Absolute advantage The ability to produce more of a good with the same quantity of resources, or the same quantity of goods with fewer resources than all other producers.
absolute (or money) prices The price of a good measured in units of currency.
accounting profit The difference between total revenue and total explicit cost.
all else equal The assumption that all other variables are held constant so that we can predict how a change in one variable affects a second. Also known as the “ceteris paribus” assumption.
allocative efficiency Production of the combination of goods and services that provides the most net benefit to society. This is achieved when the MSB = MSC of the next unit.
average fixed cost (AFC) Total fixed cost divided by output.
average product of labor (APL) Total product divided by the labor employed.
average tax rate The proportion of total income paid to taxes.
average total cost (ATC) Total cost divided by output.
average variable cost (AVC) Total variable cost divided by output.
capitalist market system (capitalism) An economic system based upon the fundamentals of private property, freedom, self-interest, and prices.
cartel Firms that agree to maximize their joint profits rather than compete.
circular flow of economic activity (or circular of goods and services) A model that shows how households and firms circulate resources, goods, and incomes through the economy. This basic model is expanded to include the government and the foreign sector.
collusive oligopoly Models where firms agree to work together to mutually improve their situation.
comparative advantage The ability to produce a good at lower opportunity cost than all other producers.
complementary goods Two goods that provide more utility when consumed together than when consumed separately.
constant returns to scale The horizontal range of long-run average total cost where LRAC is constant over a variety of plant sizes.
constant returns to scale in production The long run outcome when output exactly doubles from a doubling of all inputs.
constrained utility maximization Given prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal utility received.
consumer surplus The difference between a buyer’s willingness to pay and the price actually paid.
cross-price elasticity of demand A measure of how sensitive the consumption of good X is to a change in the price of good Y.
decreasing returns to scale in production The long run outcome when output less than doubles from a doubling of all inputs.
deadweight loss The lost net benefit to society caused by a movement from the competitive market equilibrium.
demand curve Shows the quantity of a good demanded at all prices.
demand for labor Shows the quantity of labor demanded at all wages. Labor demand for a firm hiring in a competitive labor market is MRPL.
demand schedule A table showing quantity demanded for a good at all prices.
derived demand Demand for a resource arising from the demand for the goods produced by the resource.
determinants of demand The external factors that shift demand to the left or right.
determinants of supply The external factors that influence supply. When these variables change, the entire supply curve shifts to the left or right.
disequilibrium Any price where the quantity demanded does not equal the quantity supplied.
diseconomies of scale The upward part of the long-run average total cost curve where LRAC rises as plant size rises.
domestic price The equilibrium price of a good in a nation without trade.
dominant strategy A strategy that is always the best strategy to pursue, regardless of what a rival is doing.
economic costs The sum of explicit and implicit costs of production.
economic growth The increase in an economy’s PPF over time.
economic profit The difference between total revenue and total economic cost.
economics The study of how society allocates scarce resources.
economies of scale The downward part of the long-run average total cost curve where LRAC falls as plant size rises.
egalitarianism The philosophy that all citizens should receive an equal share of the economic resources.
elasticity Measures the sensitivity, or responsiveness, of a choice to a change in an external factor.
elasticity along the demand curve At the midpoint of a linear demand curve, Ed = 1. Above the midpoint demand is elastic, and below the midpoint demand is inelastic.
excess capacity The difference between the long-run output in monopolistic competition and the output at minimum average total cost.
excess demand The difference between quantity demanded and quantity supplied. A shortage.
excess supply The difference between quantity supplied and quantity demanded. A surplus.
excise tax A per-unit tax on a specific good or service.
explicit costs Direct, purchased, out-of-pocket costs, paid to resource suppliers outside the firm. Also referred to as accounting costs.
exports Goods and services produced domestically but sold abroad.
factors of production Inputs or resources that go into the production function to produce goods and services.
firm An organization that employs factors of production to produce a good or service that it hopes to profitably sell.
fixed inputs Production inputs that cannot be changed in the short run.
four-firm concentration ratio The sum of the market share of the four largest firms in an industry.
free rider An individual who receives the benefit of a good without incurring any cost for the good.
free-rider problem The lack of private funding for, or production of, a public good due to the presence of free riders.
game theory An approach for modeling the strategic interactions of firms in oligopoly markets.
