Microeconomics

Scarcity

Limited nature of society’s resources.

Opportunity Cost

The value of the next best alternative foregone.

Marginal Analysis

Examining decisions based on small changes in costs and benefits.

Incentives

Factors that motivate individuals and firms to make decisions.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of goods.

Absolute Advantage

The ability to produce more of a good using the same amount of resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost.

Specialization

Focusing on the production of one good to increase efficiency.

Trade

Voluntary exchange that allows parties to benefit from specialization.

Law of Demand

As price decreases, quantity demanded increases (and vice versa).

Law of Supply

As price increases, quantity supplied increases (and vice versa).

Market Equilibrium

Where quantity demanded equals quantity supplied.

Shortage

Quantity demanded exceeds quantity supplied at a given price.

Surplus

Quantity supplied exceeds quantity demanded at a given price.

Price Elasticity of Demand

A measure of how much quantity demanded responds to price changes.

Elastic vs. Inelastic

Elastic: large response to price changes; Inelastic: small response.

Income Elasticity of Demand

How demand changes with consumer income.

Cross-Price Elasticity

How demand for one good changes when the price of another good changes.

Price Ceiling

Legal maximum price (e.g., rent control).

Price Floor

Legal minimum price (e.g., minimum wage).

Tax Incidence

How the burden of a tax is shared between buyers and sellers.

Subsidy

A government payment to support a market.

Utility

Satisfaction from consuming a good or service.

Marginal Utility

The additional satisfaction from one more unit.

Law of Diminishing Marginal Utility

Marginal utility decreases as consumption increases.

Budget Constraint

All combinations of goods a consumer can afford.

Indifference Curve

Shows combinations of goods that provide equal satisfaction.

Fixed Costs

Costs that don’t change with output.

Variable Costs

Costs that change with output.

Total Cost

Fixed + Variable Costs.

Average Cost (AC)

Total cost divided by quantity.

Marginal Cost (MC)

Cost of producing one more unit.

Economies of Scale

Lower average costs with increased production.

Perfect Competition

Many firms, identical products, no market power.

Monopoly

One firm dominates the market.

Oligopoly

Few large firms with market power.

Monopolistic Competition

Many firms selling slightly differentiated products.

Consumer Surplus

Difference between willingness to pay and market price.

Producer Surplus

Difference between market price and minimum acceptable price.

Deadweight Loss

Loss of total surplus due to inefficiency.

Economic Efficiency

Resources allocated to maximize total surplus.

Externality

A cost or benefit that affects a third party.

Positive Externality

Benefit to others (e.g., education).

Negative Externality

Cost to others (e.g., pollution).

Public Good

Non-excludable and non-rival (e.g., national defense)

Free Rider Problem

People benefit from a good without paying for it.

Tragedy of the Commons

Overuse of a common resource.