Chapter 1

Foundations and Models

Scarcity: societies resources are limited
Economics: study of how society manages its scarce resources
Marginal Analysis: Analysis that involves comparing marginal
benefits and marginal costs
Trade-Offs: The idea that because of scarcity, producing more of one
good or service means producing less of another good or service
Opportunity Cost: The highest valued alternative that must be given
up to engage in an activity
Positive analysis: Analysis concerned with what is
Normative Analysis: Analysis concerned with what ought to be
Microeconomics: The study of how households and firms make
choices, how they interact in markets, and how the government
attempts to influence their choices
Macroeconomics: The study of the economy as a whole, including
topics such as inflation, unemployment, and economic growth
Chapter 2
Tradeoffs, Comparative Advantage, and the Market System
Productions Possibilities Frontier: A curve showing the maximum
attainable combinations of two products that may be produced with
available resources and current technology
Attainable: achievable
Efficient: preventing the wasteful use of a particular resource
Economic Growth: The ability of the economy to increase the
production of goods and services
Trade: The act of buying and selling
Absolute Advantage: The ability of an individual, a firm, or a country
to produce more of a good or service than competitors, using the same
amount of resources
Comparative Advantage: The ability of an individual, a firm, or a
country to produce a good or service at a lower opportunity cost than
competitors
Chapter 3
Where Price Comes From: The Interaction of Demand and Supply
Demand: how much of a product is desired by buyers at various prices
Quantity Demanded: The amount of a good or service that a
consumer is willing and able to purchase at a given price
Demand Schedule: A table that shows the relationship between the
price of a product and the quantity of the product demanded
Demand Curve: A curve that shows the relationship between the
price of a product and the quantity of the product demanded

Law of Demand: The rule that, holding everything else constant,

when the price of a product falls, the quantity demanded of the
product will increase, and when the price of a product rises the
quantity demanded of the product will decrease
Substitution Effect: The change in the quantity demanded of a good
that results form a change in price, making the good more or less
expensive relative to other goods that are substitutes
Income Effect: The change in the quantity demanded of a good that
results from the effect of a change in the goods price on consumers
purchasing power
Ceteris Paribus: if all else is equal
Normal good: a good for which the demand increases as income rises
and decreases as income falls
Inferior good: a good for which the demand increases as income falls
and decreases as income rises
Substitutes: goods and services that can be used for the same
purpose
Complements: goods and services that are used together
Demographics: The characteristics of a population with respect to
age, race and gender
Supply: entire relationship between prices and quantity of product
supplied at each price
Quantity Supplied: the amount of a good or service that a consumer
is willing and able to purchase at a given price
Supply schedule: a table that shows the relationship between the
price of a product and the quantity of the product supplied
Supply Curve: A curve that shows the relationship between the price
of a product and the quantity of the product
Law of Supply: the rule that, holding everything else constant,
increases in price cause increases in the quantity supplied, and
decreases in price cause decreases in the quantity supplied
Technological change: A change in the ability of a firm to produce a
given level of output with a given quantity of inputs
Market Equilibrium: A Situation in which quantity demanded equals
quantity supplied
Equilibrium Quantity:
Equilibrium Price:
Surplus: A situation in which the quantity supplied is greater than the
quantity demanded
Shortage: A situation in which the quantity demanded is greater than
the quantity supplied
Chapter 4
Economic Efficiency, Government Price Setting, and Taxes

Consumer Surplus: The difference between the highest prices a

consumer is willing to pay for a good and the price the consumer
actually pays
Marginal Benefit: The additional benefit to a consumer for
consuming one more unit of a good
Producer Surplus: The difference between the lowest price a firm is
willing to accept for a good and the price it actually receives
Marginal Cost: The additional cost to a firm of producing one more
unit of a good
Economic Surplus: The sum of consumer surplus and producer
surplus
Price Floor: A legally determined minimum price that sellers may
receive
Price Ceiling: A legally determined price maximum that sellers may
charge
Tax Burden: percentage of income that taxpayers pay in each state
Tax Incidence: the actual division of the burden of a tax between
buyers and sellers in a market
Chapter 6
Elasticity: The Responsiveness of Demand and Supply
Price Elasticity of Demand: The responsiveness of the quantity
demanded to a change in price, measured by dividing the percentage
change in the product by the percentage change in the products price
Elastic Demand:
Inelastic Demand: Demand is inelastic when the percentage change
in quantity demanded is less than the percentage change in price, so
the price elasticity is less than 1 in absolute value
Cross-Price Elasticity of Demand: The percentage change in
quantity demanded of one good divided by the percentage change in
the price of another good
Income Elasticity of Demand: A measure of the responsiveness of
quantity demanded to changes in income, measured by the
percentage change in quantity demanded divided by the percentage
change in income
Price Elasticity of Supply: The responsiveness of the quantity
demanded to a change in price, measured by dividing the percentage
change in the quantity supplied of a product by the percentage change
in the products price
Chapter 10
Consumer Choice and Behavioral Economics
Utility: The satisfaction people receive from consuming goods and
services

