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accounting costs
part of total costs; include only actual monetary expenditures
accounting profits
profit that does not include opportunity costs
average cost
total production divided by quantity produced; total production cost of one input
barriers to entry
prevents competitors from entering a market
describes a price floor above the equilibrium price, or a price ceiling below the equilibrium price
what results when firms in an oligopoly agree to behave as a monopolist
Coase theorem
theory that any private market can resolve externalities given low negotiation costs and clearly defined property rights
a situation in which firms in an oligopoly make decisions as one; common in oligopolies; banned by American anti-trust law
two goods for which a rise in the price of one leads to the decline in demand for another; cross-price elasticity is negative
consumer surplus
the surplus that consumers receive when buying something at a lower value than they would be willing to pay; represented by the area below the demand curve and above the price level
agreements entered into voluntarily; where both parties anticipate receiving benefit; enforced by courts
contrived scarcity
deliberate under-provision of a good by a monopolist, increasing prices above the market equilibrium
creative destruction
phenomenon whereby old practices or good disappear in favor of newer, more efficient, better goods that increase social welfare; first described by Joseph Schumpeter; allows entrepreneurs to earn economic profits
deadweight loss
reduction in social welfare that results from a distortion of the market, such as government intervention; represented by a triangular wedge on the market curves
demand curve
diagram of quantity demanded against a good's price; shifts in demand are represented by a movement in the demand curve while changes in quantity demanded are shifts along the demand curve
demand schedule
table depicting the quantity demanded of a good at certain prices; corresponds to the demand cruve
economic costs
the total cost of producing a good; includes accounting costs and opportunity costs
economic profit
difference between the revenue a producer receives and the opportunity cost of producing the good
percent change in quantity due to a percent change in price
individuals who take on risk when creating new goods services, and are rewarded with economic profits
in economics, the single combination of price and quantity where a market settles; in general, the state of stability of a system
ability to prevent someone from consuming a good; property of a private good
result when the actions of one person affects another's well-being, but neither party pays or is paid for these effects; may be positive or negative; can be resolved if Coase theorem is fulfilled; results in deadweight loss
the economic actors who supply goods and services for an economy; seeks to maximize profit; faces a downward sloping demand curve if they possess market power; are price takers in a perfectly competitive market
fixed costs
costs that cannot be changed in the short run
imperfectly competitive
markets with only one or a few suppliers; may be monopolies or oligopolies; firms which face a downward-sloping demand curve and are price setters and possess market power
inferior goods
goods for which quantity demanded falls as income rises
law of demand
negative relationship between price and quantity demanded
law of supply
positive relationship between price and quantity supplied
vote trading by legislators to gain support for pet projects
goods for which price elasticity is higher, as compared to necessities; consumers tend to reduce consumption of this type of good during recessionary periods
marginal cost
the additional cost of producing one more of a good; does not include fixed costs
marginal revenue
the additional revenue gained from selling one more of a good
marginal tax
tax that creates a "price wedge" between consumers and producers
composed of all the buyers and sellers of a good
market demand curve
relationship between quantity demanded of a good and its price; obtained by adding the quantities demanded by all buyers
market failure
lack of a socially desirable outcome in competitive markets
market power
firms with a downward sloping demand curve that can choose from combinations of price and quantity
market supply curve
shows relationship between quantity supplied of a good and its price; obtained by adding the quantities supplied by all firms
branch of economics studying supply and demand within markets
monopolistic competition
combines parts of the monopoly and perfectly competitive models; firms sell similar, but differentiated, products
a market with only one supplier
type of good for which elasticity is lower compared to luxuries
negative externalities
externalities that harm third parties; tend to be over-produced; can be resolved by the Coase theorem
normal goods
goods which quantity demanded rises as income rises
a market with a small number of sellers; often involves collusion
perfect price discrimination
when firms can sell their product to each customer at the exact value the customer places on the product
perfectly competitive market
market characterized by a higher number of buyers and sellers, product standardization, and market participants are well informed about prices
perfectly price-elastic
a characteristic in which increasing prices above equilibrium results in nothing supplied or demanded, and decreasing prices results in an infinite amount being supplied or demanded; purely theoretical; represented as a completely flat or horizontal demand curve
perfectly price-inelastic
a characteristic in which prices can be raised or lowered without changing the quantity demanded or supplied; on the demand side, purely theoretical; represented as a vertical demand curve
pork barrel politics
the tendency for elected officials to steer money to their constituents via pet projects; causes a net increase in government spending without necessary increase in utility
positive externalities
externalities that benefit third parties; tend to be under-produced
price ceilings
a maximum price on a good; if set below market equilibrium, it will cause a supply shortage
price controls
limits on the prices of a good
price elasticity of demand
measures how much the quantity demanded of a good responds to changes in price
price elasticity of supply
measures how much the quantity supplied of a good responds to changes in price
price floors
a minimum price on a good; if set above market equilibrium, it will cause a shortage of demand relative to supply
price taker
for a perfectly competitive market; when buyers and sellers must accept the market price
goods where a change in price results in a greater change in quantity; describes goods that are luxuries, with many substitutes, and a narrow market definition, and in the long run
goods where a change in price results in lesser change in quantity; describes necessities, short-run time horizons, goods with a broad market definition, and those with few substitutes
producer surplus
the surplus that producers receive when selling something for more than they would be willing to; represented by the area between price and the supply curve
product differentiation
distinguishing between different goods that serve the same purpose in the same market
social institution that allows an individual exclusive use of a good
quantity demanded
the amount of a good that consumers are willing and able to buy
quantity supplied
the amount of a good that sellers are willing and able to produce
a numerical limit on how much of something is allowed
rent seeking
socially unproductive activities that redirect economic benefits
goods whose quantity is reduced when consumed by one person
when quantity demanded exceeds quantity supplied; often happens with an effective price ceiling
when individuals and countries focus on producing what they produce best (For the lowest opportunity cost relative to others)
goods for which an increase in the price of one increases the demand of the other
supply curves
diagram of quantity supplied of a good and that good's price
supply schedule
a table depicting quantity supplied of a good and that good's price
when quantity supplied exceeds quantity demanded; often happens with an effective price floor
tax revenue
the tax per unit times the quantity of units; sits as a rectangle between producer and consumer surplus
time horizon
factor determining the elasticity of a good; over longer, prices will be more elastic
total costs
the comprehensive cost of supplying a good or service
total market surplus
the sum of producer and consumer surplus; the total benefit market participants receive from buying and selling
total revenue
equal to equilibrium price times equilibrium quantity; shown graphically as a rectangle
tragedy of the commons
when a resource that is owned jointly is overused because no one accounts for negative externalities caused by overuse
unit elastic
situation in which a 1% change in price results in a 1% change in quantity
variable costs
costs that can be altered in the short run
calculation of price elasticity of demand or price elasticity of supply