Gini ratio A measure of income inequality. As the Gini ratio gets closer to zero, the more equally the income is distributed. As the Gini ratio gets closer to one, the more unequally the income is distributed.
human capital The amount of knowledge and skills that labor can apply to the work that they do.
implicit costs Indirect, nonpurchased, or opportunity costs of resources provided by the entrepreneur.
imports Goods produced abroad but consumed domestically.
incidence of tax The division of a tax between consumers and producers.
income effect Due to a higher price, the change in quantity demanded that results from a change in the consumer’s purchasing power (or real income).
income elasticity A measure of how sensitive consumption of a good is to a change in consumers’ income.
increasing returns to scale in production The long run outcome when output more than doubles from a doubling of all inputs.
inferior goods A good for which demand decreases with an increase in consumer income.
law of demand All else equal, when the price of a good rises, the quantity demanded of that good falls.
law of diminishing marginal returns As successive units of a variable input are added to a fixed input, beyond some point the marginal product declines.
law of diminishing marginal utility In a given time period, as consumption of an item increases, the marginal (additional) utility from that item falls.
law of increasing costs As more of a good is produced, the greater is its opportunity (or marginal) cost.
law of increasing marginal cost As a producer produces more of a good, the marginal cost rises. This is very similar to the idea of increasing opportunity costs.
law of supply All else equal, when the price of a good rises, the quantity supplied of that good rises.
least-cost rule The combination of labor and capital that minimizes total costs for a given production rate is where MPL/PL = MPK/PK.
long run A period of time long enough for the firm to alter all production inputs, including capital and the plant size.
Lorenz curve A graphical device that shows how a nation’s income is distributed across the nation’s households.
luxury A good for which the proportional increase in consumption exceeds the proportional increase in income.
marginal The next unit, or increment of, an action.
marginal analysis Making decisions based upon weighing the marginal benefits and costs of that action. The rational decision maker chooses an action if MB ≥ MC.
marginal benefit (MB) The additional benefit received from the consumption of the next unit of a good or service.
marginal cost (MC) The additional cost of producing one more unit of output.
marginal productivity theory The theory that a citizen’s share of economic resources is proportional to the marginal revenue product of his or her labor.
marginal product of labor (MPL) The change in total product resulting from a change in the labor input.
marginal resource cost (MRC) The change in a firm’s total cost from the hiring of an additional unit of an input. Some authors refer to this as marginal factor cost (MFC) or the marginal cost of labor MCL.
marginal revenue product of labor (MRP) The change in a firm’s total revenue from the hiring of an additional unit of labor. If the output market is competitive, some authors call this the value of the marginal product (VMP) of labor.
marginal social benefit The additional benefit that society receives from the consumption of the next unit of a good or service.
marginal social cost The additional cost that society incurs from the production of the next unit of a good or service.
marginal tax rate The rate paid on the last dollar earned, calculated by taking the ratio of the change in taxes divided by the change in income.
marginal utility The change in an individual’s total utility from the consumption of an additional unit of a good or service.
market A group of buyers and sellers involved in the exchange of a good or service.
market economy An economic system in which resources are allocated through the decentralized decisions of firms and consumers.
market equilibrium Exists at the only price where the quantity supplied equals the quantity demanded. Or, it is the only quantity where the price consumers are willing to pay is exactly the price producers are willing to accept.
market failure A market outcome for which the quantity produced is not allocatively efficient (MSB ≠ MSC) and either too many or too few units are produced.
market power The ability to set a price above the perfectly competitive level.
monopolistic competition A market structure characterized by a few small firms producing a differentiated product with easy entry into the market.
monopoly A market structure in which one firm is the sole producer of a good with no close substitutes in a market with entry barriers.
monopsony A factor market in which there is a sole firm that has market power, i.e., a wage setter.
Nash equilibrium The outcome of a game for which each player’s strategy maximizes his or her payoff, given the strategies used by the rival players.
natural monopoly The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand than for multiple firms to share the market.
necessity A good for which the proportional increase in consumption is less than the proportional increase in income.
negative externality The existence of spillover costs upon third parties from the production or consumption of a good.
noncollusive oligopoly Models of industries in which firms are competitive rivals seeking to gain at the expense of their rivals.
nonrenewable resources Natural resources that cannot replenish themselves.
normal goods A good for which demand increases with an increase in consumer income.
normal profit The opportunity cost of the entrepreneur’s talents. Another way of saying the firm is earning zero economic profit.
oligopoly A very diverse market structure characterized by a small number of interdependent large firms, producing either a standardized or differentiated product in a market with a barrier to entry.
opportunity cost The value of the sacrifice made to pursue a course of action.
