Microeconomics CLEP

Scarcity

Limited quantities of resources to meet unlimited wants

Needs

Things that are required in order to live

Wants

Those things which make our lives more comfortable but are not needed for survival

Economic Choice

The decision to buy one thing instead of another.

Trade-Off

An alternative that we sacrifice when we make a decision

PPF Curve

(Production Possibilities Frontier) A graph that shows the possibilities of combinations of goods and services

Law of Diminishing Marginal Returns

As successive units of a variable input are added to a fixed input, beyond some point the marginal product declines

Law of Increasing Opportunity Cost

To produce more of one good, a successively larger amount of the other good must be sacrificed

Law of Supply

As supply increases, prices go down; as supply decreases, prices go up.

Law of Demand

As demand increases, prices go up; as demand decreases, prices go down.

Determinants of Supply

Factors other than price that determine the quantities supplied of a good or service.

Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service

Change in Quantity Supplied

A movement along the supply curve that occurs in response to a change in price

Change in Quantity Demanded

A movement along the demand curve that occurs in response to a change in price

Change in Supply

A change in supply that is shown by drawing a new supply curve

Change in Demand

A change in demand that is show by drawing a new demand curve

Markets

Divisions of the economy that specialize in certain goods or services

Equilibrium Price

The price that balances quantity supplied and quantity demanded

Shortage

A situation in which quantity demanded is greater than quantity supplied

Surplus

A situation in which quantity supplied is greater than quantity demanded

Productive Efficiency

The situation in which a good or service is produced at the lowest possible cost

Allocative Efficiency

When the last unit produced costs the same as the benefit recieved by consumers

Market Equilibrium

A situation in which quantity demanded equals quantity supplied

Types of Economic Systems

Free Market, Traditional, Command, Mixed Markets.

Four Factors of Production (Imputs)

Land, Capital, Labor, Entrepreneurship.

Circular Flow Model

A model that shows the flow of goods and services and the interaction among households, businesses, and banks

Price Elasticity

A measure of the sensitivity of demand to changes in price

Elastic

Describes demand that is very sensitive to a change in price

Inelastic

Describes demand that is not very sensitive to a change in price

Total Revenue

The total amount of money a firm receives by selling goods or services

Cross Elasticity of Demand

The impact of price changes on the quantity demand of a good or service by gauging the effect on the total revenue the firm will generate

Cross Elasticity of Income

Determines and classifies the relationship between income and demand for a good or service.

Price Ceiling

A maximum price that can be legally charged for a good or service

Price floor

A legal minimum on the price at which a good can be sold

Price Elasticity of Supply

Measures the relationship between change in quantity supplied and a change in price.

Consumer Utility Maximization

Allocating one's income so that the marginal utility/price of the last units obtained of each good are equal

Budget Income Limits

The maximum amount an individual is willing to pay in a specific scenario

Explicit Cost

A cost that requires an outlay of money.

Implicit Cost

An opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment

Short Run

A period during which at least one of a firm's resources is fixed

Long Run

A period of time of sufficient length that all the firm's factors of production are variable

TFC

Total Fixed Cost

TVC

Total Variable Cost

AFC

Average Fixed Costs (Declines as output increases.)

AVC

Average Fixed Cost

ATC

Average Total Cost

MC

Marginal Cost

Economy of Scale

The more you produce the less it costs and the cheaper the product is for the consumer.