Unit 1 and 2 Microeconomics

Opportunity Cost

Opportunity Cost

The most desirable alternative that is given up when making a choice.

Factors of Production

Land, Labor, and Capital used in the production process.

PPC (Production Possibilities Curve)

Illustrates the efficiency in producing two items, showing efficiency, inefficiency, and impossibility.

Constant Opportunity Cost

Represents a straight, downward sloping line on a PPC due to similar resource usage.

Increasing Opportunity Cost

Depicted as a curved line on a PPC due to the law of increasing opportunity costs.

Substitute

A product used as a replacement when the price of another product increases.

Complement

A product that decreases in demand when the price of another product increases.

Normal Good

Demand increases when income rises, indicating it's not a necessity.

Inferior Good

Demand decreases when income rises, suggesting it's a lower-quality product.

Elastic

Demand is sensitive to price changes, leading to more or less consumption.

Inelastic

Demand remains relatively constant despite price changes.

Price Ceiling

Maximum price set below equilibrium.

Price Floor

Minimum price set above equilibrium.

Shortage

Occurs when the price is below equilibrium, leading to excess demand.

Surplus

Occurs when the price is above equilibrium, leading to excess supply.

Consumer Surplus

Difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

Difference between what producers are willing to sell for and what they actually sell for.

Equilibrium

Intersection point of supply and demand where efficiency is maximized.

Cross Price Elasticity of Demand

Measures the responsiveness of quantity demanded of one good to a change in the price of another good.

Income Elasticity

Measures the responsiveness of quantity demanded to a change in income.

Total Revenue Test

Determines if a product is elastic or inelastic based on the direction of total revenue changes.

Utility Maximizing Rule

Compares the satisfaction derived from a product to its price to determine the best option.