Midterm 1 Review (Ch 14, 15, 24, 25, 29)

A set of vocabulary flashcards covering important economic concepts from the midterm review.

Costs of Production

The value of resources a firm uses to produce goods or services.

Explicit Costs

Direct, out-of-pocket payments such as wages, rent, and utilities.

Implicit Costs

Opportunity costs of using resources the firm already owns, such as the owner's time and capital.

Economic Profit

Considers both explicit and implicit costs.

Accounting Profit

Considers only explicit costs.

Total Revenue (TR)

Calculated as TR = P × Q, where P is price and Q is quantity.

Total Cost (TC)

Calculated as TC = Fixed Costs + Variable Costs.

Profit (π)

Calculated as π = TR − TC.

Fixed Costs (FC)

Costs that do not change with output, such as rent and salaries.

Variable Costs (VC)

Costs that change with output, such as raw materials and labor.

Average Fixed Cost (AFC)

Calculated as AFC = FC ÷ Q.

Average Variable Cost (AVC)

Calculated as AVC = VC ÷ Q.

Average Total Cost (ATC)

Calculated as ATC = TC ÷ Q = AFC + AVC.

Marginal Cost (MC)

The change in total cost from producing one more unit, calculated as MC = ΔTC/ΔQ.

Diminishing Marginal Product

As more workers are added, each additional worker contributes less additional output.

Short Run Costs

At least one input is fixed.

Long Run Costs

All inputs are variable.

Economies of Scale

Occur when ATC falls as output rises.

Constant Returns to Scale

Occurs when ATC remains unchanged as output increases.

Diseconomies of Scale

Occur when ATC rises as output rises.

Efficient Scale

The quantity of output that minimizes ATC.

Perfect Competition Characteristics

Many buyers and sellers, identical products, free entry and exit, perfect information.

Price Takers

Firms in perfectly competitive markets that cannot influence the market price.

Total Revenue (TR) for Competitive Firms

Calculated as TR = P × Q.

Average Revenue (AR)

Calculated as AR = TR / Q = P.

Marginal Revenue (MR)

Calculated as MR = ΔTR / ΔQ = P.

Profit Maximization Condition

Firms maximize profit where MR = MC.

Shutdown Point

The point at which P = AVC.

GDP

Gross Domestic Product, calculated as GDP = C + I + G + NX.

Components of GDP

Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX).

Excluded from GDP

Used goods, financial assets, transfer payments, household production, and intermediate goods.

Income Approach to GDP Calculation

Aggregate Income = Aggregate Expenditure.

Nominal GDP

Calculated using current prices and current year quantities.

Real GDP

Calculated using base year prices and current year quantities.

Economic Growth Calculation

Economic Growth = (RGDP2025 - RGDP2024) / RGDP2024 * 100.

Limitations of National Income Accounting

Includes inconsistencies and omitted factors affecting economic measurement.

Human Development Index (HDI)

A measure of a country's social and economic development.

Consumer Price Index (CPI)

Measures changes in the price level of a market basket of consumer goods and services.

Producer Price Index (PPI)

Measures changes in the selling prices received by domestic producers.

GDP Price Index

Calculated to assess the overall price level of all domestically produced goods.

Inflation Rate Calculation

Inflation Rate = (CPI2025 - CPI2024) / CPI2024 * 100.

Demand-Pull Inflation

Inflation caused by increased demand for products and services.

Cost-Push Inflation

Inflation caused by rising costs of production.

Indexation

Adjusting income payments based on inflation.

Labor Force Participation Rate (LFPR)

LFPR = Labor Force / Adult Population * 100.

Unemployment Rate

Calculated as Unemployment Rate = Unemployed / Labor Force * 100.

Natural Rate of Unemployment

The sum of frictional and structural unemployment.

Full Employment

Occurs when the economy operates at the natural rate of unemployment.

Problems with Unemployment Rate

Understates unemployment by excluding marginally attached and underemployed workers.

U-6 Measure of Unemployment

Includes total unemployed, plus all marginally attached workers, plus those employed part-time for economic reasons.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Economic Efficiency

Occurs when resources are allocated in a way that maximizes total surplus.

Diminishing Returns

When adding more of one factor of production, while keeping others constant, results in smaller increases in output.

Cost Structure

The various types of costs that a firm incurs in its operation.

Fixed Inputs

Factors of production whose quantity cannot be changed in the short run.

Variable Inputs

Factors of production that can be adjusted in the short run.

Long Run Average Cost Curve

Represents the lowest cost of producing each level of output when all inputs are variable.

Total Revenue Maximization

Occurs when a firm sets output at a level where TR is highest.

Market Structure

The organizational characteristics of a market, affecting competition and pricing.

Monopoly

A market structure where a single seller dominates the market.

Oligopoly

A market structure characterized by a few firms dominating the market.

Market Supply Curve

Shows the relationship between price and the total quantity of a product supplied by all firms.

Price Elasticity of Demand

Measures how much quantity demanded responds to a change in price.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between what producers receive for a good and the minimum they would accept.

Tax Incidence

Refers to who ultimately bears the burden of a tax.

Substitute Goods

Goods that can replace each other and fulfill the same need.

Complementary Goods

Goods that are often used together.

Price Floor

A minimum price set by the government that can be charged for a good.

Price Ceiling

A maximum price set by the government that can be charged for a good.

Market Failure

Occurs when free markets fail to allocate resources efficiently.

Public Goods

Goods that are non-excludable and non-rivalrous, available for everyone to use.

Externalities

Costs or benefits that affect third parties who are not involved in a transaction.

Asymmetric Information

When one party in a transaction has more information than the other.

Business Cycle

The fluctuating levels of economic activity that an economy experiences over time.

Recession

A period of economic decline typically defined by two consecutive quarters of negative GDP growth.

Monetary Policy

Actions taken by a central bank to manage the economy by controlling the money supply.

Fiscal Policy

Government spending and tax policies used to influence economic conditions.

Inflation Targeting

A monetary policy strategy aimed at maintaining a specific inflation rate.

Liquidity

The availability of liquid assets to a firm or economy.