Edwin Mansfield & Gary Yohe
Microeconomics 10th Edition
Norton, NYC, 2000
A country has an absolute advantage over another country in the production of a particular good if it produces more of this good from a unit of resources than the other country does. (MY)
Situation in which insurance companies find that a disproportionately large share of their customers come from high-risk groups.
The value of the product that particular resources could have produced had they been used in the best alternative way; also called opportunity cost.
Arc Elasticity of Demand
If Pl and Ql are the first values of price and quantity demanded, and PZ and QZ are the second values, then arc elasticity equals -[(Q1 - Q2)/(Qi + Q.z)]/[(P1 – P2)l(P1 + P2)]
In some markets, all participants do not have the same information. For example, in the market for used cars, sellers frequently have better information regarding the quality of a used car than do prospective buyers.
(a) Total cost divided by the quantity of output; also called average total cost. (MY)
(b) Short-Run Average (Total) Cost (SRAC) = fixed (AFC) + variable (AVC) cost per unit output; or, Long-Run Average Cost (LRAC) = total cost per unit output (all factors variable in the long-run). (HHC)
Average fixed cost
Total fixed cost divided by the quantity of output.
Total output divided by the quantity of input.
Average Variable Cost
Total variable cost divided by the quantity of output. (MY)
(AVC) = variable (short-run) cost per unit output. In the LR, all factor costs are variable (HHC)
A cardinal measure of economic well-being expressed in currency units. Geometrically, benefits can be computed as the area under a demand curve in the absence of external economies or diseconomies of consumption.
An economically based tool designed to inform decision makers who try to achieve the highest level (or at least higher levels) of total surplus. Calculating total benefits net of total costs is equivalent to calculating the sum of producer and consumer surplus. Benefits .net of costs are maximized where marginal benefits equal marginal costs-a condition that is satisfied by equilibrium in a perfectly competitive market.
A measure of the nondiversifiable risk attached to an investment. For Glossary a stock, it shows how sensitive the stock's return is to changes in the return from all available stocks.
The return earned on a bond.
A chart showing how both total revenue and total cost vary with changes in the total number of units of a product that is sold. The break-even point is the minimum number that must be sold to avoid loss. (MY)
(a) A line showing all combinations of quantities of good X and good Y the consumer can buy given a specific income. Its slope equals -1 times the price of good X divided by the price of good Ywhen X is measured along the horizontal axis and Y is measured along the vertical axis. The Yintercept in this case equals income divided by the price of Y. (MY)
(b) Given a specific level of income (I) and assuming there are only two goods (x & y) and further assuming prices are Px and Py respectively, then a budget line can be plotted showing all commodity combinations of x and and y that a consumer can afford. (HHC)
A marketing technique whereby a firm that sells two products requires customers who buy one of them to buy the other as well.
Equipment, buildings, inventories, and other non-human and producible resources that contribute to the production, marketing, and distribution of goods and services.
The amount that people receive when they sell a stock (or other asset) in excess of what they paid for it; capital losses are possible, too.
A type of economic system that depends on the price system to answer the basic economic questions: What is produced? How is it produced? Who gets how much? What should be the rate of economic growth?
Utility that is measurable in a cardinal sense, like a person's weight or height (which means that the difference between two utilities-i.e., marginal utility-is meaningful).
A form of market structure where there is an open and formal agreement among firms to collude in determining output, distribution, and/or price of a commodity.
Cobb-Douglas Production Function
A production function of the form Q,= ALa1Ka2Ma3, where Q is the output rate, L is the quantity of labor, K is the quantity of capital, M is the quantity of raw materials, and A, al, a2, and a3 are constants that are greater than 0 and less than 1.
Agreements by firms with others in their industry with regard to price, output, and other matters.
A country has a comparative advantage over another country in the production of a particular good if the cost of making this good, compared with the cost of making other goods, is lower in this country than in the other country.
If goods X and Y are complements, the quantity demanded of X is inversely related to the price of Y:
An industry with a horizontal long-run supply curve and a linear cost function; its expansion does not result in an increase or decrease in input prices.
Constant Returns to Scale
A condition in which output increases at the same rate as employment when the quantities of all inputs are increased or reduced at the same rate.
