BSSE Economics 1443 flashcards
BSSE Economics 1443 · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- The value of the best alternative given up when a choice is made. It includes implicit costs and measures the true economic cost of an action, not just the money paid.
- Production possibilities frontier
- A curve showing the maximum combinations of two goods an economy can produce with fixed resources and technology. Points on the curve are efficient; points inside are inefficient.
- Normative statement
- A claim about what ought to be, based on values and therefore not testable by data. Contrasts with a positive statement, which describes what is and can be verified.
- Law of demand
- The principle that quantity demanded falls as price rises, holding other factors constant. It gives the demand curve its downward slope and reflects diminishing marginal benefit.
- Shift in demand
- A change in the entire demand relationship caused by income, tastes, expectations, or prices of related goods. At every price, a different quantity is now demanded.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. At this price there is no shortage or surplus, and the market clears without upward or downward pressure.
- Deadweight loss
- The loss of total surplus when quantity traded differs from the efficient level, as with taxes, price controls, or monopoly. It represents mutually beneficial trades that do not occur.
- Price elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one and inelastic when it is below one.
- Total revenue test
- A method for judging elasticity: if a price cut raises total revenue, demand is elastic; if it lowers revenue, demand is inelastic; if revenue is unchanged, demand is unit elastic.
- Tax incidence and elasticity
- The burden of a tax falls more heavily on the less elastic side of the market. Inelastic buyers pay most of a tax on demand; inelastic sellers absorb most of a tax on supply.
- Utility maximization rule
- A consumer allocates spending so that marginal utility per dollar is equal across goods: MUx/Px = MUy/Py. This condition yields the highest total utility for a given budget.
- Economic profit
- Total revenue minus explicit and implicit costs, including the opportunity cost of the owner's resources. It can be negative even when accounting profit is positive.
- Diminishing marginal returns
- As more of a variable input is added to fixed inputs, the extra output eventually declines. This makes marginal cost rise and gives short-run cost curves their U shape.
- MR equals MC rule
- A firm maximizes profit at the output where marginal revenue equals marginal cost. Producing less forgoes profitable units; producing more adds cost faster than revenue.
- Shutdown rule
- A firm should shut down in the short run when price falls below minimum average variable cost, because continuing to produce loses more than fixed costs alone.
- Perfect competition
- A market with many small price-taking firms, a homogeneous product, and free entry and exit. In long-run equilibrium price equals minimum average total cost.
- Monopoly pricing
- A single seller with barriers to entry maximizes profit where marginal revenue equals marginal cost, then charges the highest price buyers will pay on the demand curve.
- Nash equilibrium
- A set of strategies in which no player can improve their payoff by unilaterally changing strategy, given the strategies chosen by the other players.
- Monopolistic competition
- A market with many firms selling differentiated products and easy entry. Short-run profits attract entrants, driving price to average total cost and profit to zero in the long run.
- Marginal revenue product
- The extra revenue a firm earns from hiring one more unit of a factor, equal to marginal product times marginal revenue. Competitive firms hire until it equals the factor price.
- Monopsony in labor markets
- A market with a single buyer of labor. The employer faces an upward-sloping labor supply, hires where marginal revenue product equals marginal factor cost, and pays less than that value.
- Gini coefficient
- A measure of income inequality derived from the Lorenz curve, ranging from zero for perfect equality to one for perfect inequality. Higher values mean more unequal distribution.
- Negative externality
- A cost imposed on third parties not involved in a transaction, such as pollution. Because producers ignore it, marginal social cost exceeds marginal private cost and output is excessive.
- Coase theorem
- If property rights are clear and bargaining costs are low, private negotiation can resolve an externality efficiently regardless of which party holds the rights.
- Public good
- A good that is non-rival and non-excludable, such as national defense. Because users cannot be charged and can free ride, private markets undersupply it.
- Moral hazard
- A change in behavior after a transaction occurs because one party is insulated from the consequences, such as insured drivers taking fewer precautions.
- Expenditure approach to GDP
- GDP measured as the sum of consumption, gross investment, government purchases, and net exports (exports minus imports), counting only final goods produced within the country.
- GDP deflator
- Nominal GDP divided by real GDP, multiplied by 100. It measures the price level of all domestically produced final goods and is used to convert nominal to real values.
- Unemployment rate
- The number of unemployed persons divided by the labor force, times 100. The labor force includes the employed plus those actively seeking work, excluding discouraged workers.
- Money multiplier
- The ratio of the money supply to the monetary base, approximated as one divided by the reserve requirement ratio. It shows how deposits expand through bank lending.
- Open market operations
- Central bank purchases or sales of government securities. Purchases increase bank reserves and the money supply; sales reduce reserves and tighten credit conditions.
- Quantity theory of money
- The equation MV = PY states that money times velocity equals the price level times real output. If velocity and output are stable, money growth drives inflation.