Economics 1370

Vocabulary List: Definitions, Part 1

01. SCARCITY: Occurs when relatively unlimited human wants exceed the ability of limited resources to satisfy those wants.

02. VOLUNTARY EXCHANGE: When two parties to a potential exchange can bargain over the exchange price and (a) exchange the good if both parties benefit from the exchange or, (b) refrain from exchange if one party does not benefit.

03. COERCION: When a legislative body imposes limitations on some party’s property rights at the request of a potential exchange party or some outside group which has no direct economic stake in the potential exchange. The parties who are limited by such laws typically suffer an economic loss from this limitation and so would not have consented to it if given the freedom to do so.

04. AN EFFICIENT STRUCTURE OF PROPERTY RIGHTS: This structure has three characteristics: (a) Exclusivity (all benefits and costs accrued as a result of owning and using the resource should accrue to the owner, and only the owner, either directly or indirectly by sale to others); (b) Transferability (all property rights should be transferable from one owner to another in a voluntary exchange); (c) Enforceability (property rights should be secure from involuntary seizure or encroachment by others).

05. RES NULLIUS REGIMES: A regime in which no one owns or exercises control over the resources. Resources are exploited on a FCFS basis. (NOTE: These regimes are also known as OPEN-ACCESS REGIMES)

06. STATE PROPERTY REGIMES: A regime where the government owns and controls the property.

07. RENT-SEEKING: Occurs when special interest groups use resources in lobbying and other activities directed at securing protective legislation. Successful rent-seeking activity will increase the net benefits going to the group but will frequently lower the net benefits to society as a whole.

08. COMMON PROPERTY REGIMES: A regime where the property is jointly owned and managed by a specified group of co-owners.

09. LAW OF DEMAND: The quantity demanded of a good varies inversely with its price, all other things held constant. All other things held constant refers to those factors which shift the position of the demand curve and must be held constant in order to observe the influence of changes in the price of a good on the quantity demanded of that good:

(a) Consumers' incomes,

(b) Prices of related goods in consumption (substitutes and complements)

NOTE THE FOLLOWING:

(1) Varies inversely means that changes in the price of a good induce changes in the quantity demanded of a good in the opposite direction.

(2) The direction of causation is from changes in price to changes in quantity demanded.

10. DEMAND PRICE: The maximum price a consumer is willing and able to pay for any particular unit of a good.

11. THE LAW OF SUPPLY: The quantity supplied of a good varies directly with its price, all other things held constant. All other things held constant refers to those factors which shift the position of the supply curve and must be held constant in order to observe the influence of changes in the price of a good on the quantity supplied of that good:

(a) Input prices,

(b) Technology,

(d) The number of producers of this good

NOTE THE FOLLOWING:

(1) Varies directly means that changes in the price of a good induce changes in the quantity supplied in the same direction

(2) The direction of causation is from changes in price to changes in quantity supplied.

12. SUPPLY PRICE: The minimum price at which a producer is willing and able to sell any particular unit of a good. This minimum price is dictated by the opportunity costs of the resources used to produce any particular unit of a good.

13. EQUILIBRIUM: Where the quantity supplied equals the quantity demanded at a given price.

14. EXCESS SUPPLY (ES): Where the quantity supplied is greater than the quantity demanded at a given price (aka a surplus). NOTE: Excess supply causes price to fall.

15. EXCESS DEMAND (ED): Where the quantity demanded exceeds the quantity supplied at a given price (aka a shortage). NOTE: Excess demand causes price to rise.

16. SOCIAL WELFARE MAXIMUM: This occurs when the sum of the consumers' and producers' gains from trade is a maximum. In the absence of any market failures, this point can be found at market equilibrium.

17. WELFARE LOSS (WL): This occurs because either output is too small relative to output at the social welfare maximum (with resources being diverted to other markets where they have lower valued uses) or too much output is produced relative to output at the social welfare maximum (with resources being used in a lower valued use in the given market).

NOTE THE FOLLOWING:

(1) Typically, when too few resources are used in the given market, other parts of the economy are using too many resources. If these resources had been used in the market in question instead of elsewhere, the economy would have experienced a net welfare gain.

(2) Again, when too many resources are attracted into a given market, too few resources are employed elsewhere. If the resources used in this market had been used elsewhere, the economy would have experienced a net welfare gain.

18. EXTERNALITY: External costs are costs that are imposed on third parties who have not consented to bear such costs. As such they are external to the decisions of the producers of such costs.

19. COASE THEOREM: As long as negotiation costs are negligible and affected parties can negotiate with each other (when the number of affected parties is small), the court could allocate the entitlement to either party and an efficient allocation would result.

20. EMISSION STANDARDS: This is a legal limit on the amount of a pollutant an individual source is allowed to emit.

21. EMISSION CHARGE: This is a fee, collected by government, levied on each unit of pollutant emitted into the air or water.

22. TRANSFERABLE EMISSION PERMITS: This system requires each source to acquire a permit which specifies the precise amount of pollution each source is allowed to emit. Any emissions below this amount means the source can sell some of its permits; any emissions above this amount means the source must purchase more permits or face severe monetary sanctions.

23. CURRENT RESERVES: Reserves that can profitably be extracted at current prices.

24. POTENTIAL RESERVES: Reserves which are estimated to be available at higher prices.

25 RESOURCE ENDOWMENT: Amount of resources available that naturally occur in the earth’s crust (a geological concept rather than an economic one).

26. RENEWABLE RESOURCES: Resources for which the natural rate of replenishment significantly augments the flow of renewable resources at any point in time.

27. DEPLETABLE RESOURCE: A resource where the feedback loop from natural replenishment is not important.

28. RECYCLABLE RESOURCE: A resource that is currently being used for some particular purpose and once that purpose is no longer desired or necessary can be recovered for use in some other purpose. The amount recycled depends on economic conditions.

29. MARGINAL USER COST: Given that resources are scarce and that greater current use diminishes future opportunities, the marginal user cost is the present value of these foregone opportunities at the margin. (NOTE: Failure to take the higher scarcity value into account in the present will lead to an inefficiency, or an extra cost to society, because of the consequences of greater scarcity in the future. This additional value is then marginal user cost.)