The maximum amount that the consumer would pay for a particular good or service less the amount that he or she actually pays for it. Geometrically, it equals the area under the demand curve and above the price.
A market in which entry is absolutely free and exit is absolutely costless. The essence of contestable markets is that they are vulnerable to hit-and-run entry.
(a) The locus of points where the marginal rates of substitution are the same for both consumers (in exchange between consumers) or the locus of points where the marginal rates of technical substitution are the same for both producers (in exchange between producers).
(b) Using a separate indifference map (or 2-variable isoquant production function) for each of two individuals (firms) with respect to the same two commodities (inputs), the contract curve is traced by the points of tangency of the two sets of indifference (isoquant) curves when the inverted map of one individual (firm) is superimposed on the map of the other individual (firm) forming an ‘Edgeworth box’. The curve traces all possible points of final equilibrium between the two individuals (firms). The opposite sides of the box are the axes for the same good (input) of the two individuals (firms). The size of the box varies according to the quantities of the two goods (inputs) held by each individual (firm) () Adapted from dictionary of economics and business, E.E. Nemmers, Littleton, Adams Quality Paperback, Toronto, 1974)
Case in which the budget line reaches the highest achievable indifference curve at a point along an axis (analogous cases occur in the theory of production).
is the price of a factor of production used in producing final output. Cost, together with the final price and quantity of output, is a key factor in economic decision-making. Thus profit equals price per unit multiplied by the quantity of output (or revenue) minus the total cost of all factors of production. (HHC)
Cross Elasticity of Demand
The percentage change in the quantity demanded of good X resulting from a 1 percent change in the price of some other good Y:
Deadweight Loss from Monopoly
If a perfectly competitive market is transformed into a monopoly, the deadweight loss is the reduction in total surplus resulting from this transformation.
Deadweight Loss from Monopsony
If a perfectly competitive market is transformed into a monopsony, the deadweight loss is the reduction in total surplus resulting from this transformation.
An industry with a negatively sloped long-run supply curve; its expansion results in a decrease in average cost.
Decreasing Returns to Scale
A situation in which output increases at a lower rate than inputs if the quantities of all inputs are increased at the same rate.
A curve showing the quantity of a product demanded at each price.
Demand Curve for Loanable Funds
Relationship between the quantity of loanable funds demanded and the interest rate.
When an interest rate is used to calculate the net presentvalue of an investment, it is called the discount rate.
Risk that can be avoided by diversification.
In an oligopolistic industry, a single large firm that sets the price but lets the small firms in the industry sell all they want at that price.
A strategy that is best for a player regardless of the other players' strategy.
A form of market structure in which there are two sellers. The Cournot model, among others, is concerned with duopoly.
A situation in which all changes that harm no one and improve the well-being of some people have been accomplished. Such a situation is economically efficient (or Pareto efficient or Pareto optimal); no one can be made better off without hurting someone else.
The difference between a firm's revenues and its costs, where the latter include the returns that could be gotten from the most lucrative alternative use of all of the firm's resources.
A scarce resource that commands a nonzero price.
Economies of Scope
Economies resulting from the scope rather than the scale of the enterprise. They exist where it is less costly to combine two or more product lines in one firm than to produce them separately.
Efficient Markets Hypothesis
According to this hypothesis, investors quickly make effective use of available information in buying and selling stock. All that is known about the factors influencing a stock's price is already reflected in its price; thus technical analysis of stocks is useless, according to this theory.
A consumer's initial allocation of income or bundles of goods.
The relationship between the equilibrium quantity purchased of a good and the consumer's level of income.
A situation in which there is no tendency for change. For example, an equilibrium price is a price that can be maintained.
The difference between the minimum-cost output and the actual output in a long-run equilibrium. A famous and controversial conclusion of the theory of monopolistic competition is that firms under this form of market structure will tend to operate with excess capacity.
(a) The locus of points where the isoquants corresponding to various outputs are tangent to the isocost curves (no inputs are fixed). (MY)
(b) assuming technology, PK & PL remain fixed, for each level of production (isoquant) there will be a corresponding tangency with an isocost curve. The set of these tangency will trace out the expansion path for the firm. (HHC)
Expected Monetary Value
To determine the expected monetary value of an uncertain situation, multiply the amount of money gained (or lost) with each outcome by the probability of its occurrence and add the resulting expected outcomes.
