Microeconomics Concepts - Review Chapters

Vocabulary flashcards covering key microeconomics concepts from chapters on Ten Principles of Economics, Thinking Like an Economist, Interdependence and Gains from Trade, Market Forces of Supply and Demand, and Elasticity and Its Application.

Economics

The study of how society manages its scarce resources.

Scarcity

The limited resources available in a society.

Microeconomics

The study of how households and firms make decisions and interact with the market.

Macroeconomics

The study of economy-wide phenomena like inflation, unemployment, etc.

Production Possibility Curves (PPC)

Curves that show the combinations of outputs for two given goods.

Efficient Conditions (on PPC)

A point located on the Production Possibility Curve.

Inefficient Conditions (on PPC)

A point located under the Production Possibility Curve.

Expansion of the PPF Curve

Occurs due to technological improvement and/or additional resources.

Benefits of Trade

Must fall in between the opportunity costs of the trading parties.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer (efficiency).

Comparative Advantage

The ability to produce goods at a lower opportunity cost than another producer, ideally leading to specialized production.

Opportunity Cost

The value of the next best alternative that is given up when making a choice, often expressed as the time it takes to produce an opposing good.

Terms of Trade

What each person or entity receives from engaging in trade.

Movement along the Demand/Supply Curve

Caused by changes in the price of the good or service.

Relationship for Quantity Demanded

Inversely related to price (as price increases, quantity demanded decreases).

Relationship for Quantity Supplied

Positively related to price (as price increases, quantity supplied increases).

Non-Price Factors (Demand Curve Shift)

Expectation, number of buyers, tastes and preferences, income, and prices of related goods.

Non-Price Factors (Supply Curve Shift)

Weather, input prices, technology, number of sellers, and expectation about future prices.

Normal Good

A good for which an increase in income leads to an increase in demand (positive correlation).

Inferior Good

A good for which an increase in income leads to a decrease in demand (negative correlation).

Substitute Good

Goods with a positive relationship in demand; if the price of one goes up, the quantity demanded for the other will go up.

Complement Good

Goods with a negative relationship in demand; if the price of one goes up, the quantity demanded for the other will go down.

Individual Demand

The specific demand an individual has for a good or service.

Market Demand

The total demand from all consumers in the market for a good or service.

Demand/Supply Schedule

A chart that plots the points of quantity and price for demand or supply.

Change in Demand/Supply

A shift along the curve caused by non-price factors.

Change in Quantity Demanded/Supplied

A movement of the curve along the axis, caused by a change in price.

Surplus

A market condition where quantity supplied exceeds quantity demanded, typically leading to a decrease in prices.

Shortage

A market condition where quantity demanded exceeds quantity supplied, typically leading to an increase in prices.

Price Elasticity (Computation Formula)

(Q2 – Q1)/(P2 – P1) x (P2 + P1)/(Q2 + Q1).

Inelastic Demand

A condition where the price elasticity of demand is less than one, meaning quantity demanded responds only slightly to a change in price.

Unitary Elastic Demand

A condition where the price elasticity of demand is equal to one, meaning quantity demanded changes proportionally to a change in price.

Elastic Demand

A condition where the price elasticity of demand is greater than one, meaning quantity demanded responds significantly to a change in price.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Impact of Substitutes on Elasticity

More substitutes lead to more elasticity; fewer substitutes lead to less elasticity.

Impact of Timeframe on Elasticity

A shorter timeframe leads to less elasticity; a longer timeframe leads to more elasticity.

Impact of Income Share on Elasticity

A low share of income spent on a good leads to less elasticity; a high share leads to more elasticity.

Impact of Luxury vs. Necessity on Elasticity

Necessities tend to be less elastic; luxuries tend to be more elastic.

Impact of Market Narrowness on Elasticity

A more narrowly defined market leads to more elasticity; a broadly defined market leads to less elasticity.

Total Revenue

The total amount of money received from sales, calculated as quantity demanded multiplied by price.