EC120 Microeconomics Vocabulary Flashcards

This set of flashcards covers foundational microeconomics terms and concepts including supply and demand, elasticity, welfare, market structures, and consumer choice theory based on Mankiw's Principles of Microeconomics.

Economics

The study of how society manages its scarce resources.

Scarcity

The situation occurring because human wants exceed the limited resources available.

Opportunity cost

What you give up to get an item or engage in an activity.

Rational decision-maker

An economic actor who takes an action if and only if the marginal benefit exceeds the marginal cost.

Efficiency

The property of society getting the maximum benefits from its scarce resources.

Equality

The property of distributing economic prosperity uniformly among society's members.

Invisible hand

Adam Smith's concept of how self-interested market interactions lead to desirable market outcomes.

Market failure

A situation in which a market fails to allocate resources efficiently on its own.

Externality

The uncompensated impact of one person's actions on the well-being of a bystander.

Market power

The ability of a single economic actor to substantially influence market prices.

Productivity

The amount of goods and services produced per unit of labor input.

Inflation

An increase in the overall price level in the economy, often caused by rapid growth in the quantity of money.

Phillips Curve

The curve depicting the short-run tradeoff between inflation and unemployment.

Circular-flow diagram

A visual model of the economy showing how households and firms interact in markets for goods and services and markets for factors of production.

Production Possibilities Frontier (PPF)

A graph showing the combinations of output an economy can possibly produce given the available factors of production and technology.

Positive statement

A descriptive claim about how the world actually is that can be tested against data.

Normative statement

A prescriptive claim about how the world ought to be based on value judgments.

Microeconomics

The study of how households and firms make decisions and interact in markets.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Absolute advantage

The ability to produce a good using fewer inputs than another producer.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Competitive market

A market with many buyers and many sellers so that each has a negligible impact on market price.

Law of Demand

The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.

Normal good

A good for which an increase in income leads to an increase in demand.

Inferior good

A good for which an increase in income leads to a decrease in demand.

Law of Supply

The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.

Price elasticity of demand

A measure of how much quantity demanded responds to a change in price, calculated as $\frac{\%\Delta Q}{\%\Delta P}$.

Elastic demand

A situation where the price elasticity of demand is greater than $1.0$.

Price ceiling

A legal maximum on the price at which a good can be sold.

Price floor

A legal minimum on the price at which a good can be sold.

Consumer surplus

The buyer's willingness to pay minus the price actually paid; the area below the demand curve and above the market price.

Producer surplus

The price received by the seller minus the seller's cost of production; the area below the price and above the supply curve.

Total economic surplus

The sum of consumer surplus and producer surplus, maximized at market equilibrium.

Deadweight loss

The fall in total economic surplus resulting from a market distortion like a tax.

Laffer Curve

The curve depicting the relationship between tax size and the total tax revenue collected.

Public good

A good that is both non-excludable and non-rival in consumption.

Common resource

A good that is non-excludable but rival in consumption.

Explicit costs

Opportunity costs that require an outlay of money by the firm.

Implicit costs

Opportunity costs that do not require an outlay of money by the firm.

Economic profit

Total revenue minus total opportunity costs (explicit costs plus implicit costs).

Average total cost (ATC)

The total cost divided by the quantity of output produced, where $ATC = \frac{TC}{Q}$.

Marginal cost (MC)

The increase in total cost that arises from an extra unit of production, where $MC = \frac{\Delta TC}{\Delta Q}$.

Efficient scale

The quantity of output that minimizes average total cost.

Economies of scale

The property whereby long-run average total cost declines as output increases.

Monopoly

A firm that is the sole seller of a product without close substitutes, often created by barriers to entry.

Price discrimination

The business practice of selling the same good at different prices to different customers based on their willingness to pay.

Monopolistic competition

A market structure characterized by many firms selling differentiated products and free entry and exit.

Oligopoly

A market structure involving a few dominant sellers offering similar or identical products and strategic interdependence.

Nash equilibrium

A situation in which economic actors choose their best strategy given the strategies all other actors have chosen.

Dominant strategy

A strategy that is best for a player regardless of the strategies chosen by other players.

Budget constraint

A line showing the combinations of goods a consumer can afford given their income and product prices.

Indifference curve

A curve showing consumption bundles that provide the consumer with the same level of satisfaction.

Marginal rate of substitution (MRS)

The rate at which a consumer is willing to trade one good for another, represented by the slope of the indifference curve.

Substitution effect

The change in consumption resulting from a change in relative price when moving along a given indifference curve.

Income effect

The change in consumption resulting from the shift to a different indifference curve due to changed purchasing power.