Midterm 2 Study Guide

These flashcards cover key concepts related to consumer behavior, producers, and market dynamics as outlined in the study guide.

Buyer’s Problem

The challenge consumers face in deciding what to buy to maximize their benefit given their tastes, the prices of goods, and their budget.

Budget Constraint

The combination of goods that exhausts a consumer's income, determining what they can afford.

Opportunity Cost

The value of the next best alternative that is forgone 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

A measure of how much the quantity demanded of a good changes in response to a change in its price.

Elastic Demand

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

Inelastic Demand

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

Cross-Price Elasticity

The measure of how the demand for one good changes in response to a price change in another good.

Normal Goods

Goods for which demand increases when consumer income rises.

Inferior Goods

Goods for which demand decreases when consumer income rises.

Perfectly Competitive Markets

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

Marginal Product of Labor

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

Total Cost

The sum of variable costs and fixed costs in the production process.

Profit Maximization

The production level at which a firm maximizes its profit by producing where marginal cost equals marginal revenue.

Elasticity of Supply

The measure of how the quantity supplied responds to a change in price.

Producer Surplus

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

Economies of Scale

Cost advantages that firms experience when increasing production.

Invisible Hand

Adam Smith's concept that individual self-interest and competition lead to efficient resource allocation.

Pareto Efficiency

A state where no one can be made better off without making someone else worse off in resource allocation.

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 of total surplus that occurs when a market is not operating at equilibrium.