EC 201 Exam 1 Terms

question

Cost-Benefit Principle

answer

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.

question

economic surplus

answer

The total benefits minus total costs flowing from a decision; it measures how much a decision has improved your well-being.

question

framing effect

answer

When a decision is affected by how a choice is described, or framed. You should avoid framing effects altering your own decisions.

question

Interdependence principle

answer

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

question

marginal benefit

answer

The extra benefit from one extra unit (of goods purchased, hours studied, etc.).

question

marginal cost

answer

The extra cost from one extra unit.

question

Marginal Principle

answer

Decisions about quantities are best made incrementally. You should break “how many” questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

question

opportunity cost

answer

The true cost of something is the next best alternative you have to give up to get it.

question

production possibilities frontier

answer

Shows the different sets of output that are attainable with your scarce resources.

question

Rational Rule

answer

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

question

Scarcity

answer

Resources are limited, therefore any resource you spend pursuing one activity leaves fewer resources to pursue others. Scarcity implies that you always face a trade-off.

question

someone else's shoes technique

answer

By mentally “trading places” with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.

question

sunk cost

answer

A cost that has been incurred and cannot be reversed. A sunk cost exists whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs.

question

willingness to pay

answer

In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: “What is the most I am willing to pay to get this benefit (or avoid that cost)?”

question

change in quantity demanded

answer

The change in quantity associated with movement along a fixed demand curve.

question

complementary goods

answer

Goods that go together. Your demand for a good will decrease if the price of a complementary good rises

question

congestion effects

answer

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.

question

decrease in demand

answer

A shift of the demand curve to the left.

question

diminishing marginal benefit

answer

Each additional item yields a smaller marginal benefit than the previous item

question

"holding other things constant"

answer

A commonly-used qualifier noting your conclusions may change if some factor that you haven't analyzed changes.

question

increase in demand

answer

a rightward shift of the demand curve

question

individual demand curve

answer

a graphical representation of the relationship between quantity demanded and price for an individual consumer

question

inferior goods

answer

A good for which higher income causes a decrease in demand

question

law of demand

answer

The tendency for quantity demanded to be higher when the price is lower.

question

market demand curve

answer

A graph plotting the total quantity of an item demanded by the entire market, at each price.

question

movement along the demand curve

answer

A price change causes movement from one point on a fixed demand curve to another point on the same curve

question

network effects

answer

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase.

question

normal good

answer

A good for which higher income causes an increase in demand.

question

Rational Rule for Buyers

answer

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price.

question

shift in the demand curve

answer

A movement of the demand curve itself.

question

substitute goods

answer

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls.

question

change in quantity supplied

answer

The change in quantity associated with movement along a fixed supply curve.

question

complements in production

answer

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises.

question

decrease in supply

answer

A shift of the supply curve to the left.

question

diminishing marginal product

answer

The marginal product of an input declines as you use more of that input.

question

fixed costs

answer

Those costs that don’t vary when you change the quantity of output you produce.

question

increase in supply

answer

a rightward shift of the supply curve

question

individual supply curve

answer

A graph plotting the quantity of an item that a business plans to sell at each price.

question

Law of Supply

answer

The tendency for the quantity supplied to be higher when the price is higher.

question

marginal product

answer

The increase in output that arises from an additional unit of an input, like labor.

question

market supply curve

answer

A graph plotting the total quantity of an item supplied by the entire market, at each price.

question

movement along the supply curve

answer

A price change causes movement from one point on a fixed supply curve to another point on the same curve.

question

perfect competition

answer

Markets in which (1) all firms in an industry sell an identical good; and (2) there are many buyers and sellers, each of whom is small relative to the size of the market.

question

price taker

answer

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price

question

Rational rule for sellers in competitive markets

answer

Sell one more unit if the price is greater than (or is equal to) the marginal cost.

question

shift of a supply curve

answer

A movement of the supply curve itself.

question

substitutes in production

answer

Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.

question

variable costs

answer

Those costs—like labor and raw materials—that vary with the quantity of output you produce.

question

Equilibrium

answer

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded

question

equilibrium price

answer

The price at which the market is in equilibrium.

question

equilibrium quantity

answer

The quantity demanded and supplied in equilibrium.

question

market

answer

A setting bringing together potential buyers and sellers.

question

market economics

answer

Each individual makes their own production and consumption decisions, buying and selling in markets.

question

planned economics

answer

Centralized decisions are made about what is produced, how, by whom, and who gets what

question

shortage

answer

When the quantity demanded exceeds the quantity supplied.

question

surplus

answer

When the quantity demanded is less than the quantity supplied.

question

cross-price elasticity of demand

answer

A measure of how responsive the demand of one good is to price changes of another. It measures the percent change in quantity demanded that follows from a 1% change in the price of another good.

question

elastic

answer

When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity is greater than 1.

question

income elastic of demand

answer

A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a 1% change in income.

question

Inelastic

answer

When the absolute value of the percent change in quantity is smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1.

question

perfectly elastic

answer

When any change in price leads to an infinitely large change in quantity.

question

perfectly inelastic

answer

When quantity does not respond at all to a price change.

question

price elasticity of demand

answer

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change.

question

price elasticity of supply

answer

A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change

question

total revenue

answer

The total amount you receive from buyers, which is calculated as price × quantity.

question

economic burden

answer

The burden created by the change in after-tax prices faced by buyers and sellers.

question

statutory burden

answer

The burden of being assigned by the government to send a tax payment.

question

tax incidence

answer

The division of the economic burden of a tax between buyers and sellers.

question

price ceiling

answer

A maximum price that sellers can legally charge.

question

price floor

answer

A minimum price that sellers can legally charge.

