Key definitions Flashcards
Equilibrium
A model outcome that is self-perpertuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation.
Subsistence level
The level of living standards measured by consumption or income such that the population will not grow or decline.
Ceteris paribus
Ceteris paribus is what economics do to simply analysis by setting aside things that are thought to be of less importance to the question of interest. It means to hold other things equal, thus in economic models it holds other things constant.
Incentive
Economic reward or punishment, which influences the benefits and costs of alternative courses of action.
Relative price
The price of one good or service compared to another usually expressed as a ratio.
Economic rent
A payment or other benefit recieved above and beyond what the individual would have recieved in his or her reservation option (next best alternative)
Reservation price
A person’s next best alternative among all options in a particular transaction.
Dominated
We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative.
isocost lines
A line that represents all combinations that cost a given total amount.
Entrepreneur
A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities.
Creative destruction
Joseph Schumpeter’s name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations.
Factors of production
The labour, capital, land and other inputs to a production process.
Average product
Total output divided by a particular input, for example per worker or per worker per hour.
Diminishing average product of labour
A situation in which, as more labour is used in a given production process, the average product of labour typically falls.
Innovation rents
Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organization form or marketing stratergy.
Production function
A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing.
Marginal product
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.
Diminishing returns
A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase.
Tangent
When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it.
Preferences
A description of the benefit or cost we associate with each possible outcome.
Utility
A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible.
Indifference curve
A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual.