Microeconomics: Demand, Supply, Consumer Choice, and Producer Theory Vocabulary

Vocabulary flashcards covering fundamental definitions, formulas, assumptions, and concepts from microeconomics lecture notes.

Substitutes

Goods where an increase in the price of one good ($P_x$) leads to a decrease in its quantity demanded ($Q_x$) and an increase in the quantity demanded of the related good ($Q_y$).

Complements

Goods where an increase in the price of one good ($P_x$) leads to a decrease in its quantity demanded ($Q_x$) and a decrease in the quantity demanded of the related good ($Q_y$).

Demand

The quantity of a good that consumers are both willing and able to buy at different prices.

Law of Demand

The economic principle stating that as price falls, quantity demanded increases, resulting in a downward-sloping demand curve.

Supply

The quantity of a good that producers are both willing and able to sell at different prices.

Law of Supply

The economic principle stating that as price increases, quantity supplied increases, resulting in an upward-sloping supply curve.

Market Mechanism

The system through which price adjusts itself to bring quantity demanded ($Q_d$) and quantity supplied ($Q_s$) into equilibrium.

Shortage

A market state at the original price where quantity demanded ($Q_d$) exceeds quantity supplied ($Q_s$), causing price to rise, quantity demanded to fall, and quantity supplied to rise.

Price Elasticity of Demand (PED)

A measure of responsiveness calculated as the percentage change in quantity demanded divided by the percentage change in price: $\text{PED} = \frac{\text{\% change in } Q}{\text{\% change in } P}$.

Price Elastic Demand

A demand state where $\text{PED} > 1$, meaning a rise in price leads to a more-than-proportionate fall in quantity demanded, causing total revenue (TR) to fall.

Price Inelastic Demand

A demand state where $\text{PED} < 1$, meaning a rise in price leads to a less-than-proportionate fall in quantity demanded, causing total revenue (TR) to rise.

Point Elasticity

The price elasticity of demand calculated at a single specific point on the demand curve.

Arc Elasticity

The price elasticity of demand calculated over a range of prices on a demand curve using average quantity and average price: $\text{Arc Elasticity} = \frac{\frac{\text{change in } Q}{\text{average } Q}}{\frac{\text{change in } P}{\text{average } P}}$.

Cross Price Elasticity of Demand (XED)

A measure of responsiveness calculated as $\text{XED} = \frac{\text{\% change in } Q_a}{\text{\% change in } P_b}$, where $\text{XED} > 0$ indicates substitutes and $\text{XED} < 0$ indicates complements.

Consumption Bundle

A specific combination of goods and services that a consumer might choose, specified as a list of quantities of different goods.

Completeness Assumption

An assumption about consumer preferences stating that consumers can compare and rank all possible consumption bundles.

Non-satiation Assumption

The 'more is better' preference rule stating that if Bundle A contains more of at least one good and no less of any other good compared to Bundle B, Bundle A is preferred.

Transitivity Assumption

The preference consistency rule stating that if Bundle A is preferred to Bundle B ($A > B$) and Bundle B is preferred to Bundle C ($B > C$), then Bundle A must be preferred to Bundle C ($A > C$).

Utility

The total satisfaction derived from consuming goods and services.

Marginal Utility (MU)

The additional satisfaction gained from consuming one more unit of a good, expressed as $\text{MU} = \frac{du}{dx}$.

Law of Diminishing Marginal Utility

The principle stating that as consumption of a good increases, the additional satisfaction (marginal utility) derived from each additional unit decreases.

Indifference Curve

A curve representing all combinations of consumption bundles that provide a consumer with the exact same level of utility.

Marginal Rate of Substitution (MRS)

The maximum amount of one good that a consumer is willing to give up to obtain an additional unit of another good, equal to the negative slope of the indifference curve: $\text{MRS} = \frac{\text{MU}_1}{\text{MU}_2}$.

Diminishing MRS

The principle that consumers are willing to give up progressively fewer units of one good to obtain an additional unit of another good, preventing indifference curves from bending inward.

Budget Line

A graphical line representing all combinations of goods for which the total amount of money spent equals the consumer's total income ($Y$).

Optimal Bundle

The utility-maximizing consumer choice bundle located where the budget line is tangent to the highest attainable indifference curve, satisfying $\text{MRS} = \frac{P_f}{P_c}$.

Price-Consumption Curve

A curve that traces the utility-maximizing combination of two goods as the price of one good changes while income and the price of the other good remain constant.

Income-Consumption Curve

A curve that traces the utility-maximizing combination of goods as a consumer's income ($Y$) changes.

Engel Curve

A curve relating the quantity of a single good that a consumer will buy to their income ($Y$).

Normal Goods

Goods for which quantity demanded increases as income rises, yielding an upward-sloping Engel curve.

Inferior Goods

Goods for which quantity demanded decreases as income rises, yielding a downward-sloping Engel curve.

Market Demand

The overall market quantity demanded obtained by horizontally summing individual quantity demanded curves across all consumers at each price level.

Behavioral Economics

The study of how individuals make economic decisions by analyzing how social, emotional, and psychological factors influence choice alongside rational self-interest.

Production Function

A function showing the highest output ($Q$) a firm can produce for a specific combination of inputs, such as $Q = f(L, K)$.

Average Product (AP)

The amount of output produced per unit of a particular input, calculated as $\text{AP} = \frac{q}{L}$.

Marginal Product (MP)

The additional output produced when an input is increased by one unit, calculated as $\text{MP} = \frac{\text{change in } q}{\text{change in } L} = \frac{dq}{dL}$.

Law of Diminishing Marginal Returns

The principle stating that as additional units of a variable input are added while holding other inputs fixed, the marginal product of the variable input eventually decreases.

Isoquant

A curve showing all possible combinations of production inputs (such as labor and capital) that yield the exact same total output.

Marginal Rate of Technical Substitution (MRTS)

The rate at which capital can be reduced when labor is increased by one unit so that output remains constant, given by the ratio of marginal products: $\text{MRTS} = \frac{\text{MP}_L}{\text{MP}_K}$.

Constant Returns to Scale

A production condition where output increases in exact proportion to an increase in inputs (e.g., doubling all inputs doubles output).

Increasing Returns to Scale

A production condition where output increases more than proportionately relative to an increase in inputs (e.g., doubling inputs more than doubles output).

Decreasing Returns to Scale

A production condition where output increases less than proportionately relative to an increase in inputs (e.g., doubling inputs results in less than doubled output).