Microeconomics: Allocation of Scarce Resources and Market Models

This set of flashcards covers key concepts and definitions in microeconomics, focusing on resource allocation, market models, supply and demand, and consumer behavior.

Allocation of Scarce Resources

The process by which individuals and firms distribute limited resources to maximize their well-being.

Trade-Offs

The concept that in choosing to produce or consume one good, an individual or firm must forgo others.

Market Equilibrium

A situation in which the quantity of a good demanded by consumers equals the quantity supplied by producers.

Invisible Hand

The self-regulating nature of the marketplace where individuals seeking their own self-interest benefit society.

Positive Statement

A testable hypothesis about factual matters and cause-and-effect relationships.

Normative Statement

A subjective conclusion regarding whether something is good or bad; cannot be tested.

Behavioral Economics

A field that combines insights from psychology and cognitive biases to understand economic decision-making.

Demand Function

A mathematical representation showing the relationship between the quantity demanded and its influencing factors.

Substitutes

Goods that can be consumed in place of one another, such as tea and coffee.

Complements

Goods that are consumed together, such as coffee and sugar.

Law of Demand

The principle that states consumers demand more of a good when its price decreases.

Supply Function

A mathematical representation of the relationship between the quantity supplied and its influencing factors.

Equilibrium Price

The price at which the quantity of a good demanded equals the quantity supplied.

Excess Supply

A situation where the quantity supplied exceeds the quantity demanded, leading to downward pressure on prices.

Excess Demand

A situation where the quantity demanded exceeds the quantity supplied, leading to upward pressure on prices.

Price Ceiling

A legal maximum price that can be charged for a good, potentially causing shortages.

Price Floor

A legal minimum price that can be charged for a good, leading to potential surpluses.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in price.

Perfectly Inelastic Demand

A situation where the quantity demanded does not change as price changes.

Elastic Demand

A situation where the quantity demanded changes significantly with a change in price.

Short Run vs Long Run

Short run refers to a period where some factors are fixed, while long run refers to a period where all factors can be varied.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility.

Budget Constraint

The limit on the consumption bundles that a consumer can afford given their income.

Indifference Curves

Graphical representations showing combinations of goods that provide the same level of satisfaction to a consumer.

Corner Solution

An optimal choice where a consumer purchases only one good, situated at one end of the budget constraint.

Interior Solution

An optimal choice where a consumer purchases positive quantities of both goods, lying on the budget constraint.

Utility Function

A mathematical representation of the preference ranking of bundles of goods based on their utility.

Expenditure Function

A relationship showing the minimum expenditures needed to achieve a specific utility level given a set of prices.

Ad Valorem Tax

A tax based on the value of a good, calculated as a percentage of its sale price.

Specific Tax

A fixed amount charged per unit of a good sold.

Incidence of Tax

The distribution of the burden of a tax between buyers and sellers.

Quota

A government-imposed limit on the quantity of a good that can be imported.

Comparative Statics

A method to analyze the changes in equilibrium in response to external shocks or changes.

Marginal Utility

The additional satisfaction or utility a consumer gains from consuming one more unit of a good.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded.

Supply Curve

A graphical representation of the relationship between the price of a good and the quantity supplied.

Law of Supply

The principle that states that as the price of a good increases, the quantity supplied also increases.

Market Clearing Price

The price at which the quantity of a good supplied equals the quantity demanded.

Behavioral Biases

Cognitive limitations or emotional factors that affect economic decision-making.

Endowment Effect

The tendency for people to place a higher value on goods they own compared to those they do not.

Bounded Rationality

The concept that individuals are limited in their capacity to make fully rational decisions.

Sales Tax

A tax imposed on sales of goods and services, generally passed to consumers.

Government Regulations

Laws or guidelines implemented by governments to regulate economic activity.

Consumer Sovereignty

The idea that consumer preferences determine the production of goods and services.

Oligopoly

A market structure characterized by a small number of firms with significant market power.

Perfect Competition Model

A theoretical market structure where all firms sell identical products and are price takers.

Consumer Preferences

The subjective tastes and choices that influence consumer behavior.

Indifference Map

The complete set of indifference curves that represent a consumer's preferences.

More is Better

A principle stating that consumers prefer more of a good to less.

Utility Maximization

The process of obtaining the highest level of utility from consumer choices within a budget constraint.

Marginal Rate of Transformation (MRT)

The rate at which one good must be sacrificed to obtain more of another good.

Willingness to Pay

The maximum amount a consumer is willing to spend on a good or service.

Vertical Demand Curve

A demand curve that reflects perfectly inelastic demand where quantity demanded does not change with price.