Microeconomics: Production, Trade, Elasticity, and Consumer Choice

Comprehensive practice flashcards defining foundational microeconomic terms, cost functions, trade concepts, elasticity measures, and utility theory principles.

Explicit Costs

Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others; also known as accounting costs.

Implicit Cost

The opportunity costs of using owned resources; costs for which no monetary payment is explicitly made.

Opportunity Cost

The value of the next-best foregone alternative when making a decision.

Economic Costs

The sum of explicit costs and implicit costs ($\text{Economic Costs} = \text{Explicit Costs} + \text{Implicit Costs}$).

Accounting Profit

Total revenue minus explicit costs ($\text{Accounting Profit} = TR - \text{Explicit Costs}$).

Economic Profit

Total revenue minus economic costs, which accounts for both explicit and implicit costs ($\text{Economic Profit} = TR - (\text{Explicit Costs} + \text{Implicit Costs})$).

Short Run (Production)

The time period in which at least one input of production is fixed while other inputs can be changed.

Total Product (TP)

The total amount of output produced with a given amount of resources.

Marginal Product (MP)

The additional output produced when one more unit of labor is added, calculated as $MP = \frac{TP_{\text{New}} - TP_{\text{Old}}}{L_{\text{New}} - L_{\text{Old}}}$.

Average Product (AP)

The total product per unit of resource utilized, calculated as $AP = \frac{TP}{L}$.

Increasing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource.

Diminishing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.

Fixed Costs (TFC)

Costs that do not change with the amount of output produced.

Variable Costs (TVC)

Costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases.

Total Costs (TC)

The sum of fixed and variable costs of production ($TC = TFC + TVC$).

Average Fixed Costs (AFC)

Total fixed cost divided by the amount of output produced ($AFC = \frac{TFC}{Q}$); fixed cost per unit, which declines continually as output expands.

Average Variable Costs (AVC)

Total variable cost divided by the amount of output produced ($AVC = \frac{TVC}{Q}$); variable cost per unit.

Average Total Costs (ATC)

Total cost divided by the amount of output produced ($ATC = \frac{TC}{Q}$), also equal to the sum of average fixed costs and average variable costs ($ATC = AFC + AVC$).

Marginal Cost (MC)

The additional cost associated with producing one more unit of output, calculated as $MC = \frac{\Delta TC}{\Delta Q}$.

Long Run (Production)

The time period in which all inputs of production can be changed.

Long-Run Average Total Cost Curve (LRATC)

A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable.

Economies of Scale

A condition in which the long-run average total cost of production decreases as output increases.

Constant Returns to Scale

A condition in which the long-run average total cost of production remains constant as output increases.

Diseconomies of Scale

A condition in which the long-run average total cost of production increases as output increases.

Comparative Advantage

The ability to produce a good or service at a lower relative opportunity cost than another producer.

Specialization

The practice where an individual, business, or country limits production to goods and services for which it has a comparative advantage.

Terms of Trade

The exchange rate or relative price between traded goods; for mutual benefit, it must be less than the buyer's opportunity cost and greater than the seller's opportunity cost.

Autarky

A situation in which a country is closed to international trade and consumes only what it produces domestically.

Small-Country Model

A trade model where the country is a price taker that cannot affect the world price ($P_W$); if open to trade, the world price becomes the domestic price.

Tariff

A tax or fee that must be paid on goods imported from other countries, raising the domestic price to $P_{W+t}$ and reducing import volume.

Quota

A legislated numerical limit on the quantity of a good that can be imported from abroad.

Elasticity

A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price.

Price Elasticity of Demand ($E_d$)

A measure of how responsive quantity demanded is to a change in price, calculated as $E_d = \frac{\%\Delta Q_d}{\%\Delta P}$.

Elastic Demand

A condition where the absolute value of the price elasticity of demand coefficient is greater than $1$ ($|E_d| > 1$), meaning the percentage change in quantity demanded exceeds the percentage change in price ($\%\Delta Q_d > \%\Delta P$).

Inelastic Demand

A condition where the absolute value of the price elasticity of demand coefficient is less than $1$ ($|E_d| < 1$), meaning the percentage change in quantity demanded is less than the percentage change in price ($\%\Delta Q_d < \%\Delta P$).

Unit-Elastic Demand

A condition where the absolute value of the price elasticity of demand coefficient equals $1$ ($|E_d| = 1$), meaning the percentage change in quantity demanded is equal to the percentage change in price ($\%\Delta Q_d = \%\Delta P$).

Total Revenue Test

A method to determine price elasticity: if price and total revenue move in opposite directions, demand is elastic; if they move in the same direction, demand is inelastic; if total revenue does not change, demand is unit-elastic.

Cross-Price Elasticity of Demand ($E_{B/A}$)

A measure of the effect of a change in the price of product A on the quantity demanded of product B, calculated as $E_{B/A} = \frac{\%\Delta Q_{d,B}}{\%\Delta P_A}$.

Substitutes

Goods, services, or resources that are viewed as replacements for one another, having a positive cross-price elasticity of demand ($E_{B/A} > 0$).

Complements

Goods, services, or resources that are used or consumed with one another, having a negative cross-price elasticity of demand ($E_{B/A} < 0$).

Income Elasticity of Demand ($E_I$)

A measure of how responsive demand is to a change in consumer income, calculated as $E_I = \frac{\%\Delta Q_d}{\%\Delta \text{Income}}$.

Normal Good

A good for which demand increases when income increases and decreases when income falls, characterized by a positive income elasticity of demand ($E_I > 0$).

Inferior Good

A good for which demand decreases when income increases and increases when income falls, characterized by a negative income elasticity of demand ($E_I < 0$).

Price Elasticity of Supply ($E_s$)

A measure of how responsive quantity supplied is to a change in price, calculated as $E_s = \frac{\%\Delta Q_s}{\%\Delta P}$; always a positive value.

Immediate Period (Supply)

A period of time so short that producers cannot alter the quantity of output produced in response to a change in price, making supply perfectly inelastic (vertical).

Utility

The satisfaction or happiness received from the consumption of goods and services.

Utils

A subjective, hypothetical unit of measurement used to quantify the satisfaction received from consuming a good or service.

Marginal Utility (MU)

The additional satisfaction or happiness received from the consumption of an additional unit of a good or service ($MU = \frac{\Delta TU}{\Delta Q}$).

Total Utility (TU)

The total satisfaction or happiness received from the consumption of a good, service, or combination of goods and services ($TU = \sum MU$).

Law of Diminishing Marginal Utility

A principle stating that the marginal utility associated with consuming a good or service decreases with each additional unit consumed in a given time period.

Utility Maximization

The process of obtaining the greatest level of overall satisfaction from consuming goods and services, subject to consumer preferences, incomes, and prices.

Equal Marginal Principle

The condition under which consumers maximize utility by allocating limited income such that the marginal utility per dollar spent on each final choice is equal ($\frac{MU_a}{P_a} = \frac{MU_b}{P_b}$).

Budget Line

A line showing the different combinations of two products that can be purchased with a given budget and at a known set of prices ($\text{Budget} = (P_A \times Q_A) + (P_B \times Q_B)$).

Indifference Curve

A curve showing the combinations of two products that generate the same amount of total utility or satisfaction.

Consumer Equilibrium (Indifference Analysis)

The point of utility maximization where the budget line is tangent to the highest attainable indifference curve.