Microeconomics and Macroeconomics: Elasticity, Market Dynamics, and Production Costs

Comprehensive vocabulary flashcards covering elasticity of demand and supply, economic methodology, market equilibrium shifts, and short-run versus long-run production costs.

Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good responds to a change in its price, calculated as $\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$.

Unit Elastic Demand

A demand condition where the percentage change in quantity demanded equals the percentage change in price, resulting in $\text{PED} = 1$.

Elastic Demand

A demand condition where the percentage change in quantity demanded is larger than the percentage change in price, resulting in $\text{PED} > 1$.

Inelastic Demand

A demand condition where the percentage change in quantity demanded is smaller than the percentage change in price, resulting in $\text{PED} < 1$.

Perfectly Elastic Demand

A condition represented by a horizontal demand curve where buyers will purchase any quantity at a specific price, but quantity demanded drops to zero if price rises even slightly, giving $\text{PED} = \infty$.

Perfectly Inelastic Demand

A condition represented by a vertical demand curve where quantity demanded remains entirely unchanged regardless of price fluctuations, giving $\text{PED} = 0$.

Midpoint Method

A formula for calculating percentage changes using the average of initial and ending values to avoid direction-dependent elasticities: $\text{Percentage Change} = \frac{\text{End value} - \text{Start value}}{\frac{\text{End value} + \text{Start value}}{2}} \times 100$.

Determinants of Price Elasticity of Demand

The key factors that influence consumer price responsiveness: availability of close substitutes, the passage of time involved, luxuries versus necessities, how narrowly the market is defined, and the share of expenditure on the good in the consumer's budget.

Cross-Price Elasticity of Demand

A measure of responsiveness of the quantity demanded for one good with respect to a change in the price of another good, calculated as $\frac{\% \text{ change in quantity demanded for Good 1}}{\% \text{ change in price for Good 2}}$.

Substitute Goods

Pairs of goods where an increase in the price of one good raises demand for the other, characterized by a positive cross-price elasticity of demand ($\text{Cross-Price Elasticity} > 0$).

Complementary Goods

Pairs of goods that are consumed together, where an increase in the price of one good decreases demand for the other, characterized by a negative cross-price elasticity of demand ($\text{Cross-Price Elasticity} < 0$).

Income Elasticity of Demand

A measure of responsiveness of quantity demanded to a change in consumer income, calculated as $\frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$.

Normal Good

A good for which quantity demanded rises when consumer income rises, characterized by an income elasticity of demand greater than $0$.

Inferior Good

A good for which quantity demanded falls when consumer income rises, characterized by an income elasticity of demand less than $0$.

Necessity Good

A normal good with an income elasticity of demand between $0$ and $1$, meaning demand grows proportionally less than income.

Luxury Good

A normal good with an income elasticity of demand greater than $1$, meaning demand grows proportionally more than income.

Price Elasticity of Supply

A measure of how much quantity supplied changes when market price changes, calculated as $\frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$.

Positive Economic Statement

An objective assertion concerned with what is, which can be evaluated or verified using factual evidence and empirical analysis.

Normative Economic Statement

A subjective assertion based on value judgments or ethics about what ought to be, which cannot be proved or disproved solely by data.

Production Possibility Frontier (PPF)

A curve illustrating the maximum output combinations of two goods that can be produced using available resources and technology efficiently.

Decisions at the Margin

The rational behavioral principle where decision-makers evaluate choices by comparing additional (marginal) benefits against additional (marginal) costs.

Incentive

A reward or punishment that induces action, such as higher market prices motivating sellers to increase production while reducing consumer purchases.

Macroeconomics

The branch of economics studying broader aggregate phenomena, including national income, economic growth, inflation, and unemployment.

Opportunity Cost

The highest-valued alternative that must be foregone when making a choice, such as sacrificing $2$ trucks to produce $1$ car.

Market Economy

An economic structure where resource allocation decisions are determined decentralized by producers and consumers through the interaction of market supply and demand.

Explicit Cost

A business expense that involves an actual direct monetary cash outlay.

Implicit Cost

A non-monetary opportunity cost, such as forgone wages the owner could have earned working elsewhere.

Economic Profit

Total firm revenue minus all explicit and implicit opportunity costs.

Accounting Profit

Total firm revenue minus explicit monetary costs only.

Short Run

A production time horizon during which at least one input factor of production is fixed.

Long Run

A production time horizon sufficiently long that all inputs can be varied, new technology can be adopted, and plant capacity can change.

Production Function

The technological relationship expressing the output of a good resulting from varying combinations of resource inputs.

Law of Diminishing Returns

The economic principle stating that as more units of a variable input (such as labor) are added to a fixed input (such as capital), the marginal product of the variable input will eventually decline.

Fixed Costs (FC)

Production costs that do not change as output changes, such as physical store or factory lease payments.

Variable Costs (VC)

Production costs that vary directly with output volume, such as raw material and production worker costs.

Total Cost (TC)

The overall cost of production, equal to $\text{FC} + \text{VC}$ in the short run, and equal strictly to $\text{VC}$ in the long run because no fixed costs exist.

Average Fixed Cost (AFC)

Fixed costs allocated per unit of output, calculated as $\text{AFC} = \frac{\text{FC}}{Q}$.

Average Variable Cost (AVC)

Variable costs allocated per unit of output, calculated as $\text{AVC} = \frac{\text{VC}}{Q}$.

Average Total Cost (ATC)

Total cost per unit of output, computed either as $\text{ATC} = \frac{\text{TC}}{Q}$ or $\text{ATC} = \text{AFC} + \text{AVC}$.

Marginal Cost (MC)

The additional cost incurred from producing one additional unit of output.

Marginal Product of Labor

The extra output produced when one additional worker is hired, calculated as $\frac{\Delta Q}{\Delta L}$.

Average Product of Labor

The total volume of output produced per unit of labor employed, calculated as $\frac{Q}{L}$.

Economies of Scale

A condition where a firm's long-run average total cost falls as the volume of output expands.

Diseconomies of Scale

A condition where a firm's long-run average total cost rises as the scale of output expands, often due to managerial and organizational complexities.