Edwin Mansfield & Gary Yohe
Microeconomics 10th Edition
Norton, NYC,
2000
GLOSSARY
Absolute Advantage
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)
Adverse Selection
Situation
in which insurance companies find that a
disproportionately large share of their customers come from high-risk groups.
Alternative Cost
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)]
Asymmetric information
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.
Average cost
(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.
Average Product
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)
Benefits
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.
Benefit-Cost Analysis
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.
Beta
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.
Bond Yield
The
return earned on a bond.
Break-Even Chart
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)
Budget Line
(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)
Bundling
A marketing technique whereby a firm that sells two
products requires customers who buy one of them to buy the other as well.
Capital
Equipment, buildings, inventories, and other non-human
and producible resources that contribute to the production, marketing, and distribution
of goods and services.
Capital Gain
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.
Capitalism
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?
Cardinal Utility
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).
Cartel
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.
Collusion
Agreements by firms with others in their industry with
regard to price, output, and other matters.
Comparative advantage
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.
Complements
If
goods X and Y are complements, the quantity demanded of X is inversely related
to the price of Y:
Constant-Cost Industry
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.
Consumer Surplus
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.
Contestable Market
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.
Contract Curve
(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)
Corner Solution
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).
Cost
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.
Decreasing-Cost Industry
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.
Demand Curve
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.
Discount Rate
When
an interest rate is used to calculate the net presentvalue
of an investment, it is called the discount rate.
Diversifiable Risk
Risk that can be avoided by diversification.
Dominant Firm
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.
Dominant Strategy
A
strategy that is best for a player regardless of the other players' strategy.
Duopoly
A form of market structure in which there are two
sellers. The Cournot
model, among others, is concerned with duopoly.
Economic Efficiency
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.
Economic Profit
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.
Economic Resource
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.
Endowment Position
A consumer's initial allocation of income or bundles
of goods.
Engel Curve
The
relationship between the equilibrium quantity
purchased of a good and the consumer's level of income.
Equilibrium
A
situation in which there is no tendency for change. For example, an equilibrium
price is a price that can be maintained.
Excess Capacity
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.
Expansion Path
(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.
Expected Profit
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.
Expected Utility
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.
Explicit Costs
The ordinary expenses of the firm that accountants
include, such as payroll costs and payments for raw materials.
External Diseconomy
An uncompensated cost to one person or firm resulting
from the consumption or output of another person or firm.
External Economy
An uncompensated benefit to one person or firm resulting
from the consumption or output of another person or firm.
First-Mover Advantages
The
advantages that accrue to the player who makes the first move in a game.
Fixed Cost
The
total cost per period of time of the fixed inputs.
Fitted Input
A
resource used in the production process (such as plant or equipment) whose
quantity cannot be changed during the period under consideration.
Free Resource
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.
Giffen's Paradox
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)
Implicit Costs
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.
Income-Consumption Curve
(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)
Income Effect
(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.
Increasing-Cost Industry
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.
Indifference Curve
(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)
Inferior Good
A
good for which the income effect is negative, so that increases in real income
result in decreases in the quantity demanded.
Innovation
An
invention, when applied for the first time.
Input
Any
resource used in the production process.
Interest Rate
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.
Intermediate Good
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).
Investment
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.
Isocost Curve
(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)
Isoprofit Curve
A curve showing all input combinations that can
produce a given level of profit.
Isoquant
(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)
Isorevenue Line
A line showing all combinations of outputs of two
commodities that result in the same total revenue.
Labor
Human
effort, physical or mental, used to produce goods and services.
Land
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.
Lerner Index
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.
Limit Pricing
A
form of pricing in which price is set so as to bar entry. A limit price is one
that discourages or prevents entry.
Long Run
The period of time in which all inputs are variable. The firm can change completely the resources it uses
in the long run.
Marginal Benefits
The
change in benefits created as consumption increases by one unit.
Marginal Cost
(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.
Marginal Product
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.
Marginal Revenue
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.
Marginal Utility
The
additional satisfaction (utility) derived from an additional unit of a
commodity (when the levels of consumption of all other commodities are held
constant).
Market
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.
Market Period
A period of time during which the quantity that is
supplied of a good is fixed.
Market Structure
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).
Markup
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.
Microeconomics
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.
