This is a list of concepts covered in Econ 240. The list will be updated as the semester goes on.
The ordering of concepts follows approximately the order in which the topics were discussed in class.
Note: You need not memorize specific definitions for tests. Instead, be able to use
the essential concepts skilfully.
Part I
Economics: The study of choice under conditions of scarcity.
Exchange: The process of trade.
Microeconomics: The study of particular groups of participants in the economy, including
households and firms interacting in particular markets.
Goods: Things provided for the improvement of our quality of life.
Services: Activities provided for the improvement of our quality of life.
Households: All persons who occupy a housing unit.
Firms: Sellers of goods and services.
Production: The process of creating goods and services.
Markets: Environments in which buyers and sellers gather to trade.
Price: The amount of money (or other tradeable) that is traded for a given good or service.
Quantity: The amount of a good or service which is sold, at a given price.
Reservation Price: For a buyer, the reservation price is the highest amount that they would be willing
to pay, for an item. For a seller, the reservation price is the lowest amount that they would be willing
to accept, for an item.
Bid Price: The price offered by a buyer, for an item.
Ask Price: The price asked by a seller, for an item.
Labor Union: An organization of workers that coordinate their labor supply decisions.
Corporation: A firm with multiple owners, each having limited liability.
Buyer's Market: A market in which supply is particularly high.
Seller's Market: A market in which demand is particularly high.
Horizontal Market: Among producer markets, horizontal markets serve buyers in diverse industries.
Vertical Market: Among producer markets, vertical markets serve buyers in specific industries.
Price Ceiling: A government-mandated maximum price.
Price Floor: A government-mandated minimum price.
Sales Tax: A tax per-unit on items sold.
Subsidy: A government payment to a firm for production.
Property rights: Government-guaranteed rights to ownership of goods and services by households and firms.
Odd Pricing: The situation where prices are a little less than a round number, like $5.99. If prices are in
thousands, $3,995 is an example odd price since it equals 3.995 thousands (of dollars).
Demand: The buyer's willingness and ability to buy goods and services.
Supply: The seller's willingness and ability to sell goods and services.
Quantity demanded: The amount of a good that buyers will purchase, at a given price.
Quantity supplied: The amount of a good that sellers will provide, at a given price.
Trading: The practice in which two agents exchange goods or services.
Goods: Things provided for the improvement of our quality of life.
Services: Activities provided for the improvement of our quality of life.
Equilibrium: The market condition where price is at the level that makes quantity
demanded equal quantity supplied.
Surplus: A situation where price is above equilibrium, causing quantity supplied to exceed quantity
demanded.
Shortage: A situation where price is below equilibrium, causing quantity demanded to exceed quantity
supplied.
Determinants of demand and supply: Circumstances that influence the willingness and ability of
buyers and sellers to engage in markets.
Forward Price : In a futures contract, the forward price is the price at which an item will be
traded, at a future date.
Spot Price : The price of an item purchased and delivered immediately.
Option Price : The price of an option contract, giving the owner the right to purchase an item in the future.
Strike Price : In an option contract, the strike price is the price at which the owner has the right to purchase an item in the future.
Interest Rate : For bonds and other forms of loans, the interest rate is the extra amount of money that must be returned to the lender, expressed
as a percentage of the original loan amount.
Sealed-Bid Government Contract : Contracts that are awarded to the lowest bidder,
among competing firms that make secret sealed-bid offers on the price of work to be done on contract.
Entry and Exit : The ability buyers and sellers participate in, and leave, the marketplace.
Monopoly : A market with a single seller.
Monopsony : A market with a single buyer.
Oligopoly : A market with a few sellers.
Perfect Competition : A market with many buyers and sellers.
Imperfect Competition : A market with a limited number of buyers or sellers.
Price-Taking : The situation where a buyer or seller must take, or accept, the prevailing price.
Price-Setting : The situation where a buyer or seller can control, or set, price.
Demand Effect : As demand rises, price and output tend to rise. As demand falls, price and output tend to fall.
Supply Effect : As supply rises, price tends to fall and output tend to rise. As supply falls, price tends to rise and output tend to fall.
Price Ceiling : A maximum allowable price.
Price Floor : A minimum allowable price.
