Glossary

includes only the explicit costs, or those you would see in an accounting spreadsheet of the firm’s costs

is a tax based on the value of a good, such as a percentage sales tax

refers to the situation where asymmetric information on the part of one party in an economic transactions leads to desirable good remaining unsold, even though they would be sold in a market with full information

describes a situation when one side of an exchange, the buyer or the seller, knows more about the product than the other

is the fixed cost per unit of output

how much output per worker is being produced at each level of employment

of production is total cost per unit of output

is the variable cost per unit of output

refers to one player’s optimal strategy choice for every possible strategy choice of the other player

is the set of all the bundles a consumer can afford given that consumer’s income

is the line on a graph that indicates all of the possible bundles the consumer can buy when spending all their income

selling more than one good together for a single price

this input category describes all of the machines that are used in production, such as conveyor belts, robots, and computers. It also describes the buildings, such as factories, stores, and offices, and other non-human elements of production, such as delivery trucks

is a market for borrowing and lending money

is a less realistic (than ordinal) theory of utility where the size of the utility difference between two bundles of goods has some sort of significance

the Latin phrase meaning all other things remain the same

is the theorem that states that if property rights are well-defined, and negotiations among the actors are costless, the result will be a socially efficient level of the economic activity in question; named after Nobel Laureate Ronald Coase

is when the players know all about the game - the players, strategies and payoffs – and know that the other players know, and that the other players know that they know, and so on ad infinitum; In simpler terms all participants know everything

a person has a comparative advantage in the production of a good if they have a lower opportunity cost of production than someone else

the analysis of how equilibrium prices and quantities change when other exogenous variables – variables that shift demand and supply curves - change

is the change in income required after a change in price(s) to attain the same level of utility as before the price change(s)

We say preferences are complete when a consumer can always say one of the following about two bundles: A is preferred to B, B is preferred to A, or A is equally as good as B

is a good that is made up of a combination of individual goods. For example, a pizza is a composite good made up of dough, sauce, cheese, and other products.

is the process by which a sum of money, the principle, placed in an account that earns interest periodically will grow based on the interest earned by the principle and by the subsequent interest payments

describes the situation where a firm’s output changes in exact proportion to changes in the inputs

industries where firms’ costs do not change as industry output changes; so, no matter how much total output there is in the industry, all the LRATC curves remain in the same place

is the general term used by economists to describe the determination of the consumer’s optimal choice among competing bundles

the difference between the willingness-to-pay price and the price paid

occurs when it is not possible to redistribute goods to make one person better off without making another person worse off

is the line on an Edgeworth box that connects all of the points of Pareto efficiency

is the portion of the contract curve on an Edgeworth box that lies within the lens

is the term used when the solution to the consumer choice problem lies on an axis, as opposed to within the graph's interior area

represents the relationship between output and the different cost measures involved in producing the output

is the percentage change in the quantity demanded of a product resulting from a 1-percent change in the price of another good

the loss of total surplus that occurs when there is an inefficient allocation of resources

describes the situation where the output increases or decreases by a smaller percentage than the increase or decrease in inputs

industries where firms’ costs decrease as industry output increases; this could be because these industries have increasing returns to scale, or because increased demand for inputs and capital leads to increased returns to scale on the part of the firms that supply these goods

a graphical representation of the demand function that tells us for every price of a good, how much of the good is demanded

are mathematical functions that describe the relationship between quantity demanded and prices, income and other things that affect purchase decisions

is the loss of value of a durable good or asset over time

selling the same good or service for different prices to different consumers

is the principal that the consumption of each additional unit provides less utility

is the method of placing a value on future consumption relative to present consumption

occur when the average cost of production rises as output increases

the amount of employment lost due to the minimum wage

is a strategy for which the payoffs are always greater than any other strategy no matter what the opponent does

an equilibrium where each player plays his or her dominant strategy

is a strategy is a strategy for which the payoffs are always lower than any other strategy no matter what the opponent does

is a good that has a long usable life

is the cost inclusive of all opportunity costs, so it includes both explicit costs and implicit costs

is another term for the slope of the budget line

occur when the average cost of production falls as output increases

exists when the average cost of one product falls as the production of another product increases

is the term for the initial allocation of goods

expresses how the optimal consumption of a good changes as a consumer's income changes

the price at which quantity demanded equals the quantity supplied

the quantity at which supply equals demand

is the change in income required to attain the utility achieved after a change in price(s) if the price(s) had never changed

