World Class Educationwww.kean.edu

By Paul SuozzoAssistant Professor of Bus. Studies

Ocean County College

1. Introduction2. Markets3. Consumer Theory4. Costs of Production5. Competition6. Monopoly7. Game Theory8. Inflation9. Economic Accounting10. Business Cycle & Unemployment11. Income & Expenditure12. Fiscal & Monetary Policy13. Taxation14. Trade15. The Future & Growth

Fertilizer 0 1 2 3 4

Tomatoes 20 35 44 48 40

Avg. per Bag

/ 35 22 16 10

Marg. Prod.

/ +15 +9 +4 -8

A B C D E

Shovels 80 75 65 45 0

Beach Chairs

0 10 20 30 40

Opportunity Cost: the forfeited benefit of the next best activity

Marginal Analysis: making decisions considering only what can be changed

Ceteris Paribus: “while all other factors proceed as usual” Factors of Production: Land, Labor, Capital &

Entrepreneurship Law of Increasing Opp. Costs: extra units are only available

at an increasing cost Cost/Benefit Analysis: to be worthwhile, an effort’s benefits

must outweigh its costs Command Econ.: a system where government makes most

production decisions and owns most means of production (communism, socialism)

Market Econ.: a system guided by markets where most means of production are owned privately (capitalism)

Scarcity: when wants outnumber resources (opposite of abundance)

Supply: a group of organizations providing a good or service for a fee

Quantity Supplied: a particular quantity of a good or service made available by a specific price

Supply Determinants: factors causing Supply to grow or shrink

(counterparts for above three exist for Demand) Shortage: when a lower than equilibrium price causes Quantity

demanded to surpass Quantity supplied (caused by P ceiling) Surplus: when a higher than equilibrium price causes Quantity

supplied to surpass Quantity demanded (caused by P floor) Equilibrium: when there is no pressure for change, the P/Q

combination that equate Qs to Qd Consumer Surplus: extra money consumers are willing to pay

for a good Producer Surplus: extra discounts suppliers are willing to

concede to sell a good Deadweight Loss: loss of surplus caused by market

interference

Coefficient of Elasticity: change in Qd relative to a corresponding P change

Normal Good: a good whose demand increases with income

Inferior Good: a good whose demand decreases with income

Item Price 1 2 3 4 5 6

Hot dog

$2 20 12 6 2 0 -4

soda 1 9 7 4 3 1 1

Welfare: a person’s level of physical comfort Utils: unit in which personal satisfaction is measured Indifferent: when a consumer has no preference

between two options totals represent one’s preferences while trade-off’s

must always reflect prices Utility Maximization Rule: the last unit from each

category brings the same utils per dollar or else a more satisfying combination exists

FC=240 TC MC VC ATC AVC AFC

1 307 67 67 307 67 240

2 360 53 120 180 60 120

3 414 54 174 138 58 80

4 500 86 260 125 65 60

5 600 100 360 120 72 48

6 726 126 486 121 81 40

Stage

1 2 3 4 5 6 7 8

Output

100 225 400 600 800 1200 1550 1800

Input 50 75 100 150 200 300 400 500

Prdtvty

2 3 4 4 4 4 3.875 3.6

Profit: proceeds remaining once all costs (both direct & indirect) are deducted

Fixed Costs: costs that remain constant despite level of production

Variable Costs: costs varying directly with production Efficiency:being able to complete the same task with less

resources Marginal Cost: cost brought about by another unit of

production Long Run: frame of time in which all resources can be

modified Scale Economies: change in efficiency brought about by

changing scale of production Productivity: output/input

Short-run: frame of time where at least one factor of production cannot be varied

Shut-down: when a firm opts to make no output and incur a loss equal to fixed costs

