Microeconomics Key Concepts and Vocabulary

A comprehensive collection of microeconomics vocabulary flashcards covering fundamental economic concepts, market structures, production theory, elasticity, welfare economics, factor markets, market failures, and economic inequality.

factors of production

The resources used to produce goods and services, including land, labor, capital, and entrepreneurship.

full employment

An economic condition where all available resources are being used efficiently to produce the maximum level of output.

production possibilities curve

A model that shows the maximum combinations of two goods or services an economy can produce with available resources and technology, illustrating trade-offs in resource allocation.

scarcity

The fundamental economic problem that arises because most resources are limited while human wants and needs are unlimited, forcing individuals and societies to make choices.

command economy

An economic system in which the government or central authority makes decisions about resource allocation, production, and distribution of goods and services.

market economy

An economic system in which resource allocation and production decisions are determined primarily by supply and demand through price mechanisms and voluntary exchange.

mixed economy

An economic system that combines elements of both market and command economies, with both private enterprise and government involvement in resource allocation.

constant opportunity costs

A situation where the opportunity cost of producing one good remains the same regardless of the quantity produced, resulting in a linear PPC.

decreasing opportunity costs

A situation where the opportunity cost of producing one good decreases as more of that good is produced, resulting in a bowed-in PPC.

increasing opportunity costs

A situation where the opportunity cost of producing one good increases as more of that good is produced, resulting in a bowed-out PPC.

economic growth

An increase in the economy's productive capacity, represented by an outward shift of the production possibilities curve.

economic contraction

A decrease in the economy's productive capacity, represented by an inward shift of the production possibilities curve.

efficiency

A market outcome where resources are allocated to maximize total surplus and no mutually beneficial trades remain unexploited.

inefficiency

A situation where resources are not being used optimally, resulting in production at a point inside the production possibilities curve.

opportunity cost

The value of the next best alternative that must be given up when making an economic choice.

productivity

The output produced per unit of factor input, which influences a firm's decision to hire factors of production.

absolute advantage

A situation in which an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources.

comparative advantage

A situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer.

gains from trade

The economic benefits that result when producers specialize according to comparative advantage and engage in mutually beneficial exchange.

specialization

The concentration of productive effort on a limited number of goods or services in which a producer has comparative advantage.

terms of trade

The rate at which one good or service is exchanged for another in trade between producers or countries.

explicit costs

Direct, out-of-pocket monetary payments made for resources and inputs used in production.

implicit costs

Opportunity costs of using resources owned by the firm that do not involve direct monetary payments, such as the cost of financial capital, compensation for risk, or an entrepreneur's time.

consumer choice theory

A model that explains how consumers make decisions to maximize satisfaction given their constraints and preferences.

diminishing marginal utility

The principle that as a consumer consumes more of a good, the additional satisfaction gained from each additional unit decreases.

marginal analysis

A method of comparing the additional benefits of increasing an activity with the additional costs to determine optimal decision-making.

marginal utility per dollar

The additional satisfaction gained from spending one more dollar on a good, calculated as marginal utility divided by price.

sunk costs

Costs that have already been incurred in the past and cannot be recovered, which should not influence current optimal decisions.

demand curve

A graph showing the relationship between the price of a good and the quantity demanded at each price level, typically downward-sloping.

law of demand

An economic principle stating that as the price of a good increases, the quantity demanded decreases, and vice versa, assuming all other factors remain constant.

income effect

The change in quantity demanded resulting from a change in a consumer's purchasing power due to a price change.

substitution effect

The change in quantity demanded resulting from a consumer switching to relatively cheaper alternatives when a good's price increases.

law of supply

The economic principle that states the quantity supplied of a good increases when its price increases and decreases when its price decreases, assuming all other factors remain constant.

market supply curve

The horizontal summation of all individual supply curves, showing the total quantity supplied by all producers at each price level.

movement along a supply curve

A change in quantity supplied caused by a change in the good's own price, represented by moving along the existing supply curve rather than shifting the curve itself.

price elasticity of demand

A measure of the responsiveness of quantity demanded to changes in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

elastic demand

A situation where the magnitude of price elasticity of demand is greater than $1$, meaning quantity demanded is highly responsive to price changes.

inelastic demand

A situation where the magnitude of price elasticity of demand is less than $1$, meaning quantity demanded is not very responsive to price changes.

unit elastic

A situation where the magnitude of price elasticity of demand equals $1$, meaning the percentage change in quantity demanded is proportional to the percentage change in price.

price elasticity of supply

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

elastic supply

A supply condition where the magnitude of price elasticity of supply is greater than $1$, indicating that quantity supplied is highly responsive to price changes.

inelastic supply

A supply condition where the magnitude of price elasticity of supply is less than $1$, indicating that quantity supplied is not very responsive to price changes.

complements

Goods that are typically consumed together, indicated by negative cross-price elasticity of demand.

substitutes

Goods that can be used in place of each other, indicated by positive cross-price elasticity of demand.

cross-price elasticity of demand

A measure of the responsiveness of quantity demanded of one good to changes in the price of another good, calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good.

income elasticity of demand

A measure of the responsiveness of quantity demanded to changes in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

inferior good

A good for which quantity demanded decreases when consumer income increases, indicated by negative income elasticity of demand.

normal good

A good for which quantity demanded increases when consumer income increases, indicated by positive income elasticity of demand.

consumer surplus

The difference between the maximum price consumers are willing to pay for a good and the actual price they pay, representing the benefit consumers receive from purchasing at market price.