Price Uniformity : The tendency for different sellers to offer the same price.
Price Discrimination : The situation where a seller offers different prices to different customers.
Bulk Discount : An example of price discrimination, wherein customers who buy more pay a lower price per item.
Exchange Rate : The price of one currency, in terms of another currency.
Sticky Wages : In the labor market, wages are sticky if they are slow to adjust to changes in supply and demand.
Sticky Prices : Prices sticky if they are slow to adjust to changes in supply and demand.
Part II
Rationality : Economic agents, including households and firms, are rational if they make choices
by picking the outcome they identify as best. In making rational choices, economic agents use all available
resources, without waste or loss.
Free Lunch : A good or service available to some economic agent at no cost.
Irrational Exuberance : A phrase, first used by economist Alan Greenspan, to describe a situation of
irrationally high demand for stocks in financial markets.
Market Diagram : A diagram illustrating possible behaviors of economic agents in markets.
Demand Curve : For a perfectly competitive market, the demand curve depicts quantities demanded,
at each possible price. Typically, demand curves are downward sloping.
Supply Curve : For a perfectly competitive market, the supply curve depicts quantities supplied,
at each possible price. Typically, supply curves are upward sloping.
Equilibrium point : In a market diagram, the equilibrium point represents a price-quantity combination,
such that quantity supplied = quantity demanded. In perfectly competitive markets, the equilibrium point lies at the crossing
of supply and demand curves.
Shortage, diagrammed : In a market diagram, shortage is represented by a price lower than
equilibrium, such that quantity demanded > quantity supplied.
Surplus, diagrammed : In a market diagram, surplus is represented by a price higher than
equilibrium, such that quantity demanded < quantity supplied.
Sales tax, diagrammed : A sales tax raises the total purchase price. In a market diagram,
introduction of a sales tax raises equlibrium price while lowering equilibrium quantity. In perfectly
competitive markets, the effect of a sales tax is the same as a fall in supply, shifting the supply curve inward.
Subsidy, diagrammed : A subsidy lowers the total purchase price. In a market diagram,
introduction of a subsidy lowers equlibrium price while rasing equilibrium quantity.
In perfectly
competitive markets, the effect of a subsidy is the same as an increase in supply, shifting the supply curve outward.
Price ceiling, diagrammed : In a market diagram, if a price ceiling is below equilibrium price then
it appears as a shortage: quantity demanded > quantity supplied. If the price ceiling is at or above
equilibrium price then it does not change the equilibrium outcome.
Price floor, diagrammed : In a market diagram, if a price floor is above equilibrium price then
it appears as a surplus: quantity demanded < quantity supplied. If the price floor is at or below
equilibrium price then it does not change the equilibrium outcome.
Change in quantity demanded, diagrammed : In perfectly competitive markets, a change in quantity demanded is
illustrated by
a movement along a demand curve, from one price-quantity combination to another one.
Change in quantity supplied, diagrammed : In perfectly competitive markets, a change in quantity
supplied is
illustrated by
a movement along a supply curve, from one price-quantity combination to another one.
Change in demand, diagrammed : In perfectly competitive markets, an increase in demand is illustrated by
a shift outward, or to the right, of the demand curve. A decrease in demand is illustrated by a shift inward, or to the left,
of the demand curve.
Change in supply, diagrammed : In perfectly competitive markets, an increase in supply is illustrated by
a shift outward, or to the right, of the supply curve. A decrease in supply is illustrated by a shift inward, or to
the left, of the supply curve.
Imperfect competition, diagrammed : In a market diagram, imperfect competition among suppliers
(monopoly, oligopoly) is represented by a price-quantity combination with higher price and lower equilibrium
quantity than that observed in perfect competition. Imperfect competition among buyers
(monopsony) is represented by a price-quantity combination with lower price and lower equilibrium
quantity than that observed in perfect competition.
sticky wages, diagrammed: In a market diagram, a sticky wage is represented by a point
different than the crossing-point of supply and demand curves. In the scenario of falling labor
demand, the sticky wage outcome is at a point on the final labor demand curve, up and to the left
of final equilibrium.
margin : The difference between two
amounts. For example, the difference between revenue and cost is the profit margin.
