List of concepts
Here you will find a list of those concepts seen in class classified by
lessons. As the class continues I will keep on adding new concepts.
Economics: study of how society manages its scarce resources.
Efficiency: society gets the most that it can from its scarce resources.
Equity: the benefits of those resources are distributed fairly among
the members of society.
Externalities: impact of one person’s actions on the well-being of a
Market economy: economy that allocates resources through the
decentralized decisions of many firms and households as they interact
in markets for goods and services.
Market failure: a situation in which a market left on its own fails to
allocate resources efficiently.
Market power: the ability of a single economic actor (or small group
of actors) to have a substantial influence on market prices.
Opportunity cost: of an item is what you give up to obtain that item.
The cost of using an item is the value of the best alternative use.
Planned economy: economía basada en la teoría de que el gobierno
era el único que podía organizar la actividad económica de una forma
que promoviera el bienestar económico de un país en su conjunto.
Scarcity: the limited nature of society's resources.
Economic model: simplified representation of reality that is used to
address relevant issues about that reality.
Macroeconomics: studies economy-wide phenomena, including
inflation, unemployment, and economic growth.
Microeconomics: studies how households and firms make decisions
and how they interact in specific markets.
Normative statements: about how the world should be (prescriptive
Positive statements: attempt to describe the world as it is
The production possibilities frontier: graph that shows the
combinations of output that the economy can possibly produce given
the available factors of production and the available production
Ceteris paribus: a Latin phrase, translated as “other things being
equal,” used as a reminder that all variables other than the ones being
studied are assumed to be constant.
Competitive market: a market in which there are may buyers and
many sellers so that each has a negligible impact on the market price.
Complements: two goods for which an increase in the price of one
good leads to a decrease in the demand for the other.
Demand curve: a graph of the relationship between the price of a
good and the quantity demanded.
Demand schedule: a table that shows the relationship between the
price of a good and the quantity demanded.
Equilibrium: situation in which supply and demand have been
brought into balance.
Equilibrium price: the price that balances supply and demand
Equilibrium quantity: the quantity supplied and the quantity
demanded when the price has adjusted to balance supply and demand.
Excess demand (or Shortage): situation in which quantity
demanded is greater than quantity supplied
Excess supply (or Surplus): situation in which quantity supplied is
greater than quantity demanded
Inferior good: a good for which, other things equal, an increase in
income leads to a decrease in demand.
Law of demand: the claim that, other things equal, the quantity
demanded of a good falls when the price of the good rises.
Law of supply: the claim that, other things equal, the quantity
supplied of a good rises when the price of a good rises.
Law of supply and demand: the price of any good adjusts to bring
the supply and demand for that good into balance.
Market: a group of buyers and sellers of a particular good or service.
Market demand: sum of all the individual demands for a particular
good or service.
Market supply: sum of the supplies of all sellers of a particular good
Monopolistic competition: a type of market that contains many
sellers but each offers a slightly different product.
Monopoly: a market with only one seller of a product without close
substitutes. This seller sets the price.
Monopsony: a market with only one buyer.
Normal good: a good for which, other things equal, an increases in
income leads to an increase in demand.
Oligopoly: a market with few sellers that do not always compete
Perfect competitive markets: markets that are defined by two
primary characteristics: (1) the goods being offered for sale are all the
same, and (2) the buyers and sellers are so numerous that no single
buyer or seller can influence the market price.
Quantity demanded: the amount of a good that buyers are willing
and able to purchase.
Quantity supplied: the amount of a good that a sellers are willing
and able to sell.
Substitutes: two goods for which an increase in the price of one leads
to an increase in the demand for the other.
Supply curve: graph of the relationship between the price of a good
and the quantity supplied.
Supply schedule: table that shows the relationship between the price
of a good and the quantity supplied.
Cross-price elasticity of demand: a measure of how much the
quantity demanded of one good responds to a change in the price of
another good, computed as the percentage change in quantity
demanded of the first good divided by the percentage change in the
price of the second good.
Elastic demand: when the elasticity is greater than 1, so that
quantity moves proportionately more than the price.
Elastic supply: if the price elasticity of supply is larger than 1.
Elasticity: A measure of the responsiveness of quantity demanded or
quantity supplied to one of its determinants.
Income elasticity of demand: a measure of how much the quantity
of a good responds to a change in consumers’ income, computed as
the percentage change in quantity demanded divided by the
percentage change in income.
Inelastic demand: when the elasticity is less than 1, so that quantity
moves proportionately less than the price.
Inelastic supply: if the price elasticity of supply is less than 1.
