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

Comprehensive vocabulary flashcards covering demand and supply elasticity, utility theory, costs of production, and market structures ranging from perfect competition to monopoly and oligopoly.

Price Elasticity of Demand

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

Price Elasticity Formula

Percentage change in quantity demanded divided by the percentage change in price, where average quantity and average price are used as bases for computing percentage changes: $E_D = \frac{\frac{\text{change in quantity}}{(\text{original quantity} + \text{new quantity}) / 2}}{\frac{\text{change in price}}{(\text{original price} + \text{new price}) / 2}}$.

Inelastic Demand

A condition 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 Demand

A condition where the percentage change in quantity demanded equals the percentage change in price; the resulting price elasticity has an absolute value of $1.0$.

Elastic Demand

A condition where a 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; such a demand curve 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.

Unit-Elastic Demand Curve

A curve along which, everywhere, 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; the percentage change in quantity supplied divided by the percentage change in price: $E_S = \frac{\frac{\text{change in quantity}}{(\text{original quantity} + \text{new quantity}) / 2}}{\frac{\text{change in price}}{(\text{original price} + \text{new price}) / 2}}$.

Inelastic Supply

A condition 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; the price elasticity of supply has a value less than $1.0$.

Unit-Elastic Supply

A 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 condition 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; the resulting price elasticity of supply exceeds $1.0$.

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 infinity.

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 by a straight line from the origin; the elasticity value equals $1.0$.

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; it could refer to either 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 stating that the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit.

Consumer Equilibrium

The condition in which an individual consumer’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 that shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred).

Marginal Rate of Substitution

The number of "A" you are willing to give up to get more of "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 "A" declines.

Budget Line

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

Explicit Cost

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

Implicit Cost

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 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 Resource

Any resource that cannot be varied in the short run.

Short Run

A period during which at least one of a firm’s resources is fixed.

Long Run

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

Total Product

The total output produced by a firm.

Production Function

The relationship between the amount of resources employed and a firm’s total product; 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.

Marginal Product

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

Increasing Marginal Returns

A condition where the marginal product of a variable resource increases as each additional unit of that resource is employed.

Law of Diminishing Marginal Returns

The principle 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, or $TC = FC + VC$.

Average Variable Cost

Variable cost divided by output, or $AVC = \frac{VC}{q}$.

Average Total Cost

Total cost divided by output, or $ATC = \frac{TC}{q}$; the sum of average fixed cost and average variable cost, or $ATC = AFC + AVC$.

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.

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 (MRTS)

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 tangency points between 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 many 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, a 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 the market price.

Golden Rule of Profit Maximization

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

Average Revenue

Total revenue divided by output, or $AR = \frac{TR}{q}$; in all market structures, average revenue equals the market price.

Short-Run Firm Supply Curve

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, 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, 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; the 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; the 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; minimum average cost in the long-run.

Allocative Efficiency

The condition that exists when firms produce the output most preferred by consumers; 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 consumers.

Barrier to Entry

Any impediment that prevents new firms 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 Maker

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

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

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

The process through which products differentiate in four basic ways: physical differences (color, weight, packaging), location (spatial differentiation, price/convenience stores), services (free delivery, guarantees, toll-free numbers), and product image (endorsements, all-natural, brand loyalty, environmentally friendly).

Excess Capacity

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

Oligopoly

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

Undifferentiated Oligopoly

An oligopoly that sells a commodity or a 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 the prices.

Cartel

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.

OPEC

Organization of Petroleum Exporting Countries.

Price Leader

A firm whose price is matched by other firms in the market as a form of tacit (understood or implied without being stated) collusion.