Microeconomics Key Terms and Concepts

Comprehensive vocabulary flashcards defining core terms, mechanisms, and market structures across introductory microeconomics.

Absolute advantage

The ability to produce more of the same good.

Comparative advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

Demand curve

A function that shows the quantity demanded at different prices.

Quantity demanded

The quantity that buyers are willing and able to buy at a particular price.

Consumer surplus

The consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.

Total consumer surplus

A quantity measured by the area beneath the demand curve and above the price.

Normal good

A good for which demand increases when income increases.

Inferior good

A good for which demand decreases when income increases.

Substitute

Two goods for which a decrease in the price of one leads to a decrease in the demand for another.

Complements

Two goods for which a decrease in the price of one leads to an increase in the demand for the other.

Supply curve

A diagram that shows the quantity supplied at different prices.

Quantity supplied

The quantity that sellers are willing and able to sell at a particular price.

Producer surplus

The producer’s gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity.

Total producer surplus

An amount measured by the area above the supply curve and below the price up to the quantity traded.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Equilibrium price

The price at which the quantity demanded is equal to the quantity supplied.

Equilibrium quantity

The quantity at which the quantity demanded is equal to the quantity supplied.

Great economic problem

How to arrange our scarce resources to satisfy as many of our wants as possible.

Speculation

The attempt to profit from future price changes.

Prediction market

A speculative market designed so that prices can be interpreted as probabilities and used to make predictions.

Substitution effect

The change in consumption caused by a change in relative prices holding the consumer's utility level constant.

Income effect

The change in consumption caused by the change in purchasing power from a price change.

Utility

Something that produces value.

Marginal utility

The change in total utility from consuming an additional unit.

Diminishing marginal utility

The principle that each additional unit of a good adds less to utility than the previous unit.

Optimal consumption rule

The principle that to maximize utility, a consumer should allocate spending so that the marginal utility per dollar is equal for all purchases.

Budget constraint

All the consumption bundles that a consumer can afford given their incomes and their prices.

Marginal rate of substitution (MRS)

The rate at which the consumer is willing to trade one good for another and remain indifferent; it is equal to the slope of the indifference curve at that point.

Marginal product of labor (MPL)

The increase in a firm's revenues created by hiring an additional laborer.

Human capital

Tools of the mind; the productive knowledge and skills that workers acquire through education, training, and experience.

Compensating differential

A difference in wages that offsets differences in working conditions for otherwise similar jobs.

Statistical discrimination

Using information about group averages to make conclusions about individuals.

Preference-based discrimination

Discrimination based on plain, flat-out dislike of some group of people.

Price ceiling

A maximum price allowed by law.

Deadweight loss

The reduction in total surplus caused by a market distortion or inefficiency.

Rent control

A price ceiling on rental housing.

Price floor

A minimum price allowed by law, held above market levels.

Unemployment

A surplus of labor.

Blat

The use of personal connections to obtain favors.

Elasticity

A measure of how responsive the quantity demanded is to a change in price.

Elasticity rule

If two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic.

Inelastic demand

Demand where the absolute value of elasticity is less than one.

Elastic demand

Demand where the absolute value of elasticity is greater than one.

Unit elastic

Demand where the absolute value of the elasticity is exactly equal to one.

Commodity tax

A tax charged on each unit of a good sold.

Subsidy wedge

The difference between the price received by sellers and the price paid by buyers.

Sunk cost

A cost that, once incurred, cannot be recovered.

Fixed costs

Costs that do not vary with the quantity produced; should be ignored for short-run decisions.

Explicit cost

A cost that requires a money outlay.

Implicit cost

A cost that does not require an outlay of money.

Accounting profits

Total revenue minus explicit costs.

Economic profits

Total revenue minus total costs including implicit opportunity costs.

Marginal revenue

The change in total revenue from selling an additional unit.

Marginal cost

The change in total cost from producing an additional unit.

Zero profits

The condition when $P = AC$, where the firm covers all of its costs, including enough to pay labor and capital their ordinary opportunity costs.

Increasing cost industry

An industry in which the costs of production increase with greater output; represented with an upward-sloped supply curve.

Constant cost industry

An industry in which costs of production do not change with greater industry output; represented with a flat supply curve.

Decreasing cost industry

An industry in which the costs of production decrease with an increase in industry output; represented with a downward-sloped supply curve.

Economies of scale

The advantages of large-scale production that reduce average cost as quantity increases.

Natural monopoly

A situation when a single firm can supply the entire market at a lower cost than two or more firms.

Barriers to entry

Factors that increase the cost to new firms of entering an industry.

Antitrust laws

Laws that give the federal government legal authority to prosecute monopolies or attempts to monopolize.

Arbitrage

The practice of taking advantage of price differences for the same good in different markets by buying low in one.

Perfect price discrimination

The situation that exists when each customer is charged their maximum willingness to pay.

Tying

A form of price discrimination in which one good, called the base good, is tied to a second good called the variable good.

Bundling

The requirement that products be bought together in a bundle or package.

Cartel

A group of suppliers that tries to operate like a monopoly.

Dominant strategy

A strategy that has a higher payoff than any of a player's other strategies, regardless of what the other player does.

Strategic decision making

Decision making in interactive situations.

Informative advertising

Advertising that focuses on price, quality, and availability.

Product differentiation

A condition occurring when each firm produces a product that is somewhat different from its competitors' products.