DP Economics Practice Cards - Microeconomics

What is the definition of Opportunity Cost?

The next best alternative forgone when an economic decision is made.

What does the Production Possibilities Curve represent?

The maximum amounts of two goods that can be produced by an economy in a given time period if all resources are used efficiently and technology is fixed.

What does the Circular flow of income model illustrate?

It helps us understand the relationship between households and firms within the overall economy.

What does the Law of Demand state?

As the price of a good increases, the quantity demanded will decrease, ceteris paribus, and vice versa.

How is Price Elasticity of Demand defined?

A measure of how much the quantity demanded changes when there is a change in the price of a product.

What does the Law of Supply indicate?

As the price of a good increases, the quantity supplied will increase, ceteris paribus.

What is Income Elasticity of Demand?

A measure of the responsiveness of demand to a change in income.

What occurs during a Shortage (excess demand)?

When there is a greater quantity demanded of a product than the quantity supplied (Qd exceeds Qs).

What is a Surplus (excess supply)?

When there is a greater quantity supplied than the quantity demanded (Qs exceeds Qd).

What is Community Surplus?

The sum of the consumer and producer surplus which represents the total benefit to society.

What is Producer Surplus?

The excess of actual earnings that a producer makes from a given output above the amount the producer was prepared to accept.

Define Consumer Surplus.

The extra utility gained by consumers from paying a price lower than that which they were willing to pay.

What is a Price Ceiling?

A maximum price set by the government below the equilibrium price.

What does a Price Floor represent?

A minimum price set by the government above the equilibrium price.

Define Subsidy.

An amount of money paid by the government to a firm, per unit of output.

What is a Specific Tax?

A fixed amount of tax imposed upon a product, such as $1 per unit sold.

Define Percentage Tax (ad valorem tax).

The tax is a percentage of the selling price.

What are Positive Externalities of Consumption?

When the consumption of a good is beneficial to consumers and also provides benefits to third parties.

What occurs with Positive Externalities of Production?

When the production of a good is beneficial to third parties.

Define Negative Externalities of Consumption.

When the consumption of a good has harmful effects on third parties and may also be harmful to consumers.

What are Negative Externalities of Production?

When the production of a good is harmful to third parties.

What characterizes Perfect Competition?

Very large number of firms, price takers, identical products, no barriers to entry or exit, and perfect information.

What distinguishes Monopolistic Competition?

Fairly large number of small firms with slightly differentiated products and no barriers to entry or exit.

What defines a Monopoly?

Only one firm with high barriers to entry and is a price-maker.

What is an Oligopoly?

A market structure characterized by a small number of large firms and high barriers to entry.

Define Game Theory.

A mathematical technique analyzing the behavior of decision-makers who are dependent on each other and display strategic behavior.

What are Economies of Scale?

When a firm experiences decreased average costs in the long run as it increases its factors of production to increase output.