The long-term average value of profit-that is, the (weighted) sum of the various possible levels of profit. The probabilities of occurrence are used as the weights.
To determine the expected utility of an uncertain situation, multiply the utility associated with each possible outcome by the probability of its occurrence and add the resulting value.
The ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials.
An uncompensated cost to one person or firm resulting from the consumption or output of another person or firm.
An uncompensated benefit to one person or firm resulting from the consumption or output of another person or firm.
The advantages that accrue to the player who makes the first move in a game.
The total cost per period of time of the fixed inputs.
A resource used in the production process (such as plant or equipment) whose quantity cannot be changed during the period under consideration.
A resource that is so abundant it can be had for a zero price.
General Equilibrium Analysis
An analysis that (in contrast to a partial equilibrium analysis) takes account of the interrelationships among various markets and prices.
A situation in which the quantity demanded of a good is directly related to its price. This occurs when the substitution effect of a price change is not strong enough to offset an inferior good's income effect.
Hypothetical Budget Line
a budget curve derived from a fixed level of I and Py but changed Px that is tangent to the original indifference curve - assuming the consumer was somehow allowed to maintain the same level of staisfaction but at the new price ratio. (HHC)
The alternative costs of using the resources owned by the firm's owner, such as his or her time and capital.
Income-Compensated Demand Curve
A curve showing how much of a good the consumer demands at each price, when the consumer's income is adjusted so that, regardless of the price, the original market basket can be purchased.
(a) A curve connecting points representing equilibrium market baskets corresponding to all possible levels of the consumer's money income. Curves of this sort can be used to derive Engel curves. (MY)
(b) the locus of tangents of budget lines with indifference curves forms the income-consumption curve or the set of commodity combinations (x, y) purchased as income increases - assuming constant prices and taste. (HHC)
(a) The change in the quantity demanded of good X due entirely to a change in the consumer's level of satisfaction, all prices being held constant. (MY)
(b) reflects the change in the price of a commodity upon the demand for that commodity by changing the purchasing power of income available for expenditure.
Income Elasticity of Demand
The percentage change in quantity demanded resulting from a 1 percent change in consumer income when prices are held constant.
An industry with a positively sloped long-run supply curve; its expansion results in an increase in input prices.
Increasing Returns to Scale
A situation in which output increases faster than employment when all inputs are increased at the same rate.
(a) The locus of points representing market baskets among which the consumer is indifferent. (MY)
(b) for any level of utility, say U1, there is a set of commodity combinations which graphically form an indifference curve representing all combinations yielding the same level of utility - U1. Indifference curves are sometimes called preference curves, i.e. a curve reflecting a constant level of preference, or isoquants, i.e. a curve reflecting a constant quantity of satisfaction or utility. (HHC)
A good for which the income effect is negative, so that increases in real income result in decreases in the quantity demanded.
An invention, when applied for the first time.
Any resource used in the production process.
The premium received by the lender 1 year hence if he or she lends a dollar for a year. If the annual interest rate equals r, he or she receives (1 + r) dollars a year hence.
A good that is used to produce other goods and ser- vices.
Internal Rate of Return
The interest rate that equates the present value of the net cash inflows from an investment project to the project's investment outlay (i.e., to the present value of its cost).
The process of creating new capital assets.
Investment Demand Curve
The relationship between the total amount of investment and the rate of return from an extra dollar of investment.
(a) A curve showing the combinations of inputs that can be obtained for a fixed total outlay. (MY)
(b) plotted assuming Cost, PK and PL are fixed showing all combinations of K & L that a firm can afford. (HHC)
A curve showing all input combinations that can produce a given level of profit.
(a) A curve showing all possible (efficient) combinations of inputs that are capable of producing a certain quantity of output. (MY)
(b) a curve showing equal levels of production for different combinations of inputs. (HHC)
A line showing all combinations of outputs of two commodities that result in the same total revenue.
Human effort, physical or mental, used to produce goods and services.
Natural resources, including both minerals and plots of ground, used to produce goods and services.
Law of Diminishing Marginal Returns
According to this law, if equal increments of an input are added (and if the quantities of other inputs are held constant), the resulting increments of product will decrease beyond some point-that is, the marginal product of the input will eventually diminish.