marginal rate : A change
in some amount. For example, price is the marginal rate of suppliers' total sales,
per unit of good sold. Marginal rates are also called rates of change.
elasticity (e) : A measure of sensitivity. Elasticity describes how much an amount varies, in response to a change
in something else, both measured in units of percentage change. The elasticity of y with respect to x
equals: ( percentage change in y )/(percentage change in x )
inelastic : The situation where elasticity e is less than 1: e < 1.
elastic : The situation where elasticity e is greater than 1: e > 1.
unit elastic : The situation where elasticity e equals 1: e = 1.
perfectly elastic : The situation where elasticity e is infinite.
perfectly inelastic : The situation where elasticity e equals 0: e = 0.
demand elasticity : The amount by which quantity demand varies, in response to a change
in some other quantity, both measured in units of percentage change.
supply elasticity : The amount by which quantity demand varies, in response to a change
in some other quantity, both measured in units of percentage change.
price elasticity : The amount by which quantity demanded, or quantity supplied, varies
in response to a change
in some other quantity, both measured in units of percentage change.
income elasticity : The amount by which quantity demand varies, in response to a change
in income, both measured in units of percentage change.
cross-price elasticity : The amount by which quantity demand varies, in response to a change
in another good's price, both measured in units of percentage change.
net benefit : benefit - cost.
marginal cost : The increase in cost, as quantity increases by 1 unit.
marginal benefit : The increase in benefit, as quantity increases by 1 unit.
opportunity cost : When making choices among outcomes,
the opportunity cost of choosing a particular outcome
is loss of the best alternative outcome given up, in making that choice.
rational choice rule : According to cost-benefit analysis,
a rational agent will seek to maximize net benefit, when selecting a quantity. This choice
make marginal benefit equal to marginal cost: MB = MC. This means that, at the best quantity,
a further increase in quantity will lead to zero improvement, as the additional benefit (MB) is
exactly offset by the additional cost (MC). A rational choice is also one for which
the benefit outweights the opportunity cost.
utility : The benefit to households from consuming goods and services.
marginal utility : The additional benefit to households, from an extra unit of consumption.
principle of diminishing marginal utility : As the quantity of consumption rises, the marginal
utility of (additional) consumption falls.
rational household : The rational household attempts to achieve the highest possible utility from
consumption, by balancing the benefits available from different kinds of goods (food, housing, etc.). Also, the rational
household attempts to achieve the highest possible utility from labor, by balancing the benefits available from
work and non-work activities.
rational consumer demand : In perfectly competetive markets, at a given price consumers will demand
the quantity
of consumption at which price equals marginal utility of consumption.
law of demand : The law of demand states that, in perfectly competitive markets,
as prices rise the quantity demanded falls. In a market diagram, the law of demand takes the form of
a downward-sloping demand curve. Also, the downward-sloping demand curve is associated with diminishing marginal
utility of consumption.
individual demand versus market demand : Market demand for an item is composed of individual demands.
In perfectly competetive markets, the market demand curve is such that
total quantity demanded equals the sum of all individual quantities demanded.
consumer' reservation price: In a market diagram of a perfectly competitive market,
the consumers' reservation price is associated with the crossing point of the demand curve with the vertical axis.
In terms of rational consumers, this reservation price is the marginal utility of consumption, at consumption quantity = 0.
normal good: As income rises, households demand a greater quantity of normal goods. Also, the
income elasticity
of a normal good is a positive number.
inferior good: As income rises, households demand a smaller quantity of inferior goods.
Also, the income elasticity
of an inferior good is a negative number.
complement good: For two complement goods, say A and B, as the price of A rises the demand for B falls.
