EC101 Principles of Microeconomics Practice Exam Flashcards

A comprehensive set of vocabulary flashcards covering microeconomic principles, market structures, externalities, and supply and demand based on practice exam questions.

Law of diminishing marginal product

The economic principle implying that as the quantity of an input increases, the production function will eventually flatten out, increase at a slower rate, and have a smaller slope.

Sunk Cost Logic

The principle that certain past costs, such as the price paid for a movie ticket, should be irrelevant to current decision-making compared to the enjoyment of remaining time.

Perfectly competitive firm

A firm that takes its price as given by the overall market for its product rather than selecting its own price to maximize profits.

Economic profit (Short run)

The difference between total revenue and the total cost (including opportunity costs) of a firm, which in a perfectly competitive market faces a perfectly elastic demand curve.

Natural monopoly

A firm that can supply the market quantity at a lower cost than could two or more firms, often protected by barriers to entry.

Accounting profits

A measure of profit calculated as economic profits plus opportunity costs, or total revenue minus explicit costs.

Perfect price discrimination

A practice where a monopolist charges each consumer their exact willingness to pay, resulting in no deadweight loss and zero consumer surplus.

Nash equilibrium

A scenario in game theory where each player chooses their best strategy given the strategies of all other players, such as when two firms both choose high advertising budgets.

Prisoner’s Dilemma and Tragedy of the Commons

Economic models that describe situations where decisions are individually rational but collectively irrational.

Positive externality

A situation where the social value of an activity, like class participation or a talented guitarist practicing in public, is higher than its private value.

Negative externality

A situation, such as pollution or noise, where a free market produces more than the socially optimal quantity because the social cost exceeds the private cost.

Public good

A resource that is both non-excludable and non-rivalrous, such as national defense, which tends to be underprovided in a free market.

Common resource

A resource that is rivalrous but non-excludable, such as fish in the ocean, which tends to be overused.

Signaling justification of schooling

The theory that completing school is a credible signal of high ability because it is costly, and specifically less costly for those with high ability or work ethic.

Deadweight loss

The reduction in total surplus that results from a market distortion, such as a tax or monopoly pricing.

Laffer curve

A curve illustrating that when a country is on the downward-sloping side, a cut in the tax rate will increase tax revenue and decrease deadweight loss.

Price elasticity of demand

A measure of the responsiveness of quantity demanded to a change in price, calculated using the midpoint approach as the percentage change in quantity divided by the percentage change in price.

Income elastic demand

A situation where the quantity demanded of a good is highly responsive to changes in consumer income.

Price floor

A legal minimum on the price at which a good can be sold, which becomes binding if set above the equilibrium price.

Price ceiling

A legal maximum on the price at which a good can be sold, such as rent control, which can lead to shortages in the long run.

Opportunity cost

The value of the next best alternative given up to obtain an item, such as the time spent waiting in line for ‘free’ ice cream.

Production Possibilities Frontier (PPF)

A graph showing the combinations of two goods an economy can produce, where the slope represents the opportunity cost of one good in terms of the other.

Absolute advantage

The ability of a producer to produce a good using fewer inputs than another producer.

Comparative advantage

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

Inferior good

A good for which an increase in consumer income leads to a decrease in demand, such as Easy Cheese or instant ramen noodles.

Normal good

A good for which an increase in consumer income leads to an increase in demand, such as golf balls or compact discs.

Substitutes

Two goods for which a decrease in the price of one leads to a decrease in the demand for the other, such as CDs and MP3s.

Complements

Two goods for which a decrease in the price of one leads to an increase in the demand for the other, such as beer and ping pong balls.

Consumer surplus

The difference between a buyer's willingness to pay and the market price actually paid.

Producer surplus

The difference between the market price a seller receives and the opportunity cost of providing the good.