perfect price discrimination The type of price discrimination in which each consumer pays exactly his or her maximum willingness to pay.
perfectly elastic Ed = ∞. In this special case, the demand curve is horizontal, meaning consumers have an instantaneous and infinite response to a change in price.
perfectly inelastic Ed = 0. In this special case, the demand curve is vertical and there is absolutely no response to a change in price.
positive externality The existence of spillover benefits upon third parties from the production or consumption of a good.
price ceiling A legal maximum price above which the product cannot be sold.
price discrimination The sale of the same product to different groups of consumers at different prices.
price elasticity of demand (Ed) Measures the sensitivity of consumers’ quantity demanded for good X when the price of good X changes.
price elasticity of supply (Es) Measures the sensitivity of producers’ quantity supplied for good X when the price of good X changes.
price floor A legal minimum price below which the product cannot be sold.
prisoner’s dilemma A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies.
private goods Goods that are both rival and excludable.
producer surplus The difference between the price received and the marginal cost of producing the good.
productive efficiency Production of maximum output for a given level of technology and resources. On the cost side, a given quantity of output is being produced at the lowest possible cost.
production function The mechanism for combining production resources, with existing technology, into finished goods and services.
production possibilities The different quantities of goods that an economy can produce with a given amount of scarce resources.
production possibility curve (or frontier) A graphical device that shows the combination of two goods that a nation can efficiently produce with available resources and technology.
productivity The quantity of output that can be produced per worker in a given amount of time.
profit maximizing resource employment The firm hires a resource up to the point where MRP = MRC.
progressive tax A tax where the proportion of income paid in taxes rises as income rises.
proportional tax A tax where the proportion of income paid in taxes is constant no matter the level of income.
protective tariff An excise tax levied on an imported good that is produced in the domestic market so that it may be protected from foreign competition.
public goods Goods that are both nonrival and nonexcludable.
quintiles When you rank household income from lowest to highest, each quintile represents 20 percent of all households.
quota A maximum amount of a good that can be imported into the domestic market.
regressive tax A tax where the proportion of income paid in taxes decreases as income rises.
relative prices The price of one unit of good X measured not in currency, but in the number of units of good Y that must be sacrificed to acquire good X.
renewable resources Natural resources that can replenish themselves if they are not overharvested.
resources Also called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability.
revenue tariff An excise tax levied on goods that are not produced in the domestic market.
scarcity The imbalance between limited productive resources and unlimited human wants.
shortage A situation in which, at the going market price, the quantity demanded exceeds the quantity supplied.
short run A period of time too short to change the size of the plant, but many other, more variable resources can be adjusted to meet demand.
specialization Production of goods, or performance of tasks, based upon comparative advantage.
spillover benefits Additional benefits to society, not captured by the market demand curve from the production of a good.
spillover costs Additional costs to society, not captured by the market supply curve from the production of a good.
subsidy A government transfer, either to consumers or producers, on the consumption or production of a good.
substitute goods Two goods are consumer substitutes if they provide essentially the same utility to the consumer.
substitution effect The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.
supply curve Shows the quantity of a good supplied at all prices.
supply schedule A table showing quantity supplied for a good at various prices.
surplus A situation in which, at the going market price, the quantity supplied exceeds the quantity demanded.
tax bracket A range of income on which a given marginal tax rate is applied.
technology A nation’s knowledge of how to produce goods in the best possible way.
total cost (TC) The sum of total fixed and total variable costs at any level of output.
total fixed costs (TFC) Production costs that do not vary with the level of output.
total product of labor (TPL) The total quantity of output produced for a given quantity of labor employed.
total revenue The price of a good multiplied by the quantity of that good sold.
total revenue test Total revenue rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic.
total utility The total happiness received from consumption of a number of units of a good.
total variable costs (TVC) Production costs that change with the level of output.
total welfare The sum of consumer surplus and producer surplus. Some authors label this as total surplus.
trade-offs The reality of scarce resources implies that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs.
unit elastic demand Ed = 1. The percentage change in price is equal to percentage change in quantity demanded.
utility Happiness, or benefit, or satisfaction, or enjoyment gained from consumption of goods and services.
utility maximizing rule The consumer chooses amounts of goods X and Y, with their limited income, so that the marginal utility per dollar spent is equal for both goods.
utils A hypothetical unit of measurement often used to quantify utility; aka “happy points.”
variable inputs Production inputs that the firm can adjust in the short run to meet changes in demand for the firm’s output.
world price The global equilibrium price of a good when nations engage in trade.