Midterm 2 Study Guide

This set of flashcards covers key concepts related to consumers, sellers, and the efficiency of markets, drawn from the midterm study guide.

Buyer's Problem

The challenge for consumers to decide what to buy to maximize their benefit given prices and budget.

Budget Constraint

The combinations of goods that exhaust a consumer's income.

Opportunity Cost

The value of the next best alternative forfeited when making a decision.

Marginal Benefit

The additional satisfaction or benefit obtained from consuming one more unit of a good.

Consumer Surplus

The difference between what a consumer is willing to pay for a good and what they actually pay.

Price Elasticity of Demand

Measures how much quantity demanded changes when the price of a good changes.

Elastic Demand

A situation where large changes in quantity demanded occur for small price changes.

Inelastic Demand

A situation where small changes in quantity demanded occur for large price changes.

Cross-Price Elasticity of Demand

Measures how the demand for one good changes in response to a price change in another good.

Substitute Goods

Goods that have a positive cross-price elasticity of demand.

Consumer Benefits Maximization

Consumers allocate their budget to maximize benefit by equating the marginal benefit per dollar spent across all goods.

Law of Demand

States that as price increases, quantity demanded decreases, holding other factors constant.

Perfectly Competitive Markets

Markets characterized by many buyers and sellers, identical products, and free entry and exit.

Seller's Problem

The challenge for sellers to maximize profits through production, cost management, and output decisions.

Marginal Product of Labor

The additional output produced by employing one more unit of labor.

Total Cost (TC)

The sum of variable costs (VC) and fixed costs (FC) in production.

Profit Maximization

Occurs when a firm produces the quantity where marginal cost equals marginal revenue.

Producer Surplus

The difference between the market price and the minimum price a firm is willing to accept.

Economies of Scale

The decrease in average total cost as production increases due to fixed costs being spread over more output.

Invisible Hand

A term used to describe how individual self-interest leads to efficient allocation of resources in a free market.

Pareto Efficiency

An allocation where no one can be made better off without making someone else worse off.

Reservation Value

The minimum amount a seller is willing to accept or the maximum a buyer is willing to pay for a good.

Deadweight Loss

The loss in total surplus due to market distortions such as taxes or price controls.

Market Efficiency

Maximizing total output or making the economic 'pie' as large as possible.

Equity

The fair distribution of resources across society.