Introductory Microeconomics: Principles, Demand, Elasticity, Supply, and Equilibrium

Comprehensive vocabulary flashcards covering introductory microeconomic foundations, core economic principles, demand and supply analysis, price elasticity, and market equilibrium.

Economics

The study of how to run a household, or manage money among competing interests.

Adam Smith

The father of Economics; a social philosopher who founded economics and discussed free markets guided by an invisible hand without the need for strict government regulation.

Microeconomics

The study of how households and firms make choices, how they interact with markets, and how the government attempts to influence their choices.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Cost-Benefit Principle

The principle stating that costs and benefits are incentives shaping decisions; choices should only be pursued if their benefits are at least as large as their costs.

Willingness to Pay (WTP)

The monetary amount used to convert nonfinancial costs and benefits into equivalent dollar values (the most one is willing to pay to obtain a benefit and avoid a cost).

Economic Surplus

Total benefits minus total costs flowing from a decision; measures how much a choice improves well-being.

Quality Adjusted Life Year (QALY)

A metric used to quantify nonfinancial outcomes like well-being and happiness.

Opportunity Cost Principle

The principle stating that the true cost of something is the next best alternative given up.

Scarcity

The foundational economic problem that resources are limited.

Production Possibilities Frontier (PPF)

A curve showing the different sets of output choices that are attainable with scarce resources.

Factors of Production

The primary inputs used to produce goods and services: natural resources/land/raw materials, labor, physical capital, and human capital.

Economic Costs

The sum of accounting costs and opportunity costs, evaluated when attempting to maximize profit.

Productivity Gains

Shifts of the production possibilities curve to new levels of output, enabled by factors like technological upgrades, research and development, more factories or data centers, or an increased retirement age.

Efficiency Gains

Movements along the production possibilities frontier to maximize output between two factors, enabled by reducing procrastination, studying while traveling, etc.

Marginal Principle

The principle stating that decisions about quantities are best made incrementally by breaking 'how many' questions into a series of smaller decisions weighing marginal benefit and marginal cost.

Marginal Benefit (MB)

The extra benefit obtained from one additional unit of an activity or good purchased.

Marginal Cost (MC)

The extra cost incurred from producing or consuming one additional unit.

Rational Rule

The decision-making rule stating that if something is worth doing, continue doing it until $MB = MC$.

Interdependence Principle

The principle that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future.

Individual Demand Curve

A downward-sloping graph plotting the quantity of an item that an individual plans to buy ($Q_d$) at each price ($P$), ceteris paribus, where $D = MB$.

Ceteris Paribus

A Latin phrase meaning 'holding other things constant.'

Law of Demand

The tendency for quantity demanded to be higher when price is lower, and vice versa; represents an inverse relationship between $P$ and $Q_d$, ceteris paribus.

Rational Rule for Buyers

A rule stating that consumers should buy until $P = MB$ to maximize economic surplus, derived from buying until $MC = MB$.

Diminishing Marginal Benefit

The economic concept that each additional unit of an item yields a smaller marginal benefit than the previous unit; explains why the demand curve slopes downward.

Market Demand

A downward-sloping graph plotting the total quantity of an item demanded by the entire market ($Q_d$) at each price ($P$).

Normal Good

A good for which an increase in income causes an increase in demand, and a decrease in income causes a decrease in demand (e.g., vacations, clothes, cars).

Inferior Good

A good for which higher income causes a decrease in demand, and lower income causes an increase in demand (e.g., public transport, second-hand clothes, fast food).

Complementary Goods

Goods or services that are used together, such that a change in the price of one inversely affects the demand for the other (e.g., bread and butter).

Substitute Goods

Goods or services that can replace each other in consumption (e.g., Coke and Pepsi).

Network Effect

A situation where an item becomes more valuable and useful the more people use it (e.g., Facebook, iPhones, vaccines).

Congestion Effect

A situation where an item becomes less valuable and useful the more consumers use it (e.g., highways).

Price Elasticity of Demand

A measure of how responsive quantity demanded is to changes in price; inversely related to the slope of the demand curve.

Elastic Demand

Demand where the absolute elasticity value is greater than $1$, meaning the percentage change in $Q_d$ is greater than the percentage change in $P$, characterized by a flat demand curve.

Inelastic Demand

Demand where the absolute elasticity value is less than $1$, meaning the percentage change in $P$ is greater than the percentage change in $Q_d$, characterized by a steep demand curve.

Unitary Elastic Demand

Demand where price elasticity equals $1$, meaning the percentage change in quantity demanded exactly equals the percentage change in price.

Perfectly Elastic Demand

A theoretical case where elasticity is infinity or undefined; the demand curve is horizontal, $Q_d$ is infinite at the given price, and $Q_d = 0$ at any other price.

Perfectly Inelastic Demand

A scenario where elasticity equals $0$; the demand curve is vertical and $Q_d$ remains entirely unaffected by changes in price (e.g., insulin for Type 1 diabetics).

Midpoint Method

A formula for calculating elasticity using $\frac{(Q_2 - Q_1) / [0.5(Q_2 + Q_1)]}{(P_2 - P_1) / [0.5(P_2 + P_1)]}$, which assigns equal weight to base and end values to prevent direction-dependent bias.

Total Revenue (TR)

The total receipts of a firm calculated as $TR = P \times Q$.

Individual Supply (S)

An upward-sloping curve plotting the quantity of an item a business plans to sell ($Q_s$) at each price ($P$), ceteris paribus, where $S = MC$.

Law of Supply

The positive relationship stating that as price increases, quantity supplied increases, and as price decreases, quantity supplied decreases, ceteris paribus.

Perfect Competition

A market structure where all firms sell an identical/homogeneous product, there are many buyers and sellers, and each participant is small relative to the overall market size.

Price Taker

A seller or buyer who decides to charge or accept the prevailing market price and whose individual actions do not affect that prevailing price.

Total Variable Costs (TVC)

Costs that change directly with the quantity of output produced and are included in marginal cost (e.g., labor, raw materials).

Total Fixed Costs (TFC)

Costs that do not change when the quantity of output produced changes and are excluded from marginal cost (e.g., rent, tuition).

Total Economic Costs (TC)

The sum of all fixed and variable costs incurred by a firm, represented by $TC = TVC + TFC$.

Rational Rule for Sellers

A rule stating that to maximize profits, a business should produce and sell units until $P = MC$, since $MB = P$.

Marginal Product (MP)

The increase in total output that arises from adding an additional unit of input, calculated as $MP = \frac{\Delta Q}{\Delta \text{Input}}$.

Diminishing Marginal Product

The property whereby the marginal product of an input declines as more of that input is used, leading to rising marginal costs.

Substitutes in Production

Alternative uses of a firm's production resources where increasing the production of one good leads to a decrease in the supply of the other.

Complements in Production

Goods that are produced together from the same process, such that an increase in the production of one increases the supply of the other (e.g., apples and honey).

Market

Any setting that brings together potential buyers and sellers.

Equilibrium

The point where the supply curve intersects the demand curve ($Q_s = Q_d$) and there is no tendency for price or quantity to change.

Disequilibrium

A market condition where quantity supplied and quantity demanded are not equal, resulting in either a shortage ($Q_d > Q_s$) or a surplus ($Q_s > Q_d$).