Economics Key Concepts: Demand, Market Structures, Externalities, and Decision-Making

Price Elasticity of Demand

measures how sensitive demand is to price changes, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Monopoly Characteristics

features one seller dominating the market, often with high barriers to entry, unique products, and significant price control.

Positive Externality

occurs when a third party benefits from an economic activity (e.g., vaccinations benefit others by reducing disease spread), unlike negative externalities like pollution.

Effect of Increased Demand

shifts the demand curve to the right, affecting equilibrium price and quantity, assuming supply remains constant.

Factors of Production

inputs used to create goods and services: land, labor, capital, and entrepreneurship. Money facilitates transactions but is not a productive resource.

Command Economy

features central planning by the government, with limited private ownership and market-driven prices, unlike market or mixed economies.

Primary Concern of Microeconomics

examines how supply and demand interact in specific markets to determine prices and quantities, leading to market equilibrium (where quantity supplied equals quantity demanded).

Law of Diminishing Marginal Utility

states that the additional satisfaction (marginal utility) from consuming more of a good decreases as consumption increases (e.g., the first slice of pizza is more satisfying than the fifth).

Production Possibilities Frontier (PPF)

the maximum combination of goods and services an economy can produce with its available resources and technology, illustrating trade-offs and opportunity costs.

Perfectly Competitive Market

many buyers and sellers, identical products, no barriers to entry, and no single participant controlling prices, leading to efficient resource allocation.

Consumer Surplus

is the benefit consumers gain when they pay less than their maximum willingness to pay for a good or service.

Monopolistic Competition

involves many sellers offering similar but differentiated products (e.g., different clothing brands), with low barriers to entry and some pricing power.

Price Ceiling Effects

set below the equilibrium price prevents prices from rising to clear the market, causing a shortage (excess demand) as quantity demanded exceeds quantity supplied.

Microeconomic Decision

involve individual or small-scale choices, such as a household's budgeting or a firm's pricing strategy, rather than large-scale policies like trade agreements or monetary policy.

Complementary Goods

are consumed together, so a change in the price of one affects the demand for the other (e.g., a price drop in one good increases demand for its complement).

Opportunity Cost

is the value of the next best alternative forgone when making a decision (e.g., choosing to study instead of working costs the wages you could have earned).