relationship in which the quantity demanded changes exactly in proportion to the change in price |
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Definition
| A demand relationship in which a given percentage change in price will result in a less than proportionate change in the quantity demanded |
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| Perfectly inelastic demand |
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Definition
| A demand that exhibits zero responsiveness to price changes; no matter what the price is, the quantity demanded remains the same |
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Definition
| A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded |
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| Cross price elasticity of demand (E sub xy) |
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Definition
| The percentage change in the demand for one good divided by the percentage change in the price of a related good |
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Term
| Income elasticity of demand (E sub i) |
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Definition
| The percentage change in demand for any good, holding its price constant, divided by the percentage change in income; the responsiveness of demand to changes in income, holding the good's relative price constant |
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| Price elasticity of supply (E_s) |
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Definition
| The responsiveness of the quantity supplied of a commodity to a change in its price; the percentage change in quantity supplied divided by the percentage change in price. |
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Definition
| A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price |
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Term
| Perfectly inelastic supply |
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Definition
| A supply for which quantity supplied remains constant, no matter what happens to price. |
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| The want-satisfying power of a good or service |
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Definition
| The analysis of consumer decision making based on utility maximization |
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| A representative unit by which utility is measured |
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Definition
The change in total utility due to a one-unit change in the quantity of a good or service consumed
Change in total utility / change in number of units consumed |
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| Diminishing marginal utility |
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Definition
| The principle that as more of any good or service is consumed, its extra benefit declines. Increases in total utility from the consumption of a good or service become smaller and smaller as more is consumed during a given time period |
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Definition
| A choice of a set of goods and services that maximizes the level of satisfaction for each customer, subject to limited income |
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Definition
| The tendency of people to substitute cheaper commodities for more expensive commodities |
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| Principle of Substitution |
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Definition
| The principle that consumers shift away from goods and services that become priced relatively higher in favor of goods and services that are now priced relatively lower |
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Definition
| The value of money for buying goods and services. If your money income stays the same but the price of one good goes up, your effective purchasing power falls, and vice versa |
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Definition
| The change in people's purchasing power that occurs when, other things being constant, the price of one good that they purchase changes. When price goes up, real income falls, and vice versa |
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