Section 1 Definitions Economics is a social science as it is concerned with the study of human behavior. Microeconomics is the study of the individual component parts of the economy. Macroeconomics is the study of aggregates (totals) of economic activity. Scarcity is an enduring inadequacy of resources Ceteris paribus is making an assumption by holding all other factors constant (all other things being equal). Utility is our perceived satisfaction from consuming a good or service Marginal utility is our perceived satisfaction from consuming one additional good or service
Opportunity cost is the value of the next best alternative forgone as the result of making a decision. Factors of production: Land includes all natural resources (minerals and other raw materials) Labor includes all human resources Capital includes all man-made machinery and equipment Enterprise is the skill of taking risk to provide goods and services and make profits.
Economic goods are scarce and their production involves opportunity costs Free goods are gifts of nature supplied without labor and without limit. In a market economy the forces of Demand and Supply determine resource allocation. In a command economy the the state determines resource allocation. In a mixed economy the forces of demand and supply and the state determine resource allocation.
Economic growth entails an increase in a country's total output of goods and services and occurs where there is an increase in the productive potential of the economy and is best measured by the increase in a country's real level of output over a period of time (GDP). Economic development entails a higher standard of living and is a process where there is improvement in the lives of all people in the country. Sustainability is the ability of the environment to survive its use for economic activity.
Elasticity definitions Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. Elastic demand means that a change in the price of a good or service will cause a proportionately larger change in quantity demanded and inelastic demand means that a change in price of a good or service will cause a proportionately smaller change in quantity demanded. Cross elasticity of demand is a measure of the responsiveness of the demand for a good or service to a change in the price of a related good. Substitute goods are goods that can be used instead of each other. Complement goods are goods which are used together Income elasticity of demand is a measure of the responsiveness of demand for a good to a change in income. A normal good has a positive income elasticity of demand. As income rises, demand rises. Inferior goods have a negative income elasticity of demand. Price elasticity of supply is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price. An Indirect tax is an expenditure tax on a good or service. A specific tax is shown as a parallel shift. An ad valorem tax is shown as a divergent shift. Incidence of tax refers to the amount of tax paid by the producer or the consumer.
Market definitions A market is where buyers and sellers come together to establish an equilibrium price and quantity for a good or service. Demand is the willingness and ability to purchase a quantity of a good or service at a certain price over a given amount of time. The law of demand states that as the price of a good or service rises, the quantity demanded decreases. The demand curve is a graphical representation of the law of demand. Supply is the willingness and ability of a producer to produce a quantity of a good or service at a certain price over a given amount of time. The law of supply states that as the price of a good or service rises, the quantity supplied increases. The supply curve is a graphical representation of the law of supply. Equilibrium price is the market-clearing price. A maximum price is also known as a ceiling price. It is a price set by the government, above which the market price is not allowed to rise. A minimum price is also known as a price floor. It is a price set by the government, below which the market price is not allowed to fall. A buffer stock scheme sets a maximum and a minimum price in a market to stabilize prices.
Theory of the firm definitions Fixed costs are costs of production that do not change with the level of output. They will be the same for one or any other numbers of units. Variable costs are costs of production that vary with the level of output. Total costs are the total costs of producing a certain level of output-fixed costs plus variable costs. Average cost is the average (total) cost of production per unit. It is calculated by dividing the total cost by the quantity produced. Marginal cost is the additional cost of producing an additional unit of output. The short run is the period of time in which at least one factor of production is fixed—the production stage. The law of diminishing average returns states that as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish. The law of diminishing marginal returns states that as extra units of variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually diminish. The long run is the period time in which all factors of production are variable.
Economies of scale are any fall in long-run unit average costs that come about as a result of a firm increasing its scale of production (output). Diseconomies of scale are any increase in long-fun (average) costs that come about as a result of firm increasing its scale of production (output). Total revenue is the aggregate revenue gained by a firm from the scale of a particular quantity of output (equal to price times quantity sold). Average revenue is total revenue received divided by the number of units sold. Usually, price is equal to average revenue. Marginal revenue is the extra revenue gained from selling an additional unit of a good or service. Normal profits are the amount of revenue needed to cover the total costs of production, including the opportunity costs. Abnormal profits are any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (It is an amount of revenue greater than the total costs of production, including opportunity costs). The profit-maximizing level of output is the level of output where marginal revenue is equal to marginal cost. The shutdown price is the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short term.
Ways to measure output Total product is the total output of the firm. Average product is the total product over the unit of the variable factor. Marginal product is the change in total product over the change in the unit of the variable factor.