Model
A
theory based on assumptions that simplify and abstract from reality and from
which predictions or conclusions about the real world are deduced.
Money Income
Income
of the consumer measured in actual dollar amounts per period of time.
Monopolistic Competition
A
market structure in which there are many sellers of differentiated products,
entry is easy, and there is no collusion among sellers.
Monopoly
A
market structure in which there is only one seller of a product.
Monopsony
A
market structure in which there is only a single buyer.
Moral Hazard
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.
Multinational Firm
A firm that invests in other countries and produces and
markets its products abroad.
Multiplant Monopoly
A
monopolist that owns and operates more than one plant and that must determine
the output of each of its plants.
Multiproduct Firm
A firm that produces more than one product.
Nash Equilibrium
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.
Natural Monopoly
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.
Net-Present-Value Rule
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.
Nondiversifiable Risk
Risk that cannot be reduced by diversification.
Nonprice Competition
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.
Normal Goods
Goods
that experience increases in quantity demanded in response to increases in the
consumer's real income.
Oligopoly
A
market structure in which there are only a few sellers of products that can be
identical or differentiated.
Oligopsony
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.
Ordinal Utility
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.
Output:
the
result of transforming inputs into goods or services that satisfy, directly or
indirectly, human wants, needs and desires. (HHC)
Pareto Criterion
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.
Pecuniary Benefits
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).
Perfect Competition
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.
Perpetuity
A bond that pays a fixed annual amount of interest
forever.
Predatory Pricing
The practice of setting price at a low level in order
to drive a rival firm out of business.
Present Value
The value today of a payment, or stream of payments,
now and in the future (or in the past).
Price Ceiling
A government-imposed maximum for the price of a
particular good.
Price-Consumption Curve
A
curve connecting the various equilibrium points corresponding to market baskets
chosen by the consumer at various prices of a commodity.
Price Discrimination
The practice whereby one buyer is charged more than
another buyer for the same product.
Price Elastic
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.
Price Floor
A government-imposed minimum for the price of a
particular good.
Price Inelastic
Description of the demand for a product if its price
elasticity of demand is less than 1.
Price Leader
A
firm in an oligopolistic industry that sets a price that other firms are willing to follow.
Price System
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).
Principal-Agent Problem
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.
Prisoners' Dilemma
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.
Private Cost
The
expense incurred by the individual user to obtain the use of a resource.
Probability
The proportion of times that a particular outcome
occurs over the long run.
Producer Surplus
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.
Production Function
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.
Profit
The
difference between a firm's revenue and its total economic costs; it is also
called "economic profit."
Public Good
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).
Quasi-Rent
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.
Quota
a limit imposed on
the amount of a commodity that can be imported annually.
Ray
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.
Reaction Curve
A
curve showing how much one duopolist will produce and
sell, depending on how much it thinks the other duopolist
will produce and sell. .
Real Benefits
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).
Rent
The
return paid to an input that is fixed in supply.
Risk
A
situation in which the outcome is not certain but the probability of each
possible outcome is known or can be estimated.
Risk Averters
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.
Risk Lovers
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
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.
Saving
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.
Selling Expenses
The expenses of advertising and distributing a product
and of trying to convince potential customers that they should buy it.
Short Run
A
period of time in which some of the firm's inputs (generally its plant and
equipment) are fixed in quantity.
Social Cost
The cost to society of producing a given commodity or
taking a particular action. This
cost may not equal the private cost.
Static Efficiency
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.
Strategic Move
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.
Substitutes
If
goods X and Y' are substitutes, the quantity demanded of X is directly related
to the price of Y:
Substitution Effect
(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.
Supply Curve
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.
Target Return
A desired rate of return that a firm hopes to achieve
by means of markup pricing.
Tariff
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).
Technological Change
New
ways of producing existing products, new designs enabling the production of new
products, and new techniques of organization,
marketing, and management.
Technology
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.
Total Cost
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.
Total Revenue
A firm's total dollar sales volume per period of time.
Total Surplus
The sum of consumer and producer surpluses.
Total Utility
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.
Transaction Cost
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.
Two-Part Tariff
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.
Tying
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.
Unitary Elasticity
An elasticity equal to 1.
Utility
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.
Variable Cost
The
total cost per period of time of the variable inputs.
Variable Input
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.
Winner's Curse
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.