Q*: output quantity that maximizes profit or minimizes loss

Price taker: when a firm has no influence over price Pure Competition: a market where many firms produce

a standard product at the same price Invisible Hand: Adam Smith’s metaphor for market

allocation

Market Power: ability to influence price Monopoly: when a market is supplied by a single firm Allocative Efficiency: pursuing a goal until marginal

benefit (P) falls to equal marginal cost Productive Efficiency: minimizing per unit cost via mass

production Fair Return: producing until costs = revenues P Discrimination: offering customers same or similar

product for different prices based on willingness to pay Natural Monopoly: where cost per unit can only be

minimized if all production is handled by a single firm (usually utility co’s)

Symmetrical: when two parties pose one another with the same circumstances

Dominant Strategy: when a best course of action offers better outcomes

Probable Outcome: outcome resulting from all parties pursuing their best course of action

Nash Outcome: when no party would opt to deviate from the probable outcome

Collusion Opportunity: when an alternative to the probable outcome exists to the benefit both parties

Year Quant.

Q ch. Price Rev. Rev. ch.

P. Index

Real Real ch

1 10 / 1 10 / 67 15 /

2 12 +.20 1.5 18 +.80 100 18 +.20

3 15 +.25 1.33 20 +.11 89 22.50 +.25

4 10 -.33 2.25 22.50 +.125 150 15 -.33

• Inflation: sustained increase in prices• Real Growth: increase in units of goods & services• Price Index: composite number representing the state of

prices

Gross Domestic Product: Market value of all new final goods and services produced within a country during a year

Consumption: spending by households Durable Consumption: “household investments”,

household spending on items not quickly exhausted (cars, appliances)

Non-Durable Consumption: household spending on quickly expendable items (food, fuel, clothing)

Investment: purchases by business not intended for resale

Government Purchases: items purchased by government- not transfers

Net Exports = Export – Imports

Long-run GDP: level of GDP needed to fully employ all resources Current GDP: current level of output regardless of sustainability Recession: 2 or more successive quarters without growth GDP Gap: current – long-run GDP Unemployment Rate: unemployed/(unemployed + employed) Labor Force: unemployed + employed Discouraged: jobless persons wanting but not looking for work Frictional: unemployed persons between employers Structural: the unemployed between occupations and/or locales Cyclical: employment caused by dips in industries Natural Unemployment: all unemployment excluding cyclical

Autonomous Consumption: basic consumption regardless of income

MPC = new consumption / new income MPS = new savings / new income APC = consumption / income APS = savings / income Injection: new expenditures introduced in an economy Leakage: lost expenditures and new taxes and savings Expenditure Multiplier = 1/MPS

Tax Multiplier = MPC/MPS Federal Reserve System: US central bank system that

divorces gov. from money supply control Discount Rate: rate of interest banks borrow from Fed Reserve Ratio: portion of deposits kept as vault cash

(reserves) Federal Funds Rate: interest rate banks borrow from

each other Term Auction Facility: Fed’s policy of making

anonymous loans to banks at a rate based on demand Easy Money Policy: lower Disc. Rate and Reserve Ratio,

selling of Treasuries and more lending via the Term Auction Facility

Flat Tax: rate of tax that remains constant despite taxable amount

Progressive Tax: tax rate that intensifies as taxed amount increases

Effective Tax Rate: tax/taxable amount Lump Sum Tax: tax that remains the same regardless of

income Subsidy: when gov. helps pay for certain activity

(negative tax)

C A L I

F O R I

N I A ID A H

O

Computer

50 25 0 10 5 0

Potato 0 50 100 0 62 125

Comparative Advantage: when a country can make a product with a lesser opportunity cost

Tariff: port toll charged on imports Reciprocal Trade Agreement Act: a simplified and

more favorable set of trade rules, most favored nation status, the US extends to nations who engage in bi-lateral trade talks with US

Gen. Agree. On Tariffs & Trade: international convention to simplify trade and reduce barriers

World Trade Organization: international organization to remedy trade disputes and foster world trade

Growth Compounding: when growth portions are added to the initial principal to further perpetuate future growth

Rule of 70: number of periods to double = 70/growth rate –or- growth rate = 70/number of periods to double