Week 2 key definitions

Question 1

Equilibrium

Answer 1

A model outcome that is self-perpetuating. 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.

Question 2

Ceteris paribus

Answer 2

Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model it means an analysis ‘holds other things constant’.

Question 3

Relative prices

Answer 3

The price of one good or service compared to another (usually expressed as a ratio).

Question 4

Incentives

Answer 4

Economic reward or punishment, which influences the benefits and costs of alternative courses of action.

Question 5

Diminishing average product of labour

Answer 5

A situation in which, as more labour is used in a given production process, the average product of labour typically falls.

Question 6

Reservation option

Answer 6

A person’s next best alternative among all options in a particular transaction

Question 7

Economoic rent

Answer 7

A payment or other benefit received above and beyond what the individual would have received in his or her next best alternativ

Question 8

Isocost line

Answer 8

A line that represents all combinations that cost a given total amount.

Question 9

Innovation Rent

Answer 9

Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy.