Vocabulary
PUPA 71

1. Utility:  A term used by economists to indicate the satisfaction that consumers obtain from consuming goods and services or engaging in an activity.

2. Indifference Curve:  A curve showing the sets of market baskets of goods that make an individual equally happy.  Along an indifference curve, the consumer’s utility is constant.  They are indifferent between one combination of goods and another.

3. Isoquant:  A curve showing all combinations of variable inputs (i.e. labor and capital goods) that can be used to produce a given quantity of output.  An isoquant is similar to an indifference curve but is used to represent trade-offs in the production side of the economy.

4. Social Welfare Function:  A mathematical function used to represent the total utility of a society as the sum of individual utilities for each person in the society and the importance (i.e. theoretical weight) of that person in the society.

5. Marginal analysis:  The technique of analyzing the way persons who seek to maximize net gains make decisions.  Marginal changes are very small changes.  When these changes are infinitely small, evaluating the marginal change is equivalent to evaluating the derivate of an equation.  In the field of mathematics, differential calculus teaches how to find maximums, minimums, and points of tangency.  In economics and policy analysis, we develop an equation that represents the behaviors of consumers and firms.  Through the application of differential calculus, we can then calculate the economic costs and benefits of different public policies.

6. Marginal Benefit:  The added benefit of ONE additional unit of a good.  If the good is a consumption good (e.g. an apple), the added benefit can be measured by the willingness to sacrifice the opportunity to spend income on other goods (i.e. willingness to pay) for one more unit of the consumption good (e.g. apple).

7. Marginal Cost:  The extra cost associated with one more unit of an activity or transaction.  The change in total cost associated with a one-unit change in the output produced by a firm.

8. Marginal Utility:  The gain in utility from consuming an additional unit of a good or service.

9. Marginal Product:  The gain in production or output generated by a one-unit increase in an input used in production of the good.

10. Marginal Revenue:  The change in revenue resulting from the sale of an additional unit of a good.

11. Marginal Rate of Substitution (MRS):  The amount of one good (Y) that a consumer would give up to obtain one more unit of another good (X) without any change in their total utility (i.e. well-being, happiness, satisfaction).

12. Marginal Rate of Technical Substitution:  A measure of the amount of capital each unit of labor can replace without increasing or decreasing production (i.e. without changing output or the quantity produced).  This is the same concept as MRS but from the production-side of the economy.

13. Marginal Social Cost:  The extra costs incurred by business (MC) AND by third parties (i.e. marginal external cost) when one more unit of a good is produced.

14. Marginal Social Benefit:  The extra benefit obtained by purchasers (MB) AND by third parties (i.e. marginal external benefit) when one more unit of a good is produced.

15. Pareto-optimality OR Allocative efficiency:  It is achieved with a given quantity of products produced over a period and allocated among consumers in a way that makes it impossible to make anyone better off without harming another.  Perfect competition is necessary and sufficient to achieve Pareto-optimality.

16. Pareto-superiority:  An allocation of goods and services which reflects a movement towards Pareto-optimality such that everyone can be made better off with the new distribution without making anyone worse off.

17. Economies of Scale: Increases in input productivities that result from division of labor and savings in materials when a firm increases the scale of its operations

18. Economies of Scope: Economies of producing multiple goods or services.  Thus economies of scope exist if it is cheaper to produce both good X and Y together rather than separately.

19. Endowments:  Ones original allocation of goods and resources including genetic or physical resources.

20. Market Equilibrium: Exists when there is no tendency for the market price or the quantity sold to change.

21. Edgeworth Box: Tool for analyzing production and the allocation of resources in an economy with fixed supplies of labor and capital; an Edgeworth box is a rectangle whose sides represent the available amount of input services to produce two goods.

22. Market Failure: Exists when exchange between buyers and sellers in an unregulated market does not result in an efficient outcome.

23. Monopoly: Single seller of a product that has few if any close substitutes.

24. Monopsony: The mirror image of monopoly: a market in which there is a single buyer; a “buyer’s monopoly.”

25. Externality: A cost or benefit of market transactions not reflected in prices.

26. Non-Rival: Property of a good which implies that it cannot be withheld from consumers who do not pay.

27. Non-Excludable:  Property of a good which implies that it cannot be withheld from consumers who do not pay.

28. Pure Public Good: A public good whose units of production are consumed collectively by all persons whether or not they pay.  It is both non-rival and non-excludable in consumption.

29. Congestible Public Good:  Goods that are non-rival in consumption only up to a certain level of usage.  These goods are subject to crowding.

30. Excludable Public Good: Goods for which the transaction costs of excluding additional consumers are quite low.

31. Utilitarian Philosophy:  A notion of justice that implies that social welfare is the sum of the welfare of each individual in society.

32. Rawlsian Philosophy:  A notion of justice that implies that social welfare can be maximized by designing institutions that provide the greatest benefit to the least well off.

33. Horizontal Equity:  The notion of justice that requires likes be treated alike.

34. Vertical Equity: The notion of justice that suggests that different groups should be treated differently.