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Microeconomics
Branch of economics that deals with the behavior of individual economic units-consumers, firm, workers, and investors- as well as the markets that these units comprise
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Macroeconomics
Branch of economics that deals with aggregate economic variable, such as the level and growth rate of national output, intreset rates, unemployment, and inflation
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Positive analysis
analysis describing relationships of cause and effect
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Normative Analysis
Analysis examining questions of what ought to be
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Market
Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products
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Market definition
Determination of the buyers, sellers, and range of products that should be included in a particular market
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Arbitrage
Practice of buying at a low price at one location and selling at a higher price in another
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Perfectly Competitive market
Market with many buyers and sellers, so that no single buyer and sellers has a significant impact on price
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Market price
price prevailing in a competitive market
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extent of a market
Boundaries of a market, both geographical and in terms of range of products produced and sold within it.
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Nominal price
Absolute price of a good, unadjusted for inflation.
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Real price
Price of a good relative to an aggregate measure of prices; price adjusted for inflation.
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Consumer price index
Measure of the aggregate price level.
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Producer Price index
Measure of the aggregate price level for intermediate products and wholesale goods.
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Supply Curve
Relationship between the quantity of a good that producers are willing to sell and the price of the good.
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Demand Curve
Relationship between the quantity of a good that consumers are willing to buy and the price of the good.
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Substitutes
Two goods for which an increase in price of one leads to an increase in the quantity demanded of the other.
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Complements
Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
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equilibrium(or market clearing) price
Price that equates the quantity supplied to the quantity demanded.
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Market mechanism
Tendency in a free market for price to change until the market clears.
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Surplus
Situation in which the quantity supplied exceeds the quantity demanded
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Shortage
Situation in which the quantity demanded exceeds the quantity supplied
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Elasticity
Percentage change in one variable resulting from a 1-percent increase in another.
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Price elasticity of demand
Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price
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Infinitely elastic demand
Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.
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Completely inelastic demand
Principle that consumers will buy a fixed quantity of a good regardless of its price
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income elasticity of demand
Percentage change in the quantity of demanded resulting from a 1-percent increase in income.
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Cross-price elasticity of demand
Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.
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Price elasticity of supply
Percentage change in quantity supplied resulting from 1-percent increase in price
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Point elasticity of demand
Price elasticity at a particular point on the demand curve.
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arc elasticity of demand
Price elasticity calculated over a range of prices.
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Cyclical industries
Industries in which sales tend o magnify cyclical changes in the gross domestic product and national income
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Theory of consumer behavior
Description of how consumers allocate incomes among different goods and services to maximize their well-being.
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Market Basket (or Bundle)
List with specific quantities of one or more goods.
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indfference curve
Curve representing all combinations of market baskets that provide a consumer with same level of sanctification.
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Indifference map
Graph containing a set of indifference curves showing the market baskets among which consumer is indifferent
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marginal rate of subsitution (MRS)
Maximum amount of a good that consumer is willing to give up in order to obtain one additional unit of another good.
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perfect subsitutes
Two goods for which the marginal rate of substitution of one for the other is constant
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perfect completments
Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.
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bad
good for which less is preferred rather than more
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Utility
Numerical score representing the satisfaction that a consumer gets from a given market basket.
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Utility function
Formula that assigns a level of utility to individual market baskets.
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Ordinal utility function
Utility function that generates a ranking of market baskets in order of most to lease preferred
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Cardinal utility function
Utility function describing by how much one market basket is preferred to another
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Budget constraints
Constraints that consumers face as a result of limited incomes.
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Budget line
All combinations of goods for which the total amount of money spent is equal to income.
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Marginal benefit
Benefit from the consumption of one additional unit of a good
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Marginal cost
Cost of one additional unit of a good
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Corner Solution
Situation in which the marginal rate of substitution of one good for another in a chose market basket is not equal to the slope of the budget line.
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Marginal Utility (MU)
Additional satisfaction obtained from consuming one additional unit of a good.
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Diminishing marginal utility
Principle that as more of a good is consumed the consumption of additional amounts will yield smaller additions to utility.
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Cost-of-living index
Ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period.
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Ideal cost-of-living index
Cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base-year prices.
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Laspeyres price index
Amount of money at current year prices that an individual requires to purchase a bundle of goods and services chosen in a base year divided by the cost of purchasing the same bundle at base-year prices
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Paache index
Amount of money at current-year prices that an individual requires to purchase a current bundle of goods and services divided by the cost of purchasing the same bundle in a base year.
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fixed-weight index
Cost-of-living index in which the quantities of goods and services remain unchanged.
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Chain-weighted price index
Cost-of-living index that accounts for changes in quantities of goods and services
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