Microeconomics & International Trade Comprehensive Study Guide

Vocabulary practice flashcards covering formulas, market systems, surplus, elasticity, and international trade from the Microeconomics & International Trade Comprehensive Study Guide.

Linear Inverse Demand

A functional form modeling human market behavior expressed as $P = a - bQ_d$, where $P$ is Price, $Q_d$ is Quantity Demanded, $a$ is the Intercept, and $b$ is the Slope (responsiveness).

Linear Inverse Supply

A functional form modeling human market behavior expressed as $P = c + dQ_s$, where $P$ is Price, $Q_s$ is Quantity Supplied, $c$ is the Intercept, and $d$ is the Slope (responsiveness).

Production Possibilities Frontier (PPF)

A graph showing the maximum attainable combinations of two goods an economy can produce given fixed resources and technology.

Law of Increasing Opportunity Costs

The economic principle stating that resources are not perfectly adaptable to producing all goods, giving the PPF a concave (bowed out) shape.

Opportunity Cost

The highest-valued alternative that must be forgone when a choice is made; calculated on a constant cost PPF as $\frac{\Delta \text{Good Y Given Up}}{\Delta \text{Good X Gained}}$.

Absolute Advantage

The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than competitors.

The Law of Comparative Advantage

The principle that total output is maximized when economic agents specialize in the good for which they hold a comparative advantage and trade with others.

The Price System

A mechanism in a market economy where prices act as signals to consumers regarding how much to buy and to producers regarding how much to bring to market.

Property Rights

Clearly defined, legally enforceable rights over resources that are necessary for trade to exist and without which market exchange breaks down.

Law of Demand

The principle that, ceteris paribus, as the price of a good rises, quantity demanded falls, resulting in a downward-sloping curve.

Law of Supply

The principle that, ceteris paribus, as the price of a good rises, quantity supplied rises, resulting in an upward-sloping curve.

Market Equilibrium

A state where Quantity Demanded ($Q_d$) equals Quantity Supplied ($Q_s$), causing the market to clear and leaving no surplus or shortage.

Shortage

A market condition where $Q_d > Q_s$, prompting consumers to bid up prices due to scarcity and causing prices to rise.

Surplus

A market condition where $Q_s > Q_d$, prompting producers to cut prices to clear excess inventory and causing prices to fall.

Consumer Surplus (CS)

The difference between the maximum price a consumer is willing to pay and the market price actually paid, represented graphically by the area below the demand curve and above the price.

Producer Surplus (PS)

The difference between the market price a seller receives and their minimum reservation price (marginal cost), represented graphically by the area above the supply curve and below the price.

Total Surplus (TS)

The sum of Consumer Surplus and Producer Surplus ($CS + PS$), which is maximized at competitive market equilibrium.

Allocative Efficiency

The state achieved when production represents consumer preferences, occurring mathematically where Marginal Benefit equals Marginal Cost ($MB = MC$).

Deadweight Loss (DWL)

The loss of economic efficiency or total surplus that is not recaptured by anyone, often caused by government interventions distorting market signals.

Price Ceiling

A legal maximum price that is binding only if set below equilibrium (such as rent control) and causes a persistent shortage.

Price Floor

A legal minimum price that is binding only if set above equilibrium (such as the minimum wage) and causes a persistent surplus.

Per-Unit Tax

A tax that creates a wedge between the price buyers pay ($P_b$) and the price sellers receive ($P_s$), shrinking the market size.

Tax Incidence

The division of the tax burden between buyers and sellers, which depends entirely on relative elasticities (the less elastic side bearing more of the burden) rather than on whom the tax is levied.

Elastic Demand

A condition where $|E_d| > 1$, meaning quantity changes by a larger percentage than price, and Total Revenue drops if price increases.

Inelastic Demand

A condition where $|E_d| < 1$, meaning quantity changes by a smaller percentage than price, and Total Revenue rises if price increases.

Cross-Price Elasticity (Exy)

The responsiveness of demand measured by $\frac{\%\Delta Q_x}{\%\Delta P_y}$, which is positive ($+$) for substitutes and negative ($-$) for complements.

Income Elasticity (Ei)

The responsiveness of demand measured by $\frac{\%\Delta Q}{\%\Delta \text{Income}}$, which is positive ($+$) for normal goods and negative ($-$) for inferior goods.

Autarky

A situation where a country does not trade internationally (a closed economy), with domestic price and quantity completely determined by domestic supply and demand.

World Price (Pw)

The prevailing price of a good in the global market.

Tariff

A tax imposed on imported goods that raises the domestic price above the world price toward the autarky price, protecting domestic producers but reducing consumer surplus and creating Deadweight Loss.

Import Quota

A legal limit on the quantity of a good that can be imported, restricting supply and raising prices similarly to a tariff.

Quota Rents

The excess revenue generated by an import quota that goes to foreign holders of import licenses rather than to domestic government tax revenue.