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World Class Education
www.kean.edu
By Paul Suozzo
Assistant Professor of Bus. Studies
Ocean County College
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Introduction
Markets
Consumer Theory
Costs of Production
Competition
Monopoly
Game Theory
Inflation
Economic Accounting
Business Cycle & Unemployment
Income & Expenditure
Fiscal & Monetary Policy
Taxation
Trade
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
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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)
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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
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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
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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
3
4
4
4
4
3.875
3.6
Prdtvty 2
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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
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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
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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)
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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
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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
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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
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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
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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
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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
Compute
r
50
25
0
10
5
0
Potato
0
50
100
0
62
125
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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
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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 –orgrowth rate = 70/number of periods to double