Also, the cross-price elasticity of complement goods is negative.
complement good: For two substitute goods, say A and B, as the price of
A rises the demand for B rises. Also, the cross-price elasticity of substitute goods is positive.
rational demand, with few buyers: In a market with few buyers, rational demand is associated with
a low quantity demanded, and low price, relative to markets with many buyers. The reason is that, as buyers consider
increasing their quantity demanded, they take into account the effect that higher quantity demanded has on the price
they must pay. Because price tends to rise with quantity demanded, in markets with few buyers, the budget-conscious buyer
cuts back on quantity demanded.
rational firms : Rational firms seek to achieve a highest possible profit, by appropriate
choices in the production and sale of goods and services. Rational firms supply goods to households, with the
goal of achieving the highest profit, and also demand labor and related resources from households.
derived demand : A demand that is not based on a direct benefit of acquiring something, but instead
on indirect benefits that result from using something.
labor demand : The demand by firms for labor. Labor demand is a derived demand, arising from firms' desire to
produce and sell goods and services.
rational labor demand: Rational firms seek to maximize profit, and they act in labor markets to
achieve the highest possible profit. In terms of labor, profit is increased by the revenue generated by labor's
contribution to output, but profit is also decreased by the cost of labor. The rational firm negotiates in labor markets
to achieve an outcome that appropriately balances the firm's benefits and costs of labor.
marginal revenue product: The extra revenue that results from employing an additional unit of labor.
marginal cost: An addition to cost, by increasing production.
labor demand, perfect competition: In perfectly competitive labor markets,
firms maximize profit by selecting, at any given wage, a quantity of labor for which
wage equals marginal revenue product. In this setting, the labor demand curve can also be viewed as
a marginal revenue product curve. The firms' reservation wage is then
the marginal revenue product, at quantity = 0. As the consumer demand for a firm's product rises,
marginal revenue product rises, and the demand curve shifts outward.
labor demand of a monopsonist: In a market with a single employer of labor,
quantity demanded is low, and wage is low, relative to perfect competition.
The reason is that, as the employer considers
increasing their quantity demanded, they take into account the effect that higher quantity demanded has on the
wage
they must pay. Because wage tends to rise with quantity demanded, for the monopsonist, the rational monopsonist
cuts back on quantity demanded.
law of supply : The law of supply states that, in perfectly competitive markets,
as prices rise the quantity supplied rises. In a market diagram, the law of supply takes the form of
an upward-sloping supply curve. Also, the upward-sloping supply curve is associated with increasing marginal
cost of production.
individual supply versus market supply : Market supply for an item is composed of individual supplies.
In perfectly competetive markets, the market supply curve is such that
total quantity supplied equals the sum of all individual quantities supplied.
Rational firms' supply, in competitive markets : In perfectly competitive markets, at any given price
firms supply a quantity at which price equals the marginal cost of production. In this setting, the supply curve can
be interpreted as a marginal cost curve.
principle of increasing marginal cost : As the quantity produced rises, the cost of additional production rises.
firms' reservation price: In perfectly competitive consumer markets, the firms' reservation
price is the marginal cost of production, at quantity = 0.
rational monopolist: The rational monopolist supplies a lower quantity, at a higher price, that
that occuring in perfect competition. Quantity, and price, meet the profit-maximizing criterion:
marginal revenue = marginal cost. In the market diagram, the monopolist equilibrium quantity
is associated with the crossing point of marginal revenue and marginal cost curves.
The monopolist equilibrium price is associated with the point on the demand curve that lies above
the crossing point of marginal revenue and marginal cost curves.
rational oligopolist: Rational oligopolists behave in ways similar to the rational monopolist,
offering a lower quantity, and higher price, than is common in perfect competition. However, with oligopoly there is
a degree of competition, and demonstrated in price wars.
labor supply: Households supply their labor to firms, in exchange for wages and income.
rational labor supply : The rational household supplies labor to firms so as to maximize their
utility, subject to limitations of their budget and time. In perfectly competitive labor markets,
at any given wage households supply the quantity of labor for which wage equals the marginal loss (or cost) of
utility associated with lost leisure time. In this setting, the labor supply curve can be interpreted as
a marginal cost curve, reflecting increasing leisure costs at higher amounts of labor.
labor unions : Labor unions exist to improve the bargaining power of households in
the labor market. In times of falling labor demand, labor unions can resist a fall in wage,
thereby causing wage to be "sticky", and stuck above the equilibrium wage.
Panera Bread Company: A firm, headquartered in St. Louis Missouri, that provides to the public
restaurants specializing in bread, sandwiches, pastries and related cafe' items such as coffee and soup.