occurs when, at a given price, consumers demand more of a good than firms supply

occurs when, at a given price, firms supply more of a good than consumers demand

are good for which consumption can be controlled or prevented

is a curve that shows the cost-minimizing amount of each input for every level of output

is the probability-weighted average utility a person gets from each possible outcome of an uncertain situation

the value of an uncertain outcome calculated as the sum of the value of each possible outcome multiplied by the probability it will occur

another name for sequential games that can be represented by a game tree

are the costs or benefits associated with an economic activity that affects people not directly involved in that activity

is one where the cost of the gamble is equal to the expected value

goods that are purchased by the end user

a firm is another term for a producer

a theorem that states that any competitive equilibrium is Pareto Efficient

is the competitive advantage that the first firm gains by selecting the optimal price and/or quantity before their competing firms optimize their behaviour in an oligopolistic market

of production is the cost of production that does not vary with output level; the fixed cost is the cost of the fixed inputs in production, such as the cost of a machine (capital) that costs the same to operate no matter how much production is happening

an input than cannot be adjusted by the firm in a given time period

there are no special costs, such as technical or legal barriers, to firms entering the industry

there are no special costs, such as technical or legal barriers, to firms exiting the industry

occurs when non-payers consume a good that has a positive marginal cost

refers to how often a particular outcome has occurred over a known number of events

is the value a sum of money is worth after a period of time if placed into an interest earning account and left to accrue compound interest

the study of strategic interactions among economic agents

a diagram that describes the players, their turns, their choices at every turn, and the payoffs for every possible set of strategy choices

the study of how equilibrium is obtained in multiple markets at the same time

a good for which a decrease in price leads to a decrease in consumption (or an increase in price leads to an increase in consumption)

or third-degree price discrimination, is charging different prices for the same good or service to different groups or different types of people

efforts (or lack thereof) on the part of one or both parties that are unobserved by the other

items whose value is not immediately known to a buyer or seller are said to have hidden characteristics

a non-monetary cost a consumer has to pay in order to qualify for a lower price

are goods that have at least some of both non-rivalry and non-excludability

is in change in consumption of a good resulting from a change in a consumer’s income holding prices constant

is the percentage change in the quantity demanded for a product from a 1 percent change in income

describes the situation where the output increases or decreases by a greater percentage than the percentage increase or decrease in inputs

industries where firms’ costs increase as industry output increases; this can happen because as an industry expands the demand for inputs or industry-specific capital increases, which can cause the prices to rise

a graph of all of the combinations of bundles that a consumer prefers equally

are goods for which the quantity demanded falls as income rises

is a function that describes the optimal factor input level for every possible level of output

is a percentage extra of an amount of money that must be paid to borrow that money for a fixed period of time

is the term used when the solution for the consumer choice problem exists within the graph's area, as opposed to on an axis

a good that is used as an input to produce other goods

is the the demand curve expressed with price as a function of quantity

the supply curve expressed with price as a function of quantity

is a graph of every possible combination of inputs that yields the same cost of production

a curve that shows all of the possible combinations of inputs that produce the same output

refers to a sharp bend in a line on a graph

this category of input encompasses physical labor as well as intellectual labor. It includes less-skilled or manual labor, managerial labor, skilled labor (engineers, scientists, lawyers, etc.) – all of the human element that goes into the production of a good or service

some goods, most notably agricultural goods, need land to produce. Fields that grow crops and forests that grow trees for lumber and pulp for paper are examples of the land input in production

the principal that as price decreases for normal goods, quantity demanded increases holding other factors such as income and the price of other goods constant

this ‘law’ states that if a firm increases one input while holding all others constant, the marginal product of the input will start to get smaller

is a plot on a graph where average cost is plotted as a function of either time or cumulative output; the learning curve is different from the typical average cost curve, which represents the total cost divided by current output

means that as the cumulative output--the total output ever produced--of the firm increases the average cost falls

this index is used to measure the firm’s optimal markup; this is also a measure of market power as firms with more market power are more able to change prices above marginal cost

is a period of time long enough that all inputs can be adjusted

is the cost per unit of output

is the increase in total cost from an increase in an additional unit of output

represents the cost associated with every possible level of output

is the additional cost incurred from the production of one more unit of output

is the extra cost of hiring one more unit of labour or other input unit

the extra output achieved from the addition of a single unit of labour

is the amount of one good a consumer is willing to give up to get one more unit of another good and maintain the same level of satisfaction

