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
Branch of economics that deals with aggregate economic variable, such as the level and growth rate of national output, intreset rates, unemployment, and inflation
analysis describing relationships of cause and effect
Analysis examining questions of what ought to be
Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products
Determination of the buyers, sellers, and range of products that should be included in a particular market
Practice of buying at a low price at one location and selling at a higher price in another
Perfectly Competitive market
Market with many buyers and sellers, so that no single buyer and sellers has a significant impact on price
price prevailing in a competitive market
extent of a market
Boundaries of a market, both geographical and in terms of range of products produced and sold within it.
Absolute price of a good, unadjusted for inflation.
Price of a good relative to an aggregate measure of prices; price adjusted for inflation.
Consumer price index
Measure of the aggregate price level.
Producer Price index
Measure of the aggregate price level for intermediate products and wholesale goods.
Relationship between the quantity of a good that producers are willing to sell and the price of the good.
Relationship between the quantity of a good that consumers are willing to buy and the price of the good.
Two goods for which an increase in price of one leads to an increase in the quantity demanded of the other.
Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
equilibrium(or market clearing) price
Price that equates the quantity supplied to the quantity demanded.
Tendency in a free market for price to change until the market clears.
Situation in which the quantity supplied exceeds the quantity demanded
Situation in which the quantity demanded exceeds the quantity supplied
Percentage change in one variable resulting from a 1-percent increase in another.
Price elasticity of demand
Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price
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.
Completely inelastic demand
Principle that consumers will buy a fixed quantity of a good regardless of its price
income elasticity of demand
Percentage change in the quantity of demanded resulting from a 1-percent increase in income.
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.
Price elasticity of supply
Percentage change in quantity supplied resulting from 1-percent increase in price
Point elasticity of demand
Price elasticity at a particular point on the demand curve.
arc elasticity of demand
Price elasticity calculated over a range of prices.
Industries in which sales tend o 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-being.
Market Basket (or Bundle)
List with specific quantities of one or more goods.
Curve representing all combinations of market baskets that provide a consumer with same level of sanctification.
Graph containing a set of indifference curves showing the market baskets among which consumer is indifferent
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.
Two goods for which the marginal rate of substitution of one for the other is constant
Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.
good for which less is preferred rather than more
Numerical score representing the satisfaction that a consumer gets from a given market basket.
Formula that assigns a level of utility to individual market baskets.
Ordinal utility function
Utility function that generates a ranking of market baskets in order of most to lease preferred
Cardinal utility function
Utility function describing by how much one market basket is preferred to another
Constraints that consumers face as a result of limited incomes.
All combinations of goods for which the total amount of money spent is equal to income.
Benefit from the consumption of one additional unit of a good
Cost of one additional unit of a good
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.
Marginal Utility (MU)
Additional satisfaction obtained from consuming one additional unit of a good.
Diminishing marginal utility
Principle that as more of a good is consumed the consumption of additional amounts will yield smaller additions to utility.
Ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period.
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.
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
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.
Cost-of-living index in which the quantities of goods and services remain unchanged.
Chain-weighted price index
Cost-of-living index that accounts for changes in quantities of goods and services