Economics Key Concepts: Micro, Macro, Supply & Demand, Externalities

What is economics?

The study of how society manages scarce resources.

What is scarcity?

Limited resources compared to unlimited wants.

What is the difference between microeconomics and macroeconomics?

Micro studies individuals/firms; macro studies the whole economy.

What are the three basic economic questions?

What to produce, how to produce, for whom to produce.

What is opportunity cost?

What you give up to get something else.

What does a Production Possibilities Curve (PPC) show?

Maximum combinations of two goods an economy can produce.

What points on a PPC are efficient?

Points on the curve.

What points on a PPC are inefficient?

Points inside the curve.

What causes a PPC to shift outward?

More resources or better technology.

What is comparative advantage?

Ability to produce at lower opportunity cost.

What is absolute advantage?

Ability to produce more with same resources.

Why do countries trade?

To specialize and gain from comparative advantage.

What law explains the demand curve slope?

Law of demand: higher price = lower quantity demanded.

What law explains the supply curve slope?

Law of supply: higher price = higher quantity supplied.

What causes movement along the demand curve?

Change in price of the good itself.

What causes a shift in demand?

Income, tastes, expectations, buyers, related goods.

What are normal goods?

Demand rises when income rises.

What are inferior goods?

Demand falls when income rises.

What are substitutes?

Two goods used in place of each other.

What are complements?

Two goods used together.

What causes a shift in supply?

Input costs, technology, sellers, taxes, expectations.

What is market equilibrium?

Where quantity demanded = quantity supplied.

What is surplus?

Quantity supplied > quantity demanded.

What is shortage?

Quantity demanded > quantity supplied.

What is the formula for price elasticity of demand?

% change in quantity demanded / % change in price.

If elasticity < 1, demand is?

Inelastic.

If elasticity > 1, demand is?

Elastic.

If elasticity = 1, demand is?

Unitary elastic.

If demand is elastic and price rises, total revenue does what?

Falls.

If demand is inelastic and price rises, total revenue does what?

Rises.

What is a price ceiling?

Legal maximum price.

What is an example of a price ceiling?

Rent control.

What is a price floor?

Legal minimum price.

What is an example of a price floor?

Minimum wage.

What is consumer surplus?

What buyers are willing to pay minus what they pay.

What is producer surplus?

Price received minus cost of production.

What is deadweight loss?

Lost total surplus from market inefficiency.

Who legally pays a tax is called?

Statutory incidence.

Who actually bears burden of tax depends on?

Elasticity.

If demand is more inelastic, who pays more tax?

Consumers.

If supply is more inelastic, who pays more tax?

Producers.

What is world price?

Price in global market.

If domestic price is below world price, nation becomes?

Exporter.

If domestic price is above world price, nation becomes?

Importer.

What is an externality?

Side effect affecting third parties.

What is a negative externality example?

Pollution.

What is a positive externality example?

Education.

How do governments fix negative externalities?

Taxes/regulations.

What is average tax rate?

Total taxes / total income.

What is marginal tax rate?

Tax rate on next dollar earned.

What is explicit cost?

Direct money payment.

What is implicit cost?

Opportunity cost of owned resources.

What is the economic profit formula?

Total revenue - explicit and implicit costs.

What is the accounting profit formula?

Total revenue - explicit costs only.

What is the total cost formula?

Fixed cost + variable cost.

What are fixed costs?

Costs that do not change with output.

What are variable costs?

Costs that change with output.

What is the marginal cost formula?

Change in total cost / change in quantity.

What is the average total cost formula?

Total cost / quantity.

What is the law of diminishing returns?

Marginal product eventually falls as more input added.

What is a price taker?

Firm accepts market price.

What market structure is a price taker?

Perfect competition.

What is the profit maximizing rule for a competitive firm?

Produce where P = MC.

What is the shutdown rule in the short run?

Shut down if price < AVC.

What do firms enter or exit in the long run based on?

Economic profit or loss.

What is a monopoly?

Single seller with no close substitutes.

What is the profit maximizing rule for a monopoly?

MR = MC.

How does a monopoly choose price?

Use demand curve at profit-max quantity.

Why is monopoly inefficient?

Price > MC causing deadweight loss.

What is monopolistic competition?

Many firms selling differentiated products.

Why does monopolistic competition face downward demand?

Product differentiation.

What is the long-run profit in monopolistic competition?

Zero economic profit.

What is oligopoly?

Few interdependent firms dominate market.

What is a dominant strategy?

Best strategy regardless of rival action.

What is the value of marginal product of labor?

Marginal product × output price.