Microeconomics Chapter 1-6 Midterm Review – Flashcards
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Price ceiling
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A legally determined maximum price that sellers may charge
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price floor
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a legally determined minimum price that sellers may receive
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consumer surplus
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the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
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marginal benefit
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the additional benefit to a consumer from consuming one more unit of a good or service.
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marginal cost
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the additional cost to a firm of producing one more unit of a good or service
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producer surplus
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the difference between the lowest price a firm would be willing to accept and the price it actually receives
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economic surplus
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the sum of consumer surplus and producer surplus
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deadweight loss
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the reduction in economic surplus resulting from a market not being in competitive equilibrium.
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economic efficiency
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a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
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tax incidence
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the actual division of the burden of a tax between buyers and sellers in a market
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black market
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a market in which buying and selling takes place at prices violate government price regulations.
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Perfectly competitive market
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A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
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Demand schedule
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A table showing the relationship between the price of a product and the quantity of the product demanded
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Quantity demanded
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the amount of a good or service that a consumer is willing and able to purchase at a given price
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demand curve
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a curve that shows the relationship between the price of a product and the quantity of the product demanded.
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market demand
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the demand by all the consumers of a given good or service.
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law of demand
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the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of the product rises, the quantity demaded of the product will decrease
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substitution effect
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the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to the other goods that are substitutes
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income effect
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the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.
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Ceteris paribus ("all else equal")
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the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant
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Normal good
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A good for which the demand increases as income rises and decreases as income falls.
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inferior good
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a good for which the demand increases as income falls and decreases as income rises.
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substitutes
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goods and services that can be used for the same purpose.
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complements
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goods and services that are used together.
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demographics
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the characteristics of a population with respect to age, race, and gender.
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quantity supplied
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the amount of a good or service that a firm is willing and able to supply at a given price
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supply schedule
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A table that shows the relationship between the price of a product and the quantity of the product supplied
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supply curve
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a curve that shows the relationship between the price of a product and the quantity of the product supplied.
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law of supply
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The rule that, holding everything else constant, increases in price causes increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
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technological change
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a positive or negative change in the ability of a firm to produce a given level of output with a give quality or inputs.
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market equilibrium
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a situation in which quantity demanded equals quantity supplied
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competitive market equilibrium
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a market equilibrium with many buyers and many sellers
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surplus
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a situation in which quantity supplied is greater than the quantity demanded
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shortage
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a situation in which the quantity demanded is greater than the quantity supplied
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scarcity
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The situation in which unlimited wants exceed the limited resources available to fulfill those wants.
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economics
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the study of the choices people make to attain their goals, given scarce resources
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economic model
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a simplified version of reality used to analyze real-world economic situations
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market
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a group of buyers and sellers of a good or service and the instition or arrangement by which they come together to trade.
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Marginal analysis
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analysis that involves comparing marginal benefits and marginal costs.
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trade-off
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the idea that because of scarcity, producing more of one service or good means producing less of another good or service.
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opportunity cost
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the highest valued alternative that must be given up to engage in an activity
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centrally planned economy
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an economy in which the government decides how economic resources will be allocated
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market economy
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an economy in which the decisions of households and firms interacting in markets allocate economic resources
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mixed economy
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an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
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productive efficiency
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the situation in which a good or service is produced at the lowest possible cost
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allocative efficiency
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a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides marginal benefit to society equal to the marginal cost of producing it
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voluntary exchange
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the situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction
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equity
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the fair distribution of economic benefits
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economic variable
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something measurable that can have different values, such as the wages of software programmers
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positive analysis
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analysis concerned with what is
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normative analysis
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analysis concerned with what ought be
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microeconomics
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the study of how households and firms make choices, how the interact in markets, and how the government attempts to influence their choices
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macroeconomics
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the study of the economy as a whole, including topics such as inflation, unemployment and economic growth
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production possibilities frontier (ppf)
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a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
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economic growth
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the ability of an economy to produce increasing quantities of goods and services
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trade
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the act of buying or selling
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absolute advantage
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the ability of an individual, a firm, or country to produce more of a good or service than competitiors, using the same amount of resources
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comparative advantage
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the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
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product markets
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markets for goods- such as computers- and services- such as medical treatment
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factor markets
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markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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factors of production
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the inputs used to makegoods and services
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circular-flow diagram
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a model that illustrates how participants in markets are linked
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free market
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a market with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed.