describes how much you must increase one input if you decrease the other input by one unit, in order to produce the same output

is the cost of production of one good in terms of the foregone production of another good; this is also the slope of the production possibility frontier

refers to the change in total revenue from a one-unit change in quantity produced

is the value of the marginal product of labour; it is the extra revenue a firm receives for an additional unit of labour

is the additional utility a consumer receives from consuming one additional unit of a good

a physical or virtual place where people go in order to buy, sell, or exchange goods and services

references the fact that the market is cleared of all unsatisfied demand and excess supply at the equilibrium price

is the condition where the quantity supplied by producers and the quantity demanded by consumers are equal

the ability to choose a price above marginal cost; monopolists face downward sloping demand curves because they are the only supplier of a particular good or service and the market demand curve is therefore the monopolist’s demand curve

the competitive environments in which firms and consumers interact

the percentage amount the price is above marginal cost

this input category describes all of the raw materials (trees, ore, wheat, oil, etc.) or intermediate products (lumber, rolled aluminum, flour, plastic, etc.) used in the production of the final good. Note that one firm’s final good like aluminum, is often another firm’s input

occurs where average cost is at its minimum; this is the point where economies of scale are used up and no longer benefit the firm

is when goods are available separately at individual prices and together at a single price that is typically lower than the sum of the two individual prices

where a player randomizes across strategies according to a set of probabilities he or she chooses

are firms that achieve some pricing power through product differentiation

is the sole supplier of a good for which there does not exist a close substitute

a single buyer for goods or services sellers

is the term used to describe a market in which there exists only one buyer for a good

where people who have entered into contract to mitigate the cost of risk engage in riskier behavior because the costs have diminished

If bundle A represents more of at least one good, and no less of any other good, then bundle A is preferred to B. This is often referred to as monotonicity of preferences.

is an outcome where, given the strategy choices of the other players, no individual player can obtain a higher payoff by altering their strategy choice; this condition is named after Nobel Laureate John Nash

when one firm can supply the market more cheaply than two or more firms

are costs imposed on individuals not directly involved in the economic activity

is the difference between the present value of the benefits of an action and the present value of the costs of the action

games where the players are not able to negotiate and make binding agreements within the game

exists when a firm charges different per unit prices based on volume; for example one pound of meat may cost $5 to purchase, whereas two pounds may cost $9

a good for which demand increases when incomes rise

games that can be represented with a payoff matrix

markets in which only a few firms compete, where firms produce homogeneous or differentiated products and where barriers to entry exist that may be natural or constructed

the opportunity cost of something is the value of the next-best alternative given up in order to do get it

means that utility functions only rank bundles – they only indicate which one is better, not how much better it is than another bundle

is a fixed value given outside the model - one that never changes (a constant)

describes an allocation of goods and services in which no redistribution can occur without making someone worse off

studying the changes in a single market in isolation

an exclusive right to an invention, which excludes others from making, using, selling or importing it into the country for a limited time

a table that lists the players of the game, their strategies and the payoffs associated with every possible strategy combination

are the outcomes associated with every possible strategic combination, for each player in a game

refers to a market with many firms, an identical product and no barriers to entry

are goods that consumers want to consume only in fixed proportions

or first-degree price discrimination, is a type of pricing strategy that charges every consumer a price equal to his or her willingness-to-pay

are goods about which consumers are indifferent as to which to consume

a market in which there are many firms so that each individual firm’s output has no impact on market equilibrium, output is identical across firms, firms have the same access to inputs and technology and consumers have perfect information about price; all firms in a perfectly competitive market are price takers

are the agents actively participating in the game and who will experience outcomes based on the play of all players

are benefits that accrue to individuals not directly involved in an economic activity

implies that indifference curves are bowed in; this is often referred to as convex preferences.

