Microeconomics Formulas and Concepts

A comprehensive set of vocabulary flashcards based on the Micro Formulas Cheat Sheet, covering core microeconomic principles, elasticity formulas, cost structures, and efficiency definitions.

Opportunity Cost

The sum of Explicit Cost and Implicit Cost; it is also simply referred to as cost.

Absolute Advantage

The entity that can produce more units with the same amount of inputs or produce the same amount with fewer inputs.

Comparative Advantage

The entity that can produce a good or service at a lower opportunity cost.

Output Method Opportunity Cost (Other Over)

When dealing with outputs (e.g., bikes, corn), the opportunity cost of $A$ is calculated as $rac{B}{A}$ units of $B$.

Input Method Opportunity Cost (It Over)

When dealing with inputs (e.g., hours, machines), the opportunity cost of $A$ is calculated as $rac{A}{B}$ units of $B$.

Total Revenue Test

Used to determine price elasticity of demand: if $P$ increases and $TR$ increases, demand is Inelastic; if $P$ increases and $TR$ decreases, demand is Elastic; if $P$ increases and $TR$ has no change, demand is Unit Elastic.

Price Elasticity (of Demand or Supply)

Calculated as $rac{ ext{\%} ext{\Delta}Q}{ ext{\%} ext{\Delta}P}$. A negative coefficient indicates demand, while a positive coefficient indicates supply.

Elasticity Coefficients

An absolute value > 1 means the good is elastic; an absolute value < 1 means the good is inelastic.

Income Elasticity

Calculated as $rac{ ext{\%} ext{\Delta}Q}{ ext{\%} ext{\Delta} ext{Income}}$. A negative coefficient indicates an inferior good, and a positive coefficient indicates a normal good.

Cross Price Elasticity

Calculated as $rac{ ext{\%} ext{\Delta}Q}{ ext{\%} ext{\Delta}P} ext{ of other good}$. A negative coefficient indicates the two goods are complements, and a positive coefficient indicates they are substitutes.

Dead Weight Loss

The area of the triangle calculated as $rac{ ext{Base} imes ext{Height}}{2}$.

Consumer Surplus

What consumers are willing to pay for each quantity bought minus the price; calculated as the triangle area $rac{ ext{Base} imes ext{Height}}{2}$.

Producer Surplus

The price minus what suppliers are willing to accept for a quantity (the supply curve or marginal cost curve); calculated as the triangle area $rac{ ext{Base} imes ext{Height}}{2}$.

Tax Revenue

Calculated as $ext{Per unit tax} imes ext{quantity taxed}$. On a graph, it is represented by the rectangle area $ext{Base} imes ext{Height}$.

Economic Surplus

The sum of Consumer Surplus, Producer Surplus, and Tax Revenue.

Allocatively Efficient Point

The point where $S = D$ for a market without externalities, $P = MC$ for a firm, or $MSB = MSC$ for a market with externalities.

Productively Efficient Point

The point of Minimum ATC, where $ATC = MC$.

Marginal Cost (MC)

The change in total cost divided by the change in quantity ($rac{ ext{\