Microeconomics Fundamentals Flashcards

Microeconomics flashcards covering scarcity, market structures, equilibrium, and supply and demand dynamics.

What does microeconomics try to explain?

Microeconomics explains how economic agents make decisions and how their decentralized decisions affect the well-being of all market participants.

What is scarcity?

Scarcity (Knappheit) means that goods, services, and resources are limited while human wants are larger.

What is allocation?

Allocation (Allokation) is the distribution and use of scarce resources among different people and purposes.

What is market failure? Name examples.

Market failure (Marktversagen) occurs when a market does not produce an efficient or socially desirable result on its own. Examples include pollution, monopolies, public goods, and asymmetric information.

What is a market?

A market consists of buyers (who determine demand) and sellers (who determine supply) of a particular good or service.

Who determines demand and supply?

Consumers determine demand based on how much they are willing and able to buy; firms and sellers determine supply based on how much they are willing and able to sell.

What does market definition mean?

Market definition (Marktabgrenzung) is the process of deciding which products and geographical areas belong to the same market.

What characterizes a perfectly competitive market?

A perfectly competitive market is characterized by numerous buyers and sellers, homogeneous goods, low transaction costs, and easy market entry and exit.

What is a price taker?

A price taker (Preisnehmer) is an individual buyer or seller who is too small to influence the market price and must accept it as given.

What are homogeneous goods?

Homogeneous goods (gleichartige Güter) are products viewed as identical by buyers, regardless of who the seller is.

What are transaction costs?

Transaction costs (Transaktionskosten) are additional costs of participating in a market, including search, legal, transport, entry, and exit costs.

How do you read a supply-and-demand graph?

$P$ represents price on the vertical axis; $Q$ represents quantity on the horizontal axis; $D$ is the downward sloping demand curve; $S$ is the upward sloping supply curve.

What is market equilibrium?

Market equilibrium (Marktgleichgewicht) occurs where quantity demanded equals quantity supplied ($Q^D = Q^S$). It is represented by equilibrium price ($P^*$) and equilibrium quantity ($Q^*$).

What does a graph showing a shortage (Nachfrageüberschuss) indicate?

A shortage occurs at a price below equilibrium where $Q^D > Q^S$. Buyers compete for scarce goods, causing the price to rise.

What does a graph showing a surplus (Angebotsüberschuss) indicate?

A surplus occurs at a price above equilibrium where $Q^S > Q^D$. Goods remain unsold, causing sellers to lower the price.

How does the market mechanism restore equilibrium?

In a shortage, the price rises, which causes demand to fall and supply to rise. In a surplus, the price falls, which causes demand to rise and supply to fall. This coordination relates to the "invisible hand".

Which variables affect demand?

Demand depends on the price of the good, prices of related goods, income, preferences, expectations, and the number of buyers.

What does ceteris paribus mean?

Ceteris paribus (unter sonst gleichen Bedingungen) means "all other variables remain constant," allowing for the isolation of the relationship between a good's price and quantity demanded.

What is the difference between a movement along the demand curve and a shift of the curve?

A movement along the curve is caused by a change in the good's own price. A shift of the entire curve is caused by changes in income, preferences, expectations, related prices, or the number of buyers.

What happens when demand increases?

The demand curve shifts right from $D$ to $D'$, leading to a new equilibrium with a higher price ($P " ↑ "$) and a higher quantity ($Q " ↑ "$).

What happens when supply increases?

The supply curve shifts right from $S$ to $S'$, leading to a new equilibrium with a lower price ($P " ↓ "$) and a higher quantity ($Q " ↑ "$).

What is an increase in demand vs. an increase in quantity demanded?

An increase in demand is a rightward shift of the entire curve due to external factors. An increase in quantity demanded is a movement along the curve caused by a fall in the good's own price.

What do $P'^*$ and $Q'^*$ mean?

The prime mark ($'$) indicates a new value: $P'^*$ is the new equilibrium price and $Q'^*$ is the new equilibrium quantity.

What are the four basic market shifts and their effects?

Demand $↑$: $P ↑$, $Q ↑$; Demand $↓$: $P ↓$, $Q ↓$; Supply $↑$: $P ↓$, $Q ↑$; Supply $↓$: $P ↑$, $Q ↓$.