Law of Diminishing Marginal Utility
According to this law, as a person consumes more and more of a given commodity (the consumption of other commodities being held constant), the marginal utility of the commodity eventually will tend to decline.
A measure of the amount of monopoly power possessed by a firm. Specifically, it equals (P - MC)/P, where P is the firm's price and MC is its marginal cost.
A form of pricing in which price is set so as to bar entry. A limit price is one that discourages or prevents entry.
The period of time in which all inputs are variable. The firm can change completely the resources it uses in the long run.
The change in benefits created as consumption increases by one unit.
(a) The addition to total cost resulting from the addition of the last unit of output. (MY)
(b) the additional cost associated with one additional unit of output. (HHC)
Marginal Cost Pricing
A pricing rule whereby firms or government-owned enterprises set price equal to marginal cost.
Marginal Expenditure Curve
A curve showing the additional cost to the firm of increasing its utilization of input X by 1 unit.
The addition to total output due to the addition of the last unit of an input (when the quantity of other inputs is held constant).
Marginal Rate of Product Transformation
The negative of the slope of the production possibilities curve. It represents the amount of one good that must be sacrificed to allow resources to be devoted to the production of one more unit of some other good.
Marginal Rate of Substitution
The number of units of good Y that must be given up if the consumer, after receiving an extra unit of good X, is to maintain a constant level of satisfaction.
The addition to total revenue due to selling 1 more unit of the product.
Marginal Revenue Product
The increase in total revenue due to the use of an additional unit of input X. It equals the marginal product of input X times the firm's marginal revenue.
The additional satisfaction (utility) derived from an additional unit of a commodity (when the levels of consumption of all other commodities are held constant).
A group of firms and individuals in touch with each other in order to buy or sell some good.
Market Demand Curve
A curve that shows the relationship between a product's price and the quantity of it demanded in the entire market.
Market Demand Schedule
A table that shows the relationship between a product's price and the quantity of it demanded in the entire market.
A period of time during which the quantity that is supplied of a good is fixed.
Four general types of market structure are perfect competition, monopoly, monopolistic competition, and oligopoly. The structure of a market depends on the number of buyers and sellers, as well as the extent of product differentiation and other factors.
Market Supply Schedule
A table showing the quantity of a good that would be supplied at various prices. Supply curves do not exist for all forms of market structure (e.g., monopolists do not have supply curves).
A percentage (or absolute) amount added to a product's estimated average (or marginal) cost to obtain its price; this amount is meant to include costs that cannot be allocated to any specific product and to provide a return on the firm's investment.
The part of economics dealing with the economic behavior of individual units such as consumers, firms, and resource owners (in contrast to macroeconomics, which deals with the behavior of economic aggregates like gross domestic product).
Minimum Efficient Size of Plant
The smallest size of plant where long-run average cost is at or close to its minimum value.
A theory based on assumptions that simplify and abstract from reality and from which predictions or conclusions about the real world are deduced.
Income of the consumer measured in actual dollar amounts per period of time.
A market structure in which there are many sellers of differentiated products, entry is easy, and there is no collusion among sellers.
A market structure in which there is only one seller of a product.
A market structure in which there is only a single buyer.
Phenomenon by which a person's or firm's behavior may change after buying insurance so as to increase the probability of theft, fire, or other loss covered by the insurance.
A firm that invests in other countries and produces and markets its products abroad.
A monopolist that owns and operates more than one plant and that must determine the output of each of its plants.
A firm that produces more than one product.
An equilibrium in game theory where, given every other player's chosen strategies, each player has no reason to change his or her own strategy.
An industry in which the average cost of production reaches a minimum at an output rate large enough to satisfy the entire market, thus competition cannot be sustained and one firm becomes the monopolist.
The rule that a firm should carry out any investment project with a positive net present value. An investment's net present value is the present value of its fixture cash flows minus its cost.
Risk that cannot be reduced by diversification.
Rivalry among firms that use advertising and other marketing weapons, as well as variation in product characteristics due to research and development and style changes.
Goods that experience increases in quantity demanded in response to increases in the consumer's real income.
A market structure in which there are only a few sellers of products that can be identical or differentiated.
A market structure in which there are only a few buyers.
The value of the product that particular resources could have produced if they had been used in the best alternative way; also called alternative cost.