Marginal Utility: The change in total utility a person receives from

consuming one additional good or service
Law of Diminishing Marginal Utility: The principle that consumers
experience diminishing additional satisfaction as they consume more
of a good or service during a given period of time
Endowment Effect: The tendency of people to be unwilling to sell a
good they already own even if they are offered a price that is greater
than the price they would be willing to pay to buy the good of they
didnt already own it
Sunk Cost: A cost that has already been paid and cannot be
recovered
Chapter 11
Technology, Production, and Costs
Labor: activity for the sake of economic gain
Physical Capital: factor of production ex. Buildings, machinery,
computers
Short Run: period of time during which at least one of a firms inputs
is fixed
Long Run: Period of time in which a firm can vary all its inputs, adopt
new technology, and increase or decrease the size of its physical plant
Total Cost: The cost of all the inputs a firm uses in production
Fixed Cost: costs that remain constant as outputs change
Variable Cost: cost that change as outputs change
Production Function: The relationship between the inputs employed
by a firm and the maximum output it could produce with those inputs
Marginal Product of Labor: the additional output a firm produces as
a result of hiring one more worker
Law of Diminishing Returns: principle that, at some point, adding
more of a variable input, such as labor, to the same amount of a fixed
input, such as capital, will cause the marginal product of the variable
input to decline
Average Product of Labor: The total output produced by a firm
divided by quantity of worker
Marginal Cost: the additional cost to a firm of producing one more
unit of a good or service
Average Total Cost: Total cost divided by quantity of output produced
Average Fixed Cost: fixed cost divided by quantity of output
produced
Average Variable Cost: variable cost divided by quantity of output
produced
Minimum Efficient Scale: the level of output at which all economies
of scale are exhausted
Increasing Returns to Scale: if inputs increases by X amount, then
output increases by more than X amount

Constant Returns to Scale: The situation in which a firms long-run

average costs remain unchanged as it increases output
Decreasing Return to Scale: if inputs increase by X amount, then
outputs increases by less than X amount
Chapter 12
Firms in Perfectly Competitive Markets
Perfectly Competitive Markets: market that meets this criteria; 1.
Many buyers and sellers 2. All firms selling identical products 3. No
barriers to new firms entering markets
Price Taker: a buyer or seller that is unable to affect the market price
Profit: Total Revenue minus total cost
Total Revenue: the total amount of funds received by a seller of a
good, calculated by multiplying price per unit by the number of units
sold
Average Revenue: total revenue divided by the quantity of the
product sold
Marginal Revenue: the change in total revenue from selling one
more unit of a product
Shut Down Point: the minimum point on a firms average variable
cost curve; if the price falls below this point, the firm shuts down
production in the short run
Entry: process of entering a market
Exit: process of exiting a market
Long run supply curve: a curve that shows the relationship in the
long run between market price and the quantity supplied
Chapter 13
Monopolistic Competition
Monopolistic Competition: a market structure in which barriers to
entry are low and many firms compete by selling similar, but not
identical products
Output Effect: the impact, assuming steady input prices, that results
from an increase in production on the utilization of a specific input
Price Effect: impact that a change in value has on the consumer
demand for a product service in the market also can refer to the
impact that an event has on somethings price
Production Differentiation: distinguishing a product or service from
others, to make it more attractive to a particular target market
Marketing: all the activities necessary for a firm to sell a product to a
consumer
Brand Management: the actions of a firm intended to maintain the
differentiation of a product over time
Advertising: encourage, persuade, manipulate an audience

Chapter 14
Oligopoly
Oligopoly: a market structure in which a small number of
interdependent firms compete
Barriers to Entry: anything that keeps new firms fro entering an
industry in which firms are earning economic profits
Patents: the exclusive right to a product for a period of 20 years from
the date the patent is filed with the government
Game Theory: The study of how people make decisions in situations
in which attaining their goals depends on their interactions with others;
in economics, the study of the decisions of firms in industries where
the profits of a firm depend on its interaction with other firms
Prisoners Dilemma: a game in which pursuing dominant strategies
results in noncooperation that leaves everyone worse off
Payoff Matrix: a table that shows the payoffs that each firm earns
from every combination of strategies by the firms
Dominant strategy: a strategy that is the best for a firm, no matter
what strategies other firms use
Nash Equilibrium: a situation in which each firm chooses the best
strategy, given the strategies chosen by other firms
Non-cooperative equilibrium: equilibrium in a game in which
players do not cooperate but pursue their own self-interest
Cooperative Equilibrium: equilibrium in a game in which players
cooperate to increase their mutual payoff
Sequential game: when one player chooses his action before the
others choose there
Entry deterrence game: any action taken by existing business in a
particular market that discourages potential entrants from entering
into competition in that market
Bargaining game: understanding how two agents should cooperate
when non-cooperative leads to a situation in which it is impossible to
make any one individual better off without making at least one
individual worse
Chapter 15
Monopoly and Antitrust
Monopoly: a firm that is the only seller of a good or service that does
not have a close substitute
Public Franchise: a government designation that a firm is the only
legal provider of a good or service
Network Externalities: a situation in which the usefulness of a
product increases with the number of consumer who uses it

Natural Monopoly: a situation in which economies of scale are so

large that one firm can supply the entire market at a lower average
total cost than can two or more firms
Price Maker: a monopoly or a firm within monopolistic competition
that has the power to influence the price it charges as the good it
produces does not have perfect substitutes
Sherman Act: first Federal law outlawing practices considered
harmful to consumers (monopolies, cartels, and trusts)
Clayton Act: prevent anticompetitive practices in their incipiency.
Federal Trade Commission Act: This commission was authorized to
issue cease and desist orders to large corporations to curb unfair
trade practices.
Collusion: an agreement among firms to charge the same price or
otherwise not to compete
Explicit Collusion: Explicit collusion is an agreement among
competitors to suppress rivalry that relies on interfirm communication
and/or transfers.
Implicit Collusion: Implicit collusion arises when two or more firms
act to monopolize a market, without an explicit or formal arrangement.
Vertical Merger: a merger between firms at different stages of
production of a good
Horizontal Merger: a merger between firms in the same industry