1 of 70

question

Cost-Benefit Principle

answer

question

economic surplus

answer

The total benefits minus total costs flowing from a decision; it measures how much a decision has improved your well-being.

question

framing effect

answer

When a decision is affected by how a choice is described, or framed. You should avoid framing effects altering your own decisions.

question

Interdependence principle

answer

question

marginal benefit

answer

The extra benefit from one extra unit (of goods purchased, hours studied, etc.).

question

marginal cost

answer

The extra cost from one extra unit.

question

Marginal Principle

answer

Decisions about quantities are best made incrementally. You should break “how many” questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

question

opportunity cost

answer

The true cost of something is the next best alternative you have to give up to get it.

question

production possibilities frontier

answer

Shows the different sets of output that are attainable with your scarce resources.

question

Rational Rule

answer

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

question

Scarcity

answer

Resources are limited, therefore any resource you spend pursuing one activity leaves fewer resources to pursue others. Scarcity implies that you always face a trade-off.

question

someone else's shoes technique

answer

By mentally “trading places” with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.

question

sunk cost

answer

A cost that has been incurred and cannot be reversed. A sunk cost exists whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs.

question

willingness to pay

answer

In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: “What is the most I am willing to pay to get this benefit (or avoid that cost)?”

question

change in quantity demanded

answer

The change in quantity associated with movement along a fixed demand curve.

question

complementary goods

answer

Goods that go together. Your demand for a good will decrease if the price of a complementary good rises

question

congestion effects

answer

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.

question

decrease in demand

answer

A shift of the demand curve to the left.

question

diminishing marginal benefit

answer

Each additional item yields a smaller marginal benefit than the previous item

question

"holding other things constant"

answer

A commonly-used qualifier noting your conclusions may change if some factor that you haven't analyzed changes.

question

increase in demand

answer

a rightward shift of the demand curve

question

individual demand curve

answer

a graphical representation of the relationship between quantity demanded and price for an individual consumer

question

inferior goods

answer

A good for which higher income causes a decrease in demand

question

law of demand

answer

The tendency for quantity demanded to be higher when the price is lower.

question

market demand curve

answer

A graph plotting the total quantity of an item demanded by the entire market, at each price.

question

movement along the demand curve

answer

A price change causes movement from one point on a fixed demand curve to another point on the same curve

question

network effects

answer

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase.

question

normal good

answer

A good for which higher income causes an increase in demand.

question

Rational Rule for Buyers

answer

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price.

question

shift in the demand curve

answer

A movement of the demand curve itself.

question

substitute goods

answer

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls.

question

change in quantity supplied

answer

The change in quantity associated with movement along a fixed supply curve.

question

complements in production

answer

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises.

question

decrease in supply

answer

A shift of the supply curve to the left.

question

diminishing marginal product

answer

The marginal product of an input declines as you use more of that input.

question

fixed costs

answer

Those costs that don’t vary when you change the quantity of output you produce.

question

increase in supply

answer

a rightward shift of the supply curve

question

individual supply curve

answer

A graph plotting the quantity of an item that a business plans to sell at each price.

question

Law of Supply

answer

The tendency for the quantity supplied to be higher when the price is higher.

question

marginal product

answer

The increase in output that arises from an additional unit of an input, like labor.

question

market supply curve

answer

A graph plotting the total quantity of an item supplied by the entire market, at each price.

question

movement along the supply curve

answer

A price change causes movement from one point on a fixed supply curve to another point on the same curve.

question

perfect competition

answer

Markets in which (1) all firms in an industry sell an identical good; and (2) there are many buyers and sellers, each of whom is small relative to the size of the market.

question

price taker

answer

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price

question

Rational rule for sellers in competitive markets

answer

Sell one more unit if the price is greater than (or is equal to) the marginal cost.

question

shift of a supply curve

answer

A movement of the supply curve itself.

question

substitutes in production

answer

Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.

question

variable costs

answer

Those costs—like labor and raw materials—that vary with the quantity of output you produce.

question

Equilibrium

answer

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded

question

equilibrium price

answer

The price at which the market is in equilibrium.

question

equilibrium quantity

answer

The quantity demanded and supplied in equilibrium.

question

market

answer

A setting bringing together potential buyers and sellers.

question

market economics

answer

Each individual makes their own production and consumption decisions, buying and selling in markets.

question

planned economics

answer

Centralized decisions are made about what is produced, how, by whom, and who gets what

question

shortage

answer

When the quantity demanded exceeds the quantity supplied.

question

surplus

answer

When the quantity demanded is less than the quantity supplied.

question

cross-price elasticity of demand

answer

A measure of how responsive the demand of one good is to price changes of another. It measures the percent change in quantity demanded that follows from a 1% change in the price of another good.

question

elastic

answer

question

income elastic of demand

answer

A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a 1% change in income.

question

Inelastic

answer

When the absolute value of the percent change in quantity is smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1.

question

perfectly elastic

answer

When any change in price leads to an infinitely large change in quantity.

question

perfectly inelastic

answer

When quantity does not respond at all to a price change.

question

price elasticity of demand

answer

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change.

question

price elasticity of supply

answer

A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change

question

total revenue

answer

The total amount you receive from buyers, which is calculated as price × quantity.

question

economic burden

answer

The burden created by the change in after-tax prices faced by buyers and sellers.

question

statutory burden

answer

The burden of being assigned by the government to send a tax payment.

question

tax incidence

answer

The division of the economic burden of a tax between buyers and sellers.

question

price ceiling

answer

A maximum price that sellers can legally charge.

question

price floor

answer

A minimum price that sellers can legally charge.

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EC 201 Exam 1 Terms

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