producer surplus

The difference between the actual price received by a producer and the minimum price at which they are willing to supply a good, representing the benefit producers receive from selling at market price.

market equilibrium

The point where the quantity supplied equals the quantity demanded at a particular price, resulting in no shortage or surplus in the market.

shortage

A situation in which the quantity demanded of a good exceeds the quantity supplied at a given price, resulting in insufficient supply.

surplus

A situation in which the quantity supplied of a good exceeds the quantity demanded at a given price, resulting in excess inventory.

allocative efficiency

An economic outcome where price equals marginal cost and resources are allocated to their highest-valued uses.

deadweight loss

The loss of economic efficiency that occurs when equilibrium is not at the socially optimal quantity, resulting in reduced total surplus.

price ceilings

A government-imposed maximum price above which a good cannot be sold, preventing prices from rising to equilibrium.

price floors

A government-imposed minimum price below which a good cannot be sold, preventing prices from falling to equilibrium.

subsidies

Government payments or incentives that can be used to encourage production or consumption of goods that generate positive externalities.

taxes

Mandatory payments to the government that can be used to discourage production or consumption of goods that generate negative externalities.

autarky

An economic state in which a country is self-sufficient and does not engage in international trade.

quotas

Limits set by a government on the quantity of a good that can be imported, used to alter quantities produced and affect domestic price and economic surplus.

tariffs

Taxes imposed by a government on imported goods that increase the domestic price of those goods and affect consumer surplus, producer surplus, and government revenue.

diminishing marginal returns

The principle that as a firm employs more of one variable input while holding other inputs constant, the marginal product of that input eventually decreases.

production function

The relationship between the quantities of inputs used by a firm and the quantity of output produced, showing how output changes with different input levels in both the short run and long run.

short run

A time period in which at least one factor of production is fixed, and firms can only adjust variable inputs to change output levels.

long run

A time period in which all factors of production are variable, allowing firms to enter or exit markets and adjust all inputs.

average variable cost

The total variable cost divided by the quantity of output produced; used to determine whether a firm should operate or shut down in the short run.

economies of scale

The cost advantages that a firm experiences as it increases production, resulting in lower average costs per unit.

diseconomies of scale

A situation where long-run average total costs increase as a firm increases its scale of production.

minimum efficient scale

The smallest level of output at which a firm can minimize its long-run average total costs; plays a role in determining market structure and firm concentration.

economic profit

The difference between total revenue and total economic cost, including both explicit and implicit costs.

accounting profit

The difference between total revenue and explicit costs only, without accounting for implicit costs or opportunity costs.

normal profit

The level of profit earned when all implicit costs are fully compensated, resulting in zero economic profit.

profit-maximizing rule

The principle that firms maximize profits by producing at the output level where marginal revenue equals marginal cost.

shut down

A short-run decision by a firm to produce zero output when price falls below average variable cost.

constant cost industry

An industry where long-run average costs remain unchanged as industry output expands or contracts.

price taker

A firm that cannot influence the market price and must accept the price determined by market supply and demand.

productive efficiency

An outcome where firms produce at the lowest possible average total cost, minimizing waste and maximizing output from available resources.

natural monopoly

A market where one firm can produce the entire market output at a lower cost than multiple firms due to economies of scale.

monopoly

A market structure with one firm that produces a unique product with no close substitutes and has significant market power.

monopolistic competition

A market structure with many firms producing differentiated products, free entry and exit, and some degree of market power.

oligopoly

A market structure dominated by a few large firms whose decisions significantly affect each other and market outcomes.

monopsony

A market structure with one buyer facing many sellers, giving the buyer significant power to influence price.

price discrimination

The practice of charging different prices to different consumers for the same product based on their willingness to pay.

perfect price discrimination

A pricing strategy where a monopolist charges each consumer the maximum price they are willing to pay, capturing all consumer surplus.

excess capacity

The situation where a firm produces at a level below the output that minimizes average total costs, leaving productive capacity unused.

cartel

An agreement among firms to collude and coordinate their actions to reduce competition.

dominant strategy

A strategy that yields the highest payoff for a player regardless of what action the other player takes.

Nash equilibrium

A condition where no player can increase their payoff by unilaterally changing their action, given the other players' actions.

Prisoner's Dilemma

A game theory scenario in which individual incentives lead players away from a cooperative outcome that would benefit all players.

factor markets

Markets where factors of production (labor, capital, and land) are bought and sold, and where factor prices are determined.

marginal revenue product

The additional revenue generated by employing one more unit of a factor of production, calculated as marginal product multiplied by marginal revenue.

marginal factor cost

The additional total cost incurred by a firm when hiring one more unit of a resource, including both the wage of the new worker and any wage increases given to existing workers.

marginal revenue product of labor

The additional revenue a firm generates by hiring one more worker, calculated as the marginal physical product of labor multiplied by the marginal revenue.

value of the marginal product of labor

The additional revenue generated by hiring one more worker, calculated as the marginal physical product of labor multiplied by the price of output.

monopsonistic labor market

A labor market in which a single firm or a small number of firms are the primary employers, giving them market power to influence wages.

asymmetric information

A situation where one party in a transaction has more or better information than the other, leading to market inefficiency.

marginal social benefit

The total benefit to society of consuming one additional unit of a good, including both private and external benefits.

marginal social cost

The total cost to society of producing one additional unit of a good, including both private and external costs.

negative externalities

External costs imposed by the production or consumption of a good that are borne by third parties without compensation.