Principles of Microeconomics Flashcards

Vocabulary flashcards covering fundamental economic concepts, supply and demand, elasticity, market interventions, and welfare economics from lecture notes.

Trade-off

Giving up one thing to get another.

Opportunity Cost

The value of the next best alternative.

Marginal Thinking

Comparing marginal benefits versus marginal costs.

Incentives

Factors that motivate people; behavior changes when costs or benefits change.

Benefits of Trade

Specialization increases total output and expands consumption beyond the PPF.

The Invisible Hand

Price signals that organize markets efficiently.

Market Failure

Instances such as externalities and market power when government intervention can improve market outcomes.

Productivity

The primary determinant of the standard of living.

Inflation

An increase in overall price levels caused by growth in the money supply.

Short-run Trade-off

The short-run macroeconomic trade-off between inflation and unemployment.

Assumptions (Economics)

Simplifications used in economic models to simplify complex systems.

Circular-Flow Diagram

An economic model showing how money and goods flow between households and firms.

Production Possibilities Frontier (PPF)

A visual representation showing trade-offs, efficiency, and opportunity cost.

Positive Statements

Descriptive statements about how the world is.

Normative Statements

Prescriptive statements about how the world ought to be.

Absolute Advantage

The ability to produce more of a good with the same resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost, which determines specialization and trade.

Law of Demand

Price increases lead to quantity demanded decreases ($\text{Price} \uparrow \rightarrow \text{quantity demanded} \downarrow$).

Demand Curve Shifters

Income, related goods, tastes, expectations, and number of buyers.

Law of Supply

Price increases lead to quantity supplied increases ($\text{Price} \uparrow \rightarrow \text{quantity supplied} \uparrow$).

Supply Curve Shifters

Input prices, technology, expectations, and number of sellers.

Equilibrium

The point where $\text{Supply} = \text{Demand}$.

Surplus

A market condition occurring when the price is set too high.

Shortage

A market condition occurring when the price is set too low.

Elasticity Formula

$$\frac{\%\Delta Q}{\%\Delta P}$$

Elastic Demand

Demand with an elasticity value $> 1$; when price rises, revenue falls ($\text{Price} \uparrow \rightarrow \text{revenue} \downarrow$).

Inelastic Demand

Demand with an elasticity value $< 1$; when price rises, revenue rises ($\text{Price} \uparrow \rightarrow \text{revenue} \uparrow$).

Determinants of Elasticity

Availability of substitutes, necessity, market definition, and time horizon.

Price Ceiling

A legal maximum price that results in a shortage if binding.

Price Floor

A legal minimum price that results in a surplus if binding.

Taxes

Government levies that create a wedge and reduce market quantity.

Tax Burden (Incidence)

The distribution of a tax that falls more heavily on the more inelastic side of the market.

Consumer Surplus

Value to buyers minus price paid; graphically located below the demand curve and above the price.

Producer Surplus

Price received minus cost; graphically located above the supply curve and below the price.

Total Surplus

The sum of consumer surplus and producer surplus ($\text{CS} + \text{PS}$).

Deadweight Loss

The lost economic surplus resulting from taxes or government controls.

Market Efficiency

A state achieved when markets successfully maximize total surplus.