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OPPORTUNITY COST: The highest valued alternative foregone in the pursuit of an activity. This is a hallmark of anything dealing with economics--and life for that matter--because any action that you take prevents you from doing something else. The ultimate source of opportunity cost is the pervasive problem of scarcity (unlimited wants and needs, but limited resources). Whenever limited resources are used to satisfy one want or need, there are an unlimited number of other wants and needs that remain unsatisfied. Herein lies the essence of opportunity cost. Doing one thing prevents doing another.

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DETERMINANT:

This has one of two somewhat related meanings. First, it refers to a ceteris paribus factor that is held constant when a curve or graphical relation between two other variables is constructed. Second, it refers to a known directional change in a variable resulting from the disruption of an equilibrium that is identified using comparative statics.
Determinant comes from the root word "determine." It surfaces in the study of economics in two ways.

Ceteris Paribus Curve Shifters

The first economic use of this word is as a ceteris paribus factor that is held constant when a curve is constructed, and which "determines" the position of the curve. If this determinant changes, the position of the curve also changes. In other words, a change in a determinant causes a shift of the curve.

Virtually every curve used in economics contains one or more determinants. The most common determinants are those found in the study of the market--demand determinants and supply determinants. A significant amount of economic analysis of the market is devoted to the study of what happens when the demand and supply determinants change. Does price increase or decrease? Does quantity increase or decrease?

Suppose, for example, that the market for hot fudge sundaes is at equilibrium with a $3 price and an exchange quantity of 1000 sundaes. This situation is based, in part, on the demand determinants, such as buyers' income. What, however, might happen to the market if buyers' income suddenly increased? If hot fudge sundaes are a normal good, this demand determinant increases demand and disrupts the market equilibrium. The result is a new equilibrium with a higher price and a larger quantity.

Known Variable Changes

The second way this word is used in economics is as a known change in a variable identified through comparative static analysis. If a model is disrupted and achieves a new equilibrium, then it is usually possible to "determine" the direction of the change (increase or decrease) of the endogenous variables in the model.

When used in this manner, the word determinant should be contrasted with the alternative, indeterminant. In some cases, the comparative static analysis of a disruption produces a known change in the direction of the variable. The variable increases or decreases. As such, the variable is said to be determinant. In other cases, the analysis does not produce a known change in the direction of a variable. The variable might increase or decrease. In this case the variable is said to be indeterminant.

Suppose, for example, that the hot fudge sundae market noted earlier, encounters a decrease in production cost due to a significant reduction in the price of hot fudge topping, in addition to the increase in buyers' income. With an increase in supply added to the increase in demand, the quantity of hot fudge sundaes exchanged in the market will most definitely increase. The direction of the change in the quantity is determinant. However, the new equilibrium price might be higher or lower than the original price. The price, in this case, is said to be indeterminant.

<= DERIVED DEMANDDETERMINANTS =>


Recommended Citation:

DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: September 20, 2021].


Check Out These Related Terms...

     | indeterminant | demand determinants | supply determinants | change in demand | change in supply |


Or For A Little Background...

     | comparative statics | ceteris paribus | economic analysis | graphical analysis | variables | demand curve | supply curve | equilibrium | equilibrium price | equilibrium quantity | market equilibrium |


And For Further Study...

     | demand shock | supply shock | demand increase | demand decrease | supply increase | supply decrease | demand and supply increase | demand and supply decrease | demand increase and supply decrease | demand decrease and supply increase | price ceiling | price floor | elasticity determinants | aggregate demand determinants | aggregate supply determinants |


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