KEY TERMS
Absolute Advantage: When a country or firm has superior production capabilities than other countries or firms in a specific good
Accounting Profits: All the revenue a firm gets minus any costs it pays out. Accounting profits do not include opportunity costs.
Anti-Trust Law: Laws that ban the collusion (or other anti-competitive behavior) between firms in the same market. The law is designed to protect consumers.
Average Fixed Cost: Total fixed cost divided by the number of units produced
Average Total Cost (or Average Cost): The total cost divided by the number of units produced
Average Variable Cost: The variable cost divided by the number of units produced
Barriers to Entry: The initial fixed costs that a new firm must face if they want to enter a market
Budget Constraint: A graph that displays all the goods a consumer can purchase given her total resources
Capital: A factor of production that a firm uses to create output which isn't labor, such as machinery or factories
Capital Market: Pool of money that firms can draw from in order to make investments; this includes bank loans, stocks, and bonds
Cartel: A group of producers with an agreement to work together to limit output and increase profit
Causation vs. Correlation: Causation is when one thing causes another. Correlation is when as one thing increases, another thing also increases. Correlation does not imply causation.
Club Goods: When a good is non-rival but excludable
Common Goods: When a good is rival but non-excludable
Comparative Advantage: When a country or firm can produce a good at a lower opportunity cost than another country or firm
Consumption Externality (Demand-Side Externality): Externalities that arise from the process of consumption
Constant Returns to Scale: When multiplying inputs by N causes output to be multiplied by N. Alternatively, when an Increase in inputs does not change the average cost of production.
Constrained Optimization: Making the best with what you have, or choosing to maximize something (like utility, or profit) given some constraint (like a budget, or costs and prices)
Consumer Surplus: The amount by which the willingness to pay for a good exceeds the price paid for that good
Cross-Price Elasticity: Measures the responsiveness of the quantity demanded for one good to the change in price of another good. Mathematically, it's (% change in Q of good X) / (% change in P of good Y)
Dead-weight Loss: Surplus that is lost when a mutually beneficial trade no longer occurs, but would have under perfect competition
Decreasing Returns to Scale (Diseconomies of Scale): When multiplying inputs by N causes output to be multiplied by less than N. Alternatively, when an increase in inputs increases the average cost of production
Demand Curve: Shows the relationship between the price of a good and the quantity demanded
Diminishing Marginal Product of Labor: With each additional worker hired, total output increases by less than it did when the previous worker was hired.
Diminishing Marginal Utility: A common assumption in consumer theory, which holds that each additional unit of a good increases utility by less than the previous unit of the good
Dominant Strategy: In game theory, a strategy which is better than all other strategies -- no matter what the other players choose
Economic Profits: All the revenue a firm gets minus any costs it pays out, including opportunity costs.
Elasticity: Measure of the responsiveness of one variable to changes in another. Mathematically, it's (% change in one variable) / (% change in another).
Exports: Value of goods a country sells to the rest of the world
Factor Endowments: A country's amount of land, capital, and land that contribute to their production capacity and comparative advantage
Fixed Cost: Any costs the firm must pay which don't depend on the quantity of output produced.
Free Rider Problem: When people can benefit from goods they don't produce or pay for
Free Trade: International trade without any restrictions, tariffs, or quotas
Giffen Good: A good which experiences a rise in demand when its price increases
Imports: Value of goods a country buys from the rest of the world
Income Effect: Change in quantity demanded because of a change in income, holding prices constant
Income Elasticity of Demand: Measures how the quantity demanded responds to a change in income. Mathematically, (% change in Q demanded) / (% change in income)
Increasing Returns to Scale (Economies of Scale): When multiplying all inputs by N causes output to be multiplied by more than N. Alternatively, when an increase in inputs decreases the average cost of production
Indifference Curves: A graphical representation of a consumer's preferences of one good versus another. Each curve shows all the bundles of goods which keep utility constant.
Individual Demand: The demand that one individual has for a particular good at different prices
Inferior Goods: Goods you consume more of when your income goes down (or, goods you consume less of when your income goes up).