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entrepreneur
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someone who operates a business, bringing together the factor of production-labor, capital, and natural resources-to produce goods and services.
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property rights
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the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
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Explicit costs
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input costs that require an outlay of money by the firm
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Implicit costs
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Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.
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Accounting Profits
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A firm's total revenue minus its explicit costs
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Economic profits
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total revenues minus total opportunity costs of all inputs used, or the total of all implicit and explicit costs.
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Zero economic profit
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a condition for long-run equilibrium; all inputs make exactly their opportunity costs so that no firm wants to enter or exit the industry
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Sunk costs
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Costs that have already been incurred and cannot be recovered
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short run
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A period during which at least one of a firm's resources is fixed
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long run
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a period of time long enough for all inputs to be varied (no fixed costs)
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production function
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relationship between the quantity of inputs a firm uses and the quantity of output it produces
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Marginal product
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extra output due to the addition of one more unit of input
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Law of diminishing returns
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increasing one factor of production will increase output up to a point, then begin to decrease
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Fixed cost
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a cost that does not change, no matter how much of a good is produced
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Variable cost
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a cost that rises or falls depending on how much is produced
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Average fixed cost (AFC)
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Fixed cost divided by the quantity produced
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Average variable cost (AVC)
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total variable costs divided by quantity of output
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Average total cost (ATC)
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total costs divided by quantity of output
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Marginal costs (MC)
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The change in total cost that results from a change in output: MC= ΔTC/ΔQ
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Isocost
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every combination of inputs that generate the same costs.(same thing as budget constraint) formula: Total expenditures=p1x1+p2+x2
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Isoquant
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a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
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profit
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the total revenue a firm receives from the sale of its product minus all costs incurred (implicit and explicit) producing it
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profit maximizing firm
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a firm whose primary goal is to maximize the difference between its total revenues and total costs
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factor of production
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an input used in the production of a good or service
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perfectly competitive market
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a market in which no individual supplier has significant influence on the market price of the product
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price taker (perfectly competitive firm)
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a firm that has no influence over the price at which it sells its product
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four conditions of a perfectly competitive market
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1. all firms sell the same standardized product 2. the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged 3. productive resources are mobile 4. buyers and sellers are well informed
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short run
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a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
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long run
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a period of time sufficient in length so that all the firm's factors of production are variable
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production function
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a technological relationship between inputs and outputs
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marginal product
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the increase in total output caused by an increase of one unit in the variable factor of production, holding all else constant
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variable factor of production
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an input whose quantity can be altered in the short run
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fixed factor of production
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an input whose quantity cannot be altered in the short run
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law of diminishing marginal returns
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beyond some point the marginal product of labor decreases as successively more units of labor are employed
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average product
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total output divided by units of the variable factor of production
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marginal revenue
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the increase in total revenue obtained by producing and selling one more unit of output
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marginal cost
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the increase in total cost incurred by producing one more unit of output
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variable cost
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any cost that changes as the firm changes its output
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formula for marginal cost
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Change in total cost / change in quantity
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formula for average variable cost
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total variable cost / quantity
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short run cost minimizing quantity of output
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the quantity of output at which a factory reaches minimum average total cost
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short run shutdown point
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a firm's minimum average variable cost; if price drops below minimum average variable cost, the firm will minimize its losses by shutting down
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price elasticity of supply
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the change in quantity supplied arising from a one percent change in price
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elastic supply
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if price elasticity of supply is greater than one
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inelastic supply
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if price elasticity of supply is less than one
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perfectly inelastic supply curve
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a supply curve whose elasticity with respect to price is zero
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perfectly elastic supply curve
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a supply curve whose elasticity with respect to price is infinite