Optimal Input Combination
The combination of inputs that is economi- cally efficient or that maximizes profit (that is, is optimal from a profit maximizing firm's point of view), or both.
Utility that is measurable in an ordinal sense, which means that a consumer can only rank various market baskets with respect to the satisfaction they give him or her.
the result of transforming inputs into goods or services that satisfy, directly or indirectly, human wants, needs and desires. (HHC)
A criterion to determine whether a particular change is an improvement; according to this criterion, a change that harms no one and improves the lot of some people (in their own eyes) is an improvement.
Partial Equilibrium Analysis
An analysis assuming (in contrast to a general equilibrium analysis) that changes in price in a particular market can occur without causing significant changes in price in other markets.
Benefits arising because of changes in relative prices that come about as the economy adjusts to a project (as distinguished from real benefits, which augment society's welfare).
A market structure in which there are many sellers of identical products, no one buyer or seller has control over price, entry is easy, and resources can switch readily from one use to another.
A bond that pays a fixed annual amount of interest forever.
The practice of setting price at a low level in order to drive a rival firm out of business.
The value today of a payment, or stream of payments, now and in the future (or in the past).
A government-imposed maximum for the price of a particular good.
A curve connecting the various equilibrium points corresponding to market baskets chosen by the consumer at various prices of a commodity.
The practice whereby one buyer is charged more than another buyer for the same product.
Description of the demand for a product if its price elasticity of demand exceeds 1.
Price Elasticity of Demand
The percentage change in quantity demanded resulting from a 1 percent change in price (by convention, always expressed as a positive number).
Price Elasticity of Supply
The percentage change in quantity supplied resulting from a 1 percent change in price.
A government-imposed minimum for the price of a particular good.
Description of the demand for a product if its price elasticity of demand is less than 1.
A firm in an oligopolistic industry that sets a price that other firms are willing to follow.
A system in which each good and service has a price and that, in a purely capitalistic economy, carries out the basic functions of an economic system (determining what will be produced, how it will be produced, how much of it each person will get, and what the country's growth of per capita output will be).
The problem that arises because managers or workers may pursue their own objectives, even though this reduces the profits of the owners of the firm. The managers or workers are agents who work for the owners, who are the principals.
A situation in which two persons (or firms) would both do better to cooperate than not to cooperate, but in which each feels it is in his or her interests not to do so; therefore each fares worse than if they cooperated.
The expense incurred by the individual user to obtain the use of a resource.
The proportion of times that a particular outcome occurs over the long run.
The aggregate profits of firms making a good plus the amount that owners of inputs (used to make the good) are compensated above and beyond the minimum they would insist on. Geometrically, it equals the area above the supply curve and below the price.
The relationship between the quantities of various inputs used per period of time and the maximum amount of output that can be produced per period of time.
Production Possibility Curve
A curve showing the various combinations ~ Glossai of quantities of two products that can be produced with a given amount of resources.
The difference between a firm's revenue and its total economic costs; it is also called "economic profit."
A good that is nonrival and nonexclusive. Nonrival meansthat the marginal cost of providing the good to an additional consumer is zero. Nonexclusive means that people cannot be excluded from consuming the good (whether or not they pay for it).
A payment to an input in temporarily fixed supply. For example, in the short run, a firm's plant cannot be altered, and the payments to this and other fixed inputs are quasi-rents.
a limit imposed on the amount of a commodity that can be imported annually.
A line that starts from some point and goes off into space. If capital is on one axis and labor is on the other, a ray from the origin describes all input combinations where the capital-labor ratio is constant.
A curve showing how much one duopolist will produce and sell, depending on how much it thinks the other duopolist will produce and sell. .
Benefits that augment society's welfare (as distinguished from pecuniary benefits, which arise because of changes in relative prices that come about as the economy adjusts to a project).
The return paid to an input that is fixed in supply.
A situation in which the outcome is not certain but the probability of each possible outcome is known or can be estimated.
When confronted with gambles with equal expected monetary values, rick averters prefer a gamble with a more-certain outcome to one with a less-certain outcome.
When confronted with gambles with equal expected monetary values, risk lovers prefer a gamble with a less-certain outcome to one witha more-certain outcome.
Risk-neutral individuals do not care whether a gamble has a less-certain or more-certain outcome. They choose among gambles on the basis of expected monetary value alone; specifically, they maximize expected monetary value.