Some Panera restaurants are frachises, purchased from Panera Bread Company by private individuals or
groups, while others are owned and operated directly by Panera, including the St. Louis Bread Company restaurants in the
St. Louis area. Panera is significant as an aggressive provider of bread-related products, in an era in which
diet fads leaned away from high-carb foods like bread. Despite diet fads, Panera has had surging
demand for its high-quality products, reasonable prices, and efficient restaurants,
making Panera one of the most profitable emerging restaurant chains in the country.
reality television : A reletively recent format for television shows, in which
the focus is on situations that involve non-actors, without written scripts. Because these shows do not
require
trained actors or writers, they can be very inexpensive to produce. While some reality shows,
particulary those that involve stars and some situation of competion, remain popular,
other reality shows have seen a decline in demand, perphaps due to the popular impression that
the "reality" in such shows has become rather scripted, predictable, and repetetive.
Part III
social welfare : The overall wellbeing of a nation's people. In economics,
social welfare is often measured in terms of the amount of goods and services enjoyed by
its people.
working class: The group of people, in a nation, that work for firms but hold no significant
ownership of firms.
capitalist class: The group of people, in a nation, that hold significant
ownership of firms.
rational government policy : Policy guided by the principle of maximizing the social net
benefit, or welfare, of society.
social net benefit : social benefit - social cost.
social benefit : The benefit to society, from taking an action.
social cost : The cost to society, from taking an action.
marginal social benefit (MSB): The additional benefit to society, from increasing an amount.
marginal social cost (MSC): The cost to society, from decreasing an amount.
rational government choice rule : When choosing an amount, such as a tax or subsidy,
make the choice for which net benefit is highest. In this situation, MSB = MSC.
private cost: The cost to firms, from producing an item.
private benefit : The benefit to consumers, from consuming an item.
marginal private cost: The additional cost to firms, from increasing production of an item.
marginal private benefit : The additional benefit to consumers, from increasing consumption of an item. This is also
the marginal utility of consumption.
rational private choice rule : When choosing an amount,
make the choice for which private net benefit is highest. In this situation, MPB = MPC.
consumer surplus : For a consumer item, the consumer surplus is the difference between
consumers' private benefit, or utility of consumption, and the amount they pay for the item.
producer surplus : The difference between a firm's revenue and cost. Producer surplus is
the firm's profit.
private surplus : The sum of consumer surplus and producer surplus.
Pareto efficiency : A situation is Pareto efficient if there is no way to change the situation
in a way that will make some people better off and nobody worse off.
technological efficiency : In using a resource for production, technological efficiency ensures that no amount
of resource is wasted.
allocative efficiency : Putting a given resource to its most productive use.
Coase Theorem : An economic theory, concerning the desirability of different ways in which
government can transfer public property to the private sector. The theory says that, so long as receipients of government
property can sell their new property in markets, there is no harm in the government's choice of whom
to transfer property. For example, if the government gives away public park land to a city dweller that never uses the land,
this can be socially desirable, provided that the city dweller has the opportunity to sell the land to a nature lover.
externality : A mismatch of social and private goals.
positive externality : A situation where the social benefit of an activity exceeds the private benefit.
negative externality : A situation where the social cost of an activity exceeds the private cost.
public good : A public good, in economic terms, is one that is both non-rival and non-excludable.
non-rival : For a non-rival good, your consumption of the good does not decrease the amount of good available
to others. Example: A statue.
non-excludable : For a non-excludable good, it is hard to keep people from consuming it. Example: A lighthouse or highway.
free-rider problem : The situation where some people consume a good, but legally avoid paying.
normal profit : The amount of profit earned by firms in a perfectly competetive industry.
economic profit : An extra amount of profit that some firms may earn, in excess of that available in perfect competition.
deadweight welfare loss : In the situation of monopoly, deadweight welfare loss is a measure of
what society potentially gives up, in having monopoly rather than perfect competition.
labor union : An organization that represents workers. Labor unions bargain with firms concerning worker pay,
benefits, and working conditions, and they also organize actions by the workers, including strikes, to improve their bargaining
position.
research and development : Activities, carried out by firms, universities, and other institutions, to
advance knowledge, develop new technology, and expand the range of goods and services available to society.
patent : A legal right to the sole ownership and commercial use of an invention.