Economics explores how societies handle limited resources to meet boundless desires. Economists develop models to understand decision-making patterns and behaviors at various levels—by individuals, companies, and nations. Economics has two main areas: macroeconomics, which examines the functioning of a nation's economy, and microeconomics, which focuses on how households and businesses decide on spending, saving, production, and distribution of goods and services. The information below is a collection of terms you will use in the course ECO-201, Microeconomics.
Microeconomics Glossary Terms
The ability to produce a good using fewer inputs than another producer.
Total revenue minus total explicit cost.
Occurs when one party in a transaction has more information than the other, leading to market inefficiencies.
A person who performs an act for another person, called the principal.
A mathematical result showing that, under certain assumed conditions, there is no method for aggregating individual preferences into a valid set of social preferences.
Properties of the ideal voting system:
Unanimity - if everyone prefers A to B, Then A beats B,
Transivity - If A beates B, and B beats C, then A beats C
Fixed cost divided by the quantity of output.
Total revenue divided by the quantity sold.
Total cost divided by the quantity of output.
Variable cost divided by the quantity of output.
The subfield of economics that integrates the insights of psychology.
A group of firms acting in unison.
A visual model of the economy that shows how dollars flow through markets among households and firms.
For more information on this concept, check out this link:
ARC Guide: Circular Flow Diagram
The Coase Theorem states that under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome.
An agreement among firms in a market about quantities to produce or prices to charge.
The ability to produce a good at a lower opportunity cost than another producer.
A market in which there are many buyers and many sellers so each has a negligible impact on the market price. Trading occurs in identical products, and each buyer and seller is a price taker.
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
The failure of majority rule to produce transitive preferences for society.
The property whereby long-run average total cost stays the same as the quantity of output changes.
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
For more information on this concept, check out this link:
ARC Guide: Consumer Surplus
A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality.
The value of everything a seller must give up to produce a good.
A measure of how much the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good.
A graph of the relationship between the price of a good and the quantity demanded.
A table that shows the relationship between the price of a good and the quantity demanded.
The property whereby the marginal product of an input declines as the quantity of the input increases.
The property whereby long-run average total cost rises as the quantity of output increases.
A strategy that is best for a player in a game regardless of the strategies chosen by the other players.
Total revenue minus total cost, including both explicit and implicit costs.
The study of how society manages its scarce resources.
The property whereby long-run average total cost falls as the quantity of output increases.
The property of society getting the most it can from its scarce resources.
The quantity of output that minimizes average total cost.
A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants.
The property of distributing economic prosperity uniformly among the members of society.
A situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded.
The price that balances the quantity supplied and the quantity demanded.
The quantity supplied and the quantity demanded at the equilibrium price.
Input costs that require an outlay of money by the firm.
Goods produced domestically and sold abroad.
The impact of one person’s actions on the well-being of a bystander.
Costs that do not vary with the quantity of output produced.
The extra benefits (such as more goods, greater variety, or lower opportunity costs) that individuals, regions, or countries obtain by specializing in what they produce relatively efficiently and then trading with others, compared to remaining self-sufficient autarky).
The study of how people behave in strategic situations.
Input costs that do not require an outlay of money by the firm.
Goods produced abroad and sold domestically.
Something that induces a person to act.
A measure of how much the quantity demanded of a good responds to a change in consumers’ income, calculated as the percentage change in quantity demanded divided by the percentage change in income.
A good for which, other things being equal, an increase in income leads to a decrease in demand.
An increase in the overall level of prices in the economy.
Altering incentives so that people take into account the external effects of their actions.
The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises.
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance.
The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
An incremental adjustment to a plan of action.
The increase in total cost that arises from an extra unit of production.
The increase in output that arises from an additional unit of input.
The change in total revenue from an additional unit sold.
A group of buyers and sellers of a particular good or service.
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
A situation in which a market left on its own does not allocate resources efficiently.
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
A mathematical result showing that if voters are choosing a point along a line and they all want the point closest to their own optimum, then majority rule will pick the optimum of the median voter.
The study of how households and firms make decisions and how they interact in markets.
A way to calculate percentage changes (often for elasticity) that uses the average of the starting and ending values as the base, so results don't depend on which point you treat as "initial."
For more information on this concept, check out this link:
ARC Guide: Midpoint Method
A market structure in which many firms sell products that are similar but not identical.
A firm that is the sole seller of a product without close substitutes.
The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.
A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.
A type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms.
A good for which, other things being equal, an increase in income leads to an increase in demand.
Claims that attempt to prescribe how the world should be.
A market structure in which only a few sellers offer similar or identical products.
Whatever must be given up obtaining some item.
For more information on this concept, check out this link:
ARC Guide: Opportunity Cost
The study of government using the analytic methods of economics.
Claims that attempt to describe the world as it is.
A legal maximum on the price at which a good can be sold.
The business practice of selling the same good at different prices to different customers.
A measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price.
For more information on this concept, check out this link:
ARC Guide: Price Elasticity of Demand
A measure of how much the quantity supplied of a good responds to a change in its price, calculated as the percentage change in quantity supplied divided by the percentage change in price.
For more information on this concept, check out this link:
ARC Guide: Price Elasticity of Supply
A legal minimum on the price at which a good can be sold.
A person for whom another person, called the agent, performs some act.
A particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
The amount a seller is paid for a good minus the seller’s cost of providing it.
For more information on this concept, check out this link:
ARC Guide: Producer Surplus
The relationship between the quantity of inputs used to make a good and the quantity of output of that good.
A graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology.
For more information on this concept, check out this link:
ARC Guide: Production Possibilities Frontier
The quantity of goods and services produced from each unit of labor input.
Total revenue minus total cost.
The ability of an individual to own and exercise control over scarce resources.
The amount of a good that buyers are willing and able to purchase.
The amount of a good that sellers are willing and able to sell.
People who systematically and purposefully do the best they can to achieve their objectives.
The limited nature of society’s resources.
An action taken by an uninformed party to induce an informed party to reveal information.
A situation in which the quantity demanded is greater than the quantity supplied.
An action taken by an informed party to reveal private information to an uninformed party.
Two goods for which an increase in the price of one leads to an increase in the demand for the other.
A cost that has already been committed and cannot be recovered.
A graph of the relationship between the price of a good and the quantity supplied.
A table that shows the relationship between the price of a good and the quantity supplied.
A situation in which the quantity supplied is greater than the quantity demanded.
The manner in which the burden of a tax is shared among participants in a market.
The market value of the inputs a firm uses in production.
The amount paid by buyers and received by the sellers of a good, calculated as the price of the good times the quantity sold.
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
Costs that vary with the quantity of output produced.
The study of how the allocation of resources affects economic well-being.
The maximum amount that a buyer will pay for a good.
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