Microeconomics: Elasticity, Consumer Choice, Production Costs, and Market Structures

Comprehensive vocabulary flashcards covering concepts of elasticity, consumer behavior, production functions, cost curves, and the four major market structures from microeconomics lecture notes.

Price Elasticity of Demand

Measures how responsive quantity demanded is to a price change; calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity Formula

Percentage change in quantity demanded divided by the percent change in price, using the average quantity and average price as the bases for computing percentage change in quantity and price.

Inelastic Demand

Demand where a change in price has relatively little effect on quantity demanded; the percentage change in quantity demanded is less than the percentage change in price, resulting in a price elasticity with an absolute value less than $1.0$.

Unit-Elastic

The condition where the percentage change in quantity demanded equals the percentage change in price, resulting in a price elasticity with an absolute value of $1.0$.

Elastic Demand

Demand where the change in price has a relatively large effect on quantity demanded; the percentage change in quantity demanded exceeds the percentage change in price, resulting in a price elasticity with an absolute value exceeding $1.0$.

Total Revenue

Price multiplied by the quantity demanded at that price.

Linear Demand Curve

A straight-line curve that has a constant slope but usually has a varying price elasticity.

Perfectly Elastic Demand Curve

A horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity.

Perfectly Inelastic Demand Curve

A vertical line reflecting a situation in which any price change has no effect on the quantity demanded; the elasticity value equals zero (e.g., insulin).

Unit-Elastic Demand Curve

Everywhere along the demand curve, the percentage change in price causes an equal but offsetting percentage change in quantity demanded, so total revenue remains the same; the elasticity has an absolute value of $1.0$.

Constant-Elasticity Demand Curve

The type of demand that exists when price elasticity is the same everywhere along the curve; the elasticity value is constant.

Price-Elasticity of Supply

A measure of the responsiveness of quantity supplied to a price change; calculated as the percentage change in quantity supplied divided by the percentage change in price.

Inelastic Supply

A situation where a change in price has relatively little effect on quantity supplied; the percentage change in quantity supplied is less than the percentage change in price, and the price elasticity of supply has a value less than $1.0$.

Unit Elasticity Supply

The condition where the percentage change in quantity supplied equals the percentage change in price; the resulting price elasticity of supply equals $1.0$.

Elastic Supply

A situation where a change in price has a relatively large effect on quantity supplied; the percentage change in quantity supplied exceeds the percentage change in price, resulting in a price elasticity of supply exceeding $1.0$.

Perfectly Elastic Supply Curve

A horizontal line reflecting a situation in which any price decrease drops the quantity supplied to zero; the elasticity value is infinite.

Perfectly Inelastic Supply Curve

A vertical line reflecting a situation in which a price change has no effect on the quantity supplied; the elasticity value is zero.

Unit-Elastic Supply Curve

A supply curve where a percentage change in price causes an identical percentage change in quantity supplied; depicted as a straight line from the origin with an elasticity value equal to $1.0$.

Income Elasticity of Demand

The percentage change in demand divided by the percentage change in consumer income; the value is positive for normal goods and negative for inferior goods.

Cross-Price Elasticity of Demand

The percentage change in the demand of one good divided by the percentage change in the price of another good.

Total Utility

The total satisfaction a consumer derives from consumption, referring either to the total utility of consuming a particular good or the total utility from all consumption.

Marginal Utility

The change in total utility derived from a one-unit change in consumption of a good.

Law of Diminishing Marginal Utility

The principle that the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit (other things constant).

Consumer Equilibrium

The condition in which an individual's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

Marginal Valuation

The dollar value of the marginal utility derived from consuming each additional unit of a good.

Consumer Surplus

The difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays.

Indifference Curve

A curve showing all combinations of goods that provide the consumer with the same satisfaction or utility, meaning the consumer finds all combinations on the curve equally preferred.

Marginal Rate of Substitution

The number of good "A" you are willing to give up to get more of good "B", neither gaining nor losing utility in the process.

The Law of Diminishing Rate of Substitution

States that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another unit of "A" declines.

Budget Line

Depicts all possible combinations of goods "A" and "B" given their prices and your budget.

Explicit Cost

Opportunity cost of resources employed by a firm that takes the form of cash payments.

Implicit Costs

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment.

Accounting Profit

A firm's total revenue minus its explicit costs.

Economic Profit

A firm's total revenue minus both its explicit and implicit costs.

Normal Profit

The accounting profit earned when all resources earn their opportunity cost.

Variable Resources

Any resource that can be varied in the short run to increase or decrease production.

