Micro Definitions
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21 Terms
Production Possibilities Frontier
A graph that shows the output that the economy can produce any combination on or inside the frontier.
Property Rights
Ability of an individual to own and exercise control over scarce resources.
Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer.
Absolute Advantage
The ability to produce a good using fewer inputs than another producer.
Law of Demand
When the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises.
Law of Supply
When the price of a good rises, the quantity supplied also rises; when the price falls, the quantity supplied falls.
Substitute Good
An increase in the price of one good leads to an increase in demand for the other.
Complement Good
An increase in the price of one good leads to a decrease in demand for the other.
Normal Good
An increase in income leads to an increase in demand.
Inferior Good
An increase in income leads to a decrease in demand.
Tax Incidence
The way in which the burden of a tax is distributed between consumers and producers.
Price Ceiling
A legal maximum on the price at which a good can be sold.
Price Floor
A legal minimum on the price at which a good can be sold.
Market Failure
A situation in which the market fails to allocate resources efficiently.
Price Elasticity of Demand
How much the quantity demanded responds to a change in price.
Price Elasticity of Supply
Measures how responsive the quantity supplied is to a change in price.
Income Elasticity of Demand
How much the quantity demanded responds to a change in consumers' income.
Cross Price Elasticity
How much the quantity demanded of one good responds to a change in the price of another good.
Perfectly Elastic
Demand and supply are extremely sensitive to price changes.
Perfectly Inelastic
Quantity demanded or supplied does not change regardless of price changes.
Unit Elastic
Supply and demand change proportionally to the change in price.