Luxuries: those goods with a very high income and price elasticity of
Necessities: those goods with a very low income and price elasticity
Perfectly elastic demand: quantity demanded changes infinitely with
any change in price.
Perfectly inelastic demand: quantity demanded does not respond to
price changes. Elasticity equals 0.
Perfectly elastic supply: close to infinity price elasticity of supply.
Perfectly inelastic supply: zero price elasticity of supply.
Price elasticity of demand: A measure of how much the quantity
demanded of a good responds to a change in price of that good,
computed as the percentage change in quantity divided by the
percentage change in price.
Price elasticity of supply: a measure of how much the quantity
supplied of a good responds to a change in price of that good,
computed as the percentage change in quantity supplied divided by
the percentage change.
Total revenue (PxQ): the amount paid by buyers and received by
sellers of a good, computed as the price of the good times the quantity
Unit-elastic demand: when the elasticity is exactly 1, so that
quantity moves the same amount proportionately as price.
Unit-elastic supply: if the price elasticity of supply is exactly one.
Willingness to pay: the maximum amount that a buyer will pay for a
Price ceiling: a legal maximum on the price at which a good can be
Price Floor: a legal minimum on the price at which a good can be
Tax incidence: is the manner in which the burden of a tax is shared
among participants in a market. Tax incidence is the study of who
bears the burden of a tax.
Welfare economics: the study of how the allocation of resources
affects economic well-being.
Marginal consumer (or buyer): the buyer who would leave the
market first if the price were any higher.
Marginal producer (or seller): the seller who would leave the
market first if the price were any lower.
Willingness to pay: the maximum amount that a buyer will pay for a
Willingness to sell (cost): the value of everything a seller must give
up to produce a good.
Consumer surplus: the amount that buyers are willing to pay for a
good minus the amount they actually pay for it, measures the benefit
that buyers receive from a good as the buyers themselves perceive it.
Producer surplus: the amount a seller is paid for a good minus the
seller’s cost, it measures the benefit to sellers participating in a
Total surplus: the sum of consumer surplus plus producer surplus. In
the absence of market imperfections, it can also be computed as the
difference between the value to buyers minus the cost to sellers.
Market efficiency: a market allocation is said to be efficient if it
maximizes the total surplus received by all members of society.
Deadweight loss: the fall in total surplus that results from a market
distortion, such as a tax.
Laffer curve: depicts the relationship between tax rates and tax
Saving: the income that households have left after paying for taxes
Giffen good: a good for which an increase in the price raises the
Neutral good: a good which has no effect on the consumer’s utility.
Indifference curve: curve that shows consumption bundles that give
the consumer the same level of satisfaction.
Income effect: the change in consumption that results when a price
change moves the consumer to a higher or lower indifference curve.
Substitution effect: the change in consumption that results when a
price change moves the consumer along a given indifference curve to
a point with a new marginal rate of substitution.
Bad: a good the consumer dislikes.
Leisure: time that could be devoted to paid work, but instead is
devoted to other activities.
Consumer’s optimal choice: allocation at which the consumer
maximizes his utility given his income and the prices of the goods. At
this point, the marginal rate of substitution equals relative prices.
Budget constraint: shows the various combinations of goods the
consumer can afford given his or her income and the prices of the
Marginal rate of substitution: the rate at which a consumer is
willing to trade one good for another.
Marginal utility: change in consumer’s utility when one more unit of
a good is consumed.
Total revenue: the amount a firm receives for the sale of its output.
Total cost: the market value of the inputs a firm uses in production.
Explicit costs: input costs that require a direct outlay of money by
Implicit costs: input costs that do not require an outlay of money by
Production function: shows the relationship between quantity of
inputs used to make a good and the quantity of output of that good.
Marginal product: of any input in the production process is the
increase in output that arises from an additional unit of that input.
Diminishing marginal product: the property whereby the marginal
product of an input declines as the quantity of the input increases.
Measured by the slope of the production function.
Total-cost curve: shows the relationship between the quantity a firm
can produce and its costs. It determines pricing decisions.
Fixed costs: those costs that do not vary with the quantity of output
Variable costs: those costs that do vary with the quantity of output
Marginal cost: measures the increase in total cost that arises from an
extra unit of production. The marginal cost rises with the amount of
output produced (diminishing marginal product).
Efficient scale: the quantity of output that minimizes average total
Economies of scale: the property whereby long-run average total
cost falls as the quantity of output increases.
Diseconomies of scale: the property whereby long-run average total
cost rises as the quantity of output increases.
Constant returns to scale: the property whereby long-run average
total cost stays the same as the quantity of output increases.