is the value of an amount of money paid at a set time in the future is worth today given some interest rate

are artificial constraints that hold prices, respectively, below their free market levels

the practice of charging different prices for the same good to different consumers

is the percentage change in the quantity demanded for a product from a 1 percent change in price

are artificial constraints that hold prices, respectively, above their free market levels

is the rate at which you can trade one good for the other in the marketplace; this is the slope of the budget line on a graph

is a firm that has no ability to influence the price the market will pay for its product; it must take the market price as determined by the laws of supply and demand in a competitive market

are situations in which one person, the principal, pays another person, the agent, to perform a task for them

are goods that are both rival and exclusive

are numbers between zero and one that indicate the likelihood that a particular outcome will occur

the difference between the price received and the willingness-to-accept price

a mathematical expression of the maximum output that results from a specific amount of each input

a line on a graph that shows all of the possible combinations of goods that can be produced in a given time frame

occurs when there is no other mix of output levels that will increase the firm’s earnings

is the difference between its total revenue and its total cost

a rule that states that a firm should set output such that marginal revenue equals marginal cost to maximize profit in a competitive market

are the rights to control the use of a good or resource

are goods that have some degree of non-rivalry and non-excludability

is when two or more goods are only sold together at a single price

are goods that are completely non-rival and non-excludable

where a player chooses a particular strategy with complete certainty

or second-degree price discrimination, is when firms charge a lower price per unit to consumers who purchase larger amounts of the good

are graphical illustrations of the best response functions

are simultaneous move games played repeatedly by the same players

the rate at which the output increases when all inputs are increased proportionally

describes any economic activity in which there are uncertain outcomes

describes someone who is willing to take an amount of money smaller than the expected value of a lottery

describes someone who would choose to gamble when the expected value of a win is worth more than a guaranteed amount of money

is someone who is indifferent between a lottery and a guaranteed payout when the expected value of the lottery is equal to the guaranteed amount of money

is the difference between the expected value of a gamble and the amount of the certain payment that yields the same utility as the gamble. Alternatively, the risk premium is the amount an agent is willing to pay to avoid the risk of a fair gamble.

are goods that are diminished with use

a theorem that states that any Pareto Efficient competitive equilibrium is achievable through the reallocation of resources

are games where players take turns and move consecutively

are games where players take turns making their strategy choices and observe their opponents choice prior to making their own strategy choices

is a period of time in which some inputs are fixed

monopolists that are limited to a single price at which all of the output they produce is sold

are games in which players take strategic actions at the same time, without knowing what move the other has chosen

are games that are played once and then the game is over

are benefits of production or consumption that accrue to everyone in society, including those who are not directly involved in the economic activity

are costs of production or consumption that accrue to everyone in society, including those who are not directly involved in the economic activity

where agents must anticipate the actions of others when making decisions, and we use game theory to model them so that we can think about the outcomes of these interactions just like we think about outcomes in markets without strategic interaction like the price and quantity outcome in a product market

are all of the possible strategic choices available to each player, they can be the same for all players or different for each player

is the solution in which every player, at every turn of the game, is playing an individually optimal strategy

is when individuals estimate probabilities based on their own experiences and whatever data are available to them

is the change in consumption of a good resulting from a change in its price holding the consumer’s utility level constant

is an expenditure that is not recoverable

the division of the burden of a tax on buyers and sellers

refers to new production technology or knowledge that changes firms’ production functions such that more output is produced by the same amount of inputs

refers to situations where the purchase of one item commits consumer to buy another product as well

is a strategy where a player simply plays the same strategy their opponent played in the previous round

of production is the sum of fixed and variable costs of production

is the sum of the income effect and the substitution effect

the relationship between the amount of labour used and the amount of output produced (given a level of the fixed input)

the sum of producer surplus and consumer surplus

the economic costs of buying and selling a good or service beyond the price itself

We say preferences are transitive if they are internally consistent: if A is preferred to B and B is preferred to C, then it must be that A is preferred to C

is a strategy where cooperative play continues until an opponent deviates and then ceases permanently or for a specified number of periods

is a pricing scheme where a consumer pays a lump-sum fee for the right to purchase unlimited number of goods at a unit price

occurs when there are people who would like to work at a given wage but are unable to find employment

the satisfaction a consumer gets from consumption

is a mathematical function that ranks bundles of consumption goods by assigning a number to each where larger numbers indicate preferred bundles

are the units of measurement for utility

is a value that can change - such as prices, income, or quantity

of production is the cost of production that varies with output level. This is the cost of the variable inputs in production, for example the cost of the workers that assemble the electronic devices along a conveyor belt

an input that can be adjusted by the firm in a given time period

the selling of a slightly different version of a product for a different price that does not reflect cost differences

refers to the economic well-being of society as a whole, including producers and consumers

a comparative static analysis to evaluate economic welfare, including the effect of government revenues

indifference curves that have the following graphical properties: (1) They are downward sloping; (2) They do not cross; (3) They are bowed in to the origin.