Fixed Resources

Any resource that cannot be varied in the short run.

Short Run

A period during which at least one of the firm's resources is fixed.

Long Run

A period during which all resources under the firm's control are variable.

Total Product

Total output produced by a firm.

Marginal Product

The change in total product that occurs when the use of a particular resource increases by one unit, holding all other resources constant.

Increasing Marginal Returns

Occurs when the marginal product of a variable resource increases as each additional unit of that resource is employed.

Law of Decreasing Marginal Returns

States that as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative.

Fixed Cost

Any production cost that is independent of the firm's rate of output.

Variable Cost

Any production cost that changes as the rate of output changes.

Total Cost

The sum of fixed cost and variable cost: $TC = FC + VC$.

Average Variable Cost

Variable cost divided by output: $AVC = \frac{VC}{\text{quantity}}$.

Average Total Cost

Total cost divided by output, $ATC = \frac{TC}{\text{quantity}}$; also equal to the sum of average fixed cost and average variable cost: $ATC = AFC + AVC$.

Long-Run Average Cost Curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.

Economies of Scale

Forces that reduce a firm's average cost as the scale of operation increases in the long run.

Diseconomies of Scale

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run.

Constant Long-Run Average Cost

A cost condition that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size.

Production Function

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

Isoquant Curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

Marginal Rate of Technical Substitution

The rate at which labor substitutes for capital without affecting output.

Isocost Line

Identifies all combinations of capital and labor the firm can hire for a given total cost.

Expansion Path

The line formed by connecting tangent points of isocost lines and isoquant curves.

Market Structure

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition.

Perfect Competition

A market structure with fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

Commodity

A standardized product that does not differ across producers, such as bushels of wheat or an ounce of gold.

Price Taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.

Marginal Revenue

The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also equal to the market price.

Golden Rule of Maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost ($MR = MC$); this rule holds for all market structures.

Average Revenue

Total revenue divided by output: $AR = \frac{TR}{q}$; applicable in all market structures.

Short-Run Firm Supply Curve

A curve showing the quantity a firm supplies at each price in the short run; in perfect competition, it is that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

Short-Run Industry Supply Curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, it is the horizontal sum of each firm's short-run supply curve.

Long-Run Industry Supply Curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.

Constant Cost Industry

An industry that can expand or contract without affecting the long-run per-unit cost of production; its long-run industry supply curve is horizontal.

Increasing-Cost Industry

An industry that faces higher per-unit production costs as industry output expands in the long run; its long-run industry supply curve slopes upward.

Producer Efficiency

The condition that exists when market output is produced using the least-cost combination of inputs; achieved at minimum average cost in the long run.

Allocative Efficiency

The condition that exists when firms produce the output most preferred by consumers, where marginal benefit equals marginal cost.

Producer Surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.

Social Welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to customers.

Monopoly

A sole supplier of a product with no close substitutes.

Barrier to Entry

Any impediment that prevents a new firm from entering an industry and competing on an equal basis with existing firms.

Patent

A legal barrier to entry that grants the holder the exclusive right to sell a product for 20 years from the date the patent is filed.

Innovation

The process of turning an invention into a marketable product.

Price Makers

A firm with some power to set the price because the demand curve for its output slopes downward; a firm with market power.

Deadweight Loss of Monopoly

The net loss to society when a firm with market power restricts output and increases the price.

Rent Seeking

Activities undertaken by individuals or firms to influence public policy in a way that increases their incomes.

Price Discrimination

Increasing profit by charging different groups of consumers different prices for the same product.

Perfect Price Discrimination

The practice of charging a different price for each unit sold.

Monopolistic Competition

A market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward; firm entry is relatively easy.

Product Differentiation

Distinguishing products through Physical Differences (packaging, color, weight), Location (spatial differentiation, convenience), Services (free delivery, guarantees, toll-free numbers), or Product Image (endorsements, brand loyalty, environmentally friendly).

Excess Capacity

The difference between a firm's profit-maximizing quantity and the quantity that minimizes average costs.

Oligopoly

A market structure characterized by a few firms whose behavior is interdependent.

Undifferentiated Oligopoly

An oligopoly that sells a commodity or product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.

Differentiated Oligopoly

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.

Collusion

An agreement among firms to increase economic profit by dividing the market or fixing prices.

Cartel

A group of firms that agree to coordinate production and pricing decisions to act like a monopolist (e.g., OPEC).

OPEC

Organization of Petroleum Exporting Countries; an example of a cartel.

Price Leader

A firm whose price is matched by other firms in the market as a form of tacit collusion.