A consumer's refraining from consuming part of the goods that he or she has.
Second-Degree Price Discrimination
Strategy by which a monopolist charges a different price depending on how much the consumer purchases, thus increasing the monopolist's revenues and profit.
The expenses of advertising and distributing a product and of trying to convince potential customers that they should buy it.
A period of time in which some of the firm's inputs (generally its plant and equipment) are fixed in quantity.
The cost to society of producing a given commodity or taking a particular action. This cost may not equal the private cost.
Efficiency when technology and tastes are fixed. If departures from static efficiency result in a faster rate of technological change and productivity increase, they may lead to a higher level of consumer satisfaction than if the conditions for static efficiency are met.
A move that influences the other person's choice in a manner favorable to oneself by affecting the other person's expectations of how oneself will behave.
If goods X and Y' are substitutes, the quantity demanded of X is directly related to the price of Y:
(a) The change in the quantity demanded of a good resulting from a price change when the level of satisfaction of the consumer is held constant. (MY)
(b) measures how much less of a now more expensive commodity (x) will be consumed simply because of a price increase. It follows from the basic economic principle of substitution, i.e. consumers will tend to substitute a less expensive for a more expensive good or service.
A curve that shows how much of a product will be supplied at each level of the product's price.
Supply Curve of Loanable Funds
The relationship between the quantity of loanable funds supplied and the interest rate.
A desired rate of return that a firm hopes to achieve by means of markup pricing.
A tax imposed by the government on imported goods (designed to cut down on imports and thus protect domestic industry and workers from foreign competition).
New ways of producing existing products, new designs enabling the production of new products, and new techniques of organization, marketing, and management.
Society's pool of knowledge regarding how goods and services can be produced from a given amount of resources.
Third-Degree Price Discrimination
A situation in which a monopolist sells a good in more than one market, the good cannot be transferred from one market and resold in another, and the monopolist can set different prices in different markets.
Tit for Tat
A strategy in game theory in which each player does on this round what the other player did on the previous round.
The sum of a firm's total fixed cost and total variable cost.
Total Cost Function
Relationship between a firm's total cost and its output.
Total Fixed Cost
A firm's total expenditure on fixed inputs per period of time.
A firm's total dollar sales volume per period of time.
The sum of consumer and producer surpluses.
A number representing the level of satisfaction that a consumer derives from a particular market basket.
Total Variable Cost
A firm's total expenditure on variable inputs per period of time.
The cost of bringing buyers and sellers together, contracting, and obtaining information concerning the market.
Transferable Emissions Permits
Permits to generate a certain amount of pollution, limited in number, that are allocated among firms and that can be bought or sold.
A pricing technique whereby the consumer pays an initial fee for the right to buy the product as well as a usage fee for each unit of the product that he or she buys.
A marketing technique whereby a firm producing a product that will function only if used in conjunction with another product requires its customers to buy the latter product from it, rather than from alternative suppliers.
An elasticity equal to 1.
A number that represents the level of satisfaction that the consumer derives from a particular market basket.
Utility Possibilities Curve
A curve showing the maximum utility that one person can achieve, given the utility achieved by another person.
Value of Information
The increase in economic well being that can be achieved by taking advantage of new information that changes the degree of uncertainty (and perhaps eliminates uncertainty altogether). For risk-neutral decision makers, it is the difference in the expected monetary outcome that can be achieved with and without using the information. For risk-averse decision makers, it is the difference in the risk premiums that they would pay to eliminate uncertainty with and without using the information. In either case, it is the maximum amount that people would pay to obtain the new information.
Value of Marginal Product
The marginal product of an input (that is, the extra output resulting from an extra unit of the input) multiplied by the product's price.
The total cost per period of time of the variable inputs.
A resource used in the production process whose quantity can be changed during the particular period under consideration.
Von Neumann-Morgenstern Utility Function
A function showing the utility that a decision maker attaches to each possible outcome of a gamble; it shows the decision maker's preferences with regard to risk.
If a number of bids are made for a particular piece of land (or other good or asset) and if the bidders' estimates of the land's value are approximately correct, on average, the highest bidder is likely to pay more for the land than it is worth if each bidder bids what he or she thinks the land is worth.