Interest Rate: The price of capital in the capital market
Leisure: Free time for enjoyment
Long Run: The time frame in which both capital and labor is a variable input
Market Demand: The sum of individual demand curves to show the total demand of all the consumers in the market
Marginal Benefit: Increase in utility from one more unit of a good
Marginal Cost: The cost of producing an additional unit of a good
Marginal Cost Curve: The increase in total cost for a firm of producing another unit of a good
Marginal Product of Capital: The change in the output resulting from an increase in capital, holding other inputs constant
Marginal Product of Labor: The change in output resulting from hiring one extra worker, holding other inputs constant
Marginal Revenue of Product of Labor: The change in revenue generated by a firm resulting from hiring one extra worker, holding other inputs constant
Marginal Utility: The change in utility from consumption of an additional unit of a good
Market Failures: Occurs when the free market doesn't lead to the most efficient welfare maximizing outcome
Market Power: The ability to price at a level higher than marginal cost
Minimum Wage: The lowest possible wage that workers can be legally paid; usually this is enforced by the government
Monopolistic Competition: A type of imperfect competition that is a mix between a monopoly and perfect competition. Like a monopoly, each firm is the only firm that can sell its good (and has market power), but other firms can make nearly identical goods to compete with the firm.
Monopoly: A market with only one firm
Monopsony: When there is only one buyer in a market
Nash Equilibrium: In game theory, a Nash Equilibrium occurs when each player has chosen a strategy that it will not want to change, given what the other players have chosen.
Natural Monopoly: A type of monopoly that occurs when fixed costs are incredibly high, which means average total cost is always dropping as output increases.
Negative Externality: In a mutually beneficial trade between two people (A and B), a negative externality occurs when a third party (person C) is negatively affected by the trade, but neither person A or B bear this cost.
Non-Excludable: When a firm can't prevent people from consuming the good without paying for it
Non-Rival: When more than one person can consume the same unit of the good at same time
Normal Goods: Goods you consume less of when your income goes down (or, goods you consume more of when your income goes up).
Oligopoly: A market structure with only a few firms, each with some market power
Opportunity Cost: The cost of any action in terms of what you could have done instead
Patent: Legal exclusive right given to a firm to sell their product for a specified period of time; a way that the government can create a monopoly
Perfect Competition: A market structure where there is a large number of firms in a market, where no single firm can affect the price, and when there are low (or no) barriers to entry.
Poisoning Effect: When the sale of an additional good lowers the revenue that a monopoly can receive from its previous sales
Positive Externality: In a mutually beneficial trade between two people (A and B), a positive externality occurs when a third party (person C) is positively affected by the trade, but neither person A or B get any of this benefit.
Price Discrimination: When a monopoly charges different consumers different prices based on each consumer's willingness to pay
Price Elasticity of Demand: Measure of how much quantity demanded changes when the price changes. Mathematically, (% change in Q) / (% change in P)
Private Goods: When a good is rival and excludable
Producer Surplus: The amount by which the price of a good exceeds the firm's willingness to supply that good
Production Externality (Supply-Side Externality): Externalities that arise from the process of production
Production Function: A function that represents how a firm's inputs translate into output
Production Possibilities Frontier: Shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced
Profit: Total revenue minus total cost
Public Goods: A type of market failure where a good is non-rival and non-excludable
Redistribution: In order to create economic equality, wealth from the rich is transferred to the poor, usually through tax systems and government spending programs
Regulation: When the economy is controlled, usually by the government, in order to achieve social optimal outcome
Returns to Scale: The change in production resulting from increasing (or decreasing) all inputs at the same rate
Short Run: The time frame in which capital is a fixed input but labor is a variable input
Shut-Down Price: The price below which it makes no sense for a firm to keep producing. In the short run, the shut-down price is average variable cost. In the long run, the shut-down price is average total cost.
Specialization: When a firm or country concentrates their production on a certain good in order to increase efficiency in the economy
Substitution Effect: Change in quantity demanded when a good's price changes, holding income constant
Sunk Costs: Costs that have already been incurred and cannot be recovered
Tax Incidence: Measure of who bears the economic burden of taxes
Total Cost: All of a firm's costs from producing a set units of output. Mathematically, it equals the sum of the firm's fixed and variable costs
Total Welfare: Total well-being of society, equal to consumer surplus + firm surplus, + government revenue (if any) minus any deadweight loss.
Trade Deficit: When the imports of a country are greater than their exports
Utility Function: A mathematical expression that translates bundles of goods into a single valuation of utility
Variable Cost: All costs a firm pays that are not fixed costs.
Wage: The price of hiring another unit of labor