Micro Econ Chs 1-5

microeconomics

branch of economics that deals with behavior of indivudal economic units, consumers, firms, workers and investors.

market

collection of buyers and sellers that through their actual or potential interactions determine the price of a product or set of products.

arbitrage

practice of buying at a low price at one location and selling at a higher price at another

extent of market

boundaries of a market, both geographical and in terms of products produced and sold within it.

market definition

Determination of the buyers, sellers, and range of products that should be included in a particular market..

Its important because a company must understand who its acutal and potential competitors are for various products that it sells or might sell in the future. Its also important for public policy decisions.

nominal price

absolute price of a good, unadjusted for inflation.

real price

Price of a good relative to an aggregate mesaure of prices, price adjusted for inflation

CPI

measures of the aggregate price level. Measures the rate of inflation in an economy.

Producer Price Index

Measure of the aggregate price level for intermediate products and wholesale goods. Shows prices changing at the wholesale level over time.

supply curve

Relationship between the qty of a good that producers are willing to sell and the price of the good.

demand curve

relationship between the qty of a good that consumers are willing to buy and the price of the good.

substitutes

two goods for which an increase in the price of one leads to an increase in the qty demanded of the other

complements

two goods for which an increase in the price of one leads to a decrease in the qty demanded for the other

equilibrium

price that equates the qty supplies to the qty demanded.
Market Mechanism is the tendency in a free market for price to change until the market clears.

elasticity

percentage change in one variable resulting from a 1 percent increase in another

price elasticity of demand

percentage change in qty demanded of a good resulting from a 1 percent increase in its price.

Cross Price Elasticity of Demand

Percentage change in the qty demanded of one good resulting from a 1-percent increase in the price of another.

If the result is positive the two goods are substitutes and if its negative they are complements.

price elasticity of supply

Percentage change in qty supplied resulting from a 1-percent increase in price

point elasticity of demand

Price elasticity at a PARTICULAR point on the demand curve

cyclical industries

Indutries in which sales tend to magnify cyclical changes in the gross domestic product and national income.

theory of consumer behavior

description of how consumers allocate incomes among different goods and services to maximize their well-bring

indifference curve

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Indifference map

Graph containing a set of indifference curves showing that market baskets among which a consumer is indifferent.

Marginal Rate of Substitution

maximum amount of a good that a consumer is willing to give up in order to obtain one additional unite of another good.

utility function

formula that assigns a level of utility to indivudal market baskets

ordinal utility function

utility function that generates a ranking of market baskets in order of most to least preferred

budget constraints

constraings that consumers face as a result of limited incomes.

corner solution

situation in which the marginal rate of substituion of one good for another in a chosen market baseket is not equal to the slope of the budget line.

equal marginal principle

principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

Price consumption curve

Curve tracing the utility maximizing comboinations of two goods as the price of one changes.

indiviudal demand curve

Curve relating the qty of a good that a single consumer will buy to its price.

income consumption curve

curve tracing the utility maximizing combinations of two goods as a consumers income changes.

substitution effect

Change in consumption of a good associated with a change in its price, with the level of utility held constant.

income effect

Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

Giffen Good

Good whose demand curve slopes upward because the income effect is larger than the substitution effect.

market demand curve

curve relating the qty of a good that all consumers in a market will buy to its price

expected value

probablity weighted average of the payoffs associated with all possible outcomes

reference point

The point from which an indivudal makes a consumption decision

endowment effect

Tendency of individuals to value an item more when they own it than when they do not. (arizona cup example)

anchoring

Tendency to rely heavily on one prior piece of information when marking a decision

loss aversion

people to prefer avoiding losses over acquiring gains. People afraid to sell stocks at a loss.

Small # Bias

People over estimate their chances of winning lotter. People scared of flying and drive all the time even though its safer to fly than to drive, but plane crashes are reported more widely on the news.