Principles of Microeconomics: Foundations, Equilibrium, Supply and Demand

Comprehensive vocabulary flashcards covering basic economic principles, the mechanics of market equilibrium, and the determinants of supply and demand.

Equilibrium

The market state where quantity supplied equals quantity demanded ($Q^S = Q^D$); an absorbing state where buyers and sellers are always able to trade at the market price.

Surplus

A market condition occurring when the price is above equilibrium ($P > P^*$), causing quantity supplied to exceed quantity demanded ($Q^S > Q^D$), resulting in inventory accumulation and downward pressure on price until equilibrium is reached.

Shortage

A market condition occurring when the price is below equilibrium ($P < P^*$), causing quantity demanded to exceed quantity supplied ($Q^D > Q^S$), resulting in empty shelves and upward pressure on price until equilibrium is reached.

Cost-Benefit Principle

The foundational economic principle stating that costs and benefits are the incentives that shape decisions; an individual should weigh financial and non-financial consequences and act only if the benefits exceed or equal the costs ($B \ge C$).

Willingness to Pay (WTP)

The maximum amount of money an individual is willing to pay to receive a benefit or avoid a cost, used to convert costs and benefits into monetary terms.

Economic Surplus

The net value created by making a decision, calculated as total benefit minus total cost ($ES = B - C$).

Opportunity Cost Principle

The principle that every choice made with limited resources requires giving up the value of the next best alternative.

Sunk Cost

A cost that has already been incurred and cannot be reversed or recovered; it should be ignored when making current decisions.

Production Possibility Frontier (PPF)

A visual representation of opportunity cost displaying the different combinations of outputs an individual or economy can attain given scarce resources.

Marginal Principle

The principle stating that decisions regarding quantities are best made incrementally by breaking them down into smaller questions of "one more unit".

Marginal Benefit (MB)

The change in total benefit resulting from buying or producing one additional unit.

Marginal Cost (MC)

The additional cost incurred by producing or acquiring one more unit.

The Rational Rule Principle

The economic rule stating that if something is worth doing, an entity should keep doing it until marginal benefit equals marginal cost ($MB = MC$), which maximizes total economic surplus.

Interdependence Principle

The principle that an individual's best choice depends on their own other choices, choices made by others, developments in other markets, and expectations about the future.

Market

Any situation that brings together buyers and sellers to exchange goods and services, without requiring a specific physical location.

Competitive Market

A market in which many buyers and sellers trade similar or identical products, meaning no single participant has the power to influence the market price.

Price Taker

A firm or consumer that must accept the prevailing market price as given, lacking the individual market power to alter the price.

Law of Demand

The empirical observation that there is an inverse relationship between price and quantity demanded ($P \downarrow \implies Q^D \uparrow$), holding all else constant (ceteris paribus).

Ceteris Paribus

A Latin condition meaning "holding all else constant," used in economic analysis to isolate the relationship between two specific variables.

Rational Rule for Buyers

The decision guideline instructing a buyer to purchase another unit as long as marginal benefit is greater than or equal to price ($MB \ge P$), and to stop purchasing when $MB = P$.

Diminishing Marginal Benefit

The tendency where, as an individual consumes more units of a good, the marginal benefit gained from each successive unit decreases ($Q \uparrow \implies MB \downarrow$).

Market Demand

The total quantity demanded by all consumers in a market at each price level, determined by horizontally summing individual demand curves.

Normal Good

A good for which demand increases when consumer income rises ($Y \uparrow \implies D \uparrow$) and decreases when income falls.

Inferior Good

A good for which demand decreases when consumer income rises ($Y \uparrow \implies D \downarrow$) and increases when income falls.

Substitutes

Goods that can replace each other in consumption, such that an increase in the price of one good causes an increase in demand for the other ($P_X \uparrow \implies D_Y \uparrow$).

Complements

Goods consumed together, such that an increase in the price of one good causes a decrease in demand for the other ($P_X \uparrow \implies D_Y \downarrow$).

Network Effects

A phenomenon where a good becomes more valuable to an individual user as more other people use it.

Congestion Effects

A phenomenon where a good becomes less valuable to an individual user as more other people use it.

Law of Supply

The observation that there is a direct positive relationship between price and quantity supplied ($P \uparrow \implies Q^S \uparrow$), holding all else constant (ceteris paribus).

Rational Rule for Sellers

The decision guideline instructing a seller to supply another unit as long as price is greater than or equal to marginal cost ($P \ge MC$), stopping when $P = MC$.

Market Supply

The total quantity supplied by all sellers in a market at each given price, calculated by the horizontal summation of all individual supply curves.

Substitutes in Production

Alternative goods a business can produce using the same resources; when the price of an alternative good rises, the supply of the original good decreases ($P_{\text{alt}} \uparrow \implies S \downarrow$).

Complements in Production

Goods that are naturally produced together from the same process; when the price of one complement rises, the supply of the other good increases ($P_{\text{comp}} \uparrow \implies S \uparrow$).

Market Economy

An economic structure where individual buyers and sellers freely make decisions regarding what gets produced, how it gets produced, and who receives it.

Planned Economy

An economic structure where a central planning authority determines what gets produced, how it gets produced, and who receives it.