Managerial Economics – Basic Concepts

BASIC CONCEPTS IN MANAGERIAL ECONOMICS

List of concepts
1. Budget constraint: shows the various combinations of goods the consumer can afford given
his or her income and the prices of the goods.
2. Ceteris paribus: a Latin phrase, translated as “other things being equal,” used as a reminder
that all variables other than the ones being studied are assumed to be constant.
3. Competitive market: a market in which there are may buyers and many sellers so that each
has a negligible impact on the market price.
4. Complements: two goods for which an increase in the price of one good leads to a decrease
in the demand for the other.
5. Constant returns to scale: the property whereby long-run average total cost stays the
same as the quantity of output increases.
6. Consumer surplus: the amount that buyers are willing to pay for a good minus the amount
they actually pay for it, measures the benefit that buyers receive from a good as the buyers
themselves perceive it.
7. Consumer’s optimal choice: allocation at which the consumer maximizes his utility given
his income and the prices of the goods. At this point, the marginal rate of substitution equals
relative prices.
8. Cross-price elasticity of demand: a measure of how much the quantity demanded of one
good responds to a change in the price of another good, computed as the percentage change
in quantity demanded of the first good divided by the percentage change in the price of the
second good.
9. Deadweight loss: the fall in total surplus that results from a market distortion, such as a
tax.
10. Demand curve: a graph of the relationship between the price of a good and the quantity
demanded.
11. Demand schedule: a table that shows the relationship between the price of a good and the
quantity demanded.
12. Diminishing marginal product: the property whereby the marginal product of an input
declines as the quantity of the input increases. Measured by the slope of the production
function.
13. Diseconomies of scale: the property whereby long-run average total cost rises as the
quantity of output increases.
14. Economic model: simplified representation of reality that is used to address relevant issues
about that reality.
15. Economics: study of how society manages its scarce resources.
16. Economies of scale: the property whereby long-run average total cost falls as the quantity
of output increases.
17. Efficiency: society gets the most that it can from its scarce resources.
18. Efficient scale: the quantity of output that minimizes average total cost.
19. Elastic demand: when the elasticity is greater than 1, so that quantity moves
proportionately more than the price.
20. Elastic supply: if the price elasticity of supply is larger than 1.
21. Elasticity: A measure of the responsiveness of quantity demanded or quantity supplied to
one of its determinants.

David - SVPITM
Managerial Economics – Basic Concepts

22. Equilibrium price: the price that balances supply and demand
23. Equilibrium quantity: the quantity supplied and the quantity demanded when the price has
adjusted to balance supply and demand.
24. Equilibrium: situation in which supply and demand have been brought into balance.
25. Equity: the benefits of those resources are distributed fairly among the members of society.
26. Excess demand (or Shortage): situation in which quantity demanded is greater than
quantity supplied
27. Excess supply (or Surplus): situation in which quantity supplied is greater than quantity
demanded
28. Explicit costs: input costs that require a direct outlay of money by the firm.
29. Externalities: impact of one person’s actions on the well-being of a bystander;
30. Fixed costs: those costs that do not vary with the quantity of output produced.
31. Giffen good: a good for which an increase in the price raises the quantity demanded.
32. Implicit costs: input costs that do not require an outlay of money by the firm.
33. Income effect: the change in consumption that results when a price change moves the
consumer to a higher or lower indifference curve.
34. Income elasticity of demand: a measure of how much the quantity of a good responds to a
change in consumers’ income, computed as the percentage change in quantity demanded
divided by the percentage change in income.
35. Indifference curve: curve that shows consumption bundles that give the consumer the
same level of satisfaction.
36. Inelastic demand: when the elasticity is less than 1, so that quantity moves proportionately
less than the price.
37. Inelastic supply: if the price elasticity of supply is less than 1.
38. Inferior good: a good for which, other things equal, an increase in income leads to a
decrease in demand.
39. Law of demand: the claim that, other things equal, the quantity demanded of a good falls
when the price of the good rises.
40. Law of supply and demand: the price of any good adjusts to bring the supply and demand
for that good into balance.
41. Law of supply: the claim that, other things equal, the quantity supplied of a good rises when
the price of a good rises.
42. Leisure: time that could be devoted to paid work, but instead is devoted to other activities.
43. Luxuries: those goods with a very high income and price elasticity of demand.
44. Macroeconomics: studies economy-wide phenomena, including inflation, unemployment,
and economic growth.
45. Marginal consumer (or buyer): the buyer who would leave the market first if the price
were any higher.
46. Marginal cost: measures the increase in total cost that arises from an extra unit of
production. The marginal cost rises with the amount of output produced (diminishing marginal
product).
47. Marginal producer (or seller): the seller who would leave the market first if the price were
any lower.

David - SVPITM
Managerial Economics – Basic Concepts

48. Marginal product: of any input in the production process is the increase in output that arises
from an additional unit of that input.
49. Marginal rate of substitution: the rate at which a consumer is willing to trade one good for
another.
50. Marginal utility: change in consumer’s utility when one more unit of a good is consumed.
51. Market demand: sum of all the individual demands for a particular good or service.
52. Market economy: economy that allocates resources through the decentralized decisions of
many firms and households as they interact in markets for goods and services.
53. Market efficiency: a market allocation is said to be efficient if it maximizes the total surplus
received by all members of society.
54. Market failure: a situation in which a market left on its own fails to allocate resources
efficiently.
55. Market power: the ability of a single economic actor (or small group of actors) to have a
substantial influence on market prices.
56. Market supply: sum of the supplies of all sellers of a particular good or service.
57. Market: a group of buyers and sellers of a particular good or service.
58. Microeconomics: studies how households and firms make decisions and how they interact in
specific markets.
59. Monopolistic competition: a type of market that contains many sellers but each offers a
slightly different product.
60. Monopoly: a market with only one seller of a product without close substitutes. This seller
sets the price.
61. Monopsony: a market with only one buyer.
62. Necessities: those goods with a very low income and price elasticity of demand.
63. Neutral good: a good which has no effect on the consumer’s utility.
64. Normal good: a good for which, other things equal, an increases in income leads to an
increase in demand.
65. Normative statements: about how the world should be (prescriptive analysis).
66. Oligopoly: a market with few sellers that do not always compete aggressively.
67. Opportunity cost: of an item is what you give up to obtain that item. The cost of using an
item is the value of the best alternative use.
68. Perfect competitive markets: markets that are defined by two primary characteristics: (1)
the goods being offered for sale are all the same, and (2) the buyers and sellers are so
numerous that no single buyer or seller can influence the market price.
69. Perfectly elastic demand: quantity demanded changes infinitely with any change in price.
70. Perfectly elastic supply: close to infinity price elasticity of supply.
71. Perfectly inelastic demand: quantity demanded does not respond to price changes.
Elasticity equals 0.
72. Perfectly inelastic supply: zero price elasticity of supply.
73. Positive statements: attempt to describe the world as it is (descriptive analysis).
74. Price ceiling: a legal maximum on the price at which a good can be sold.
75. Price elasticity of demand: A measure of how much the quantity demanded of a good
responds to a change in price of that good, computed as the percentage change in quantity
divided by the percentage change in price.

David - SVPITM
Managerial Economics – Basic Concepts

76. Price elasticity of supply: a measure of how much the quantity supplied of a good responds
to a change in price of that good, computed as the percentage change in quantity supplied
divided by the percentage change.
77. Price Floor: a legal minimum on the price at which a good can be sold.
78. Producer surplus: the amount a seller is paid for a good minus the seller’s cost, it measures
the benefit to sellers participating in a market.
79. Production function: shows the relationship between quantity of inputs used to make a
good and the quantity of output of that good.
80. Saving: the income that households have left after paying for taxes and consumption.
81. Scarcity: the limited nature of society's resources.
82. Substitutes: two goods for which an increase in the price of one leads to an increase in the
demand for the other.
83. Substitution effect: the change in consumption that results when a price change moves the
consumer along a given indifference curve to a point with a new marginal rate of substitution.
84. Supply curve: graph of the relationship between the price of a good and the quantity
supplied.
85. Supply schedule: table that shows the relationship between the price of a good and the
quantity supplied.
86. Tax incidence: is the manner in which the burden of a tax is shared among participants in a
market. Tax incidence is the study of who bears the burden of a tax.
87. Total cost: the market value of the inputs a firm uses in production.
88. Total revenue (PxQ): the amount paid by buyers and received by sellers of a good,
computed as the price of the good times the quantity sold.
89. Total revenue: the amount a firm receives for the sale of its output.
90. Total surplus: the sum of consumer surplus plus producer surplus. In the absence of market
imperfections, it can also be computed as the difference between the value to buyers minus
the cost to sellers.
91. Total-cost curve: shows the relationship between the quantity a firm can produce and its
costs. It determines pricing decisions.
92. Unit-elastic demand: when the elasticity is exactly 1, so that quantity moves the same
amount proportionately as price.
93. Unit-elastic supply: if the price elasticity of supply is exactly one.
94. Variable costs: those costs that do vary with the quantity of output produced
95. Welfare economics: the study of how the allocation of resources affects economic well-
being.
96. Willingness to pay: the maximum amount that a buyer will pay for a good.
97. Willingness to pay: the maximum amount that a buyer will pay for a good.
98. Willingness to sell (cost): the value of everything a seller must give up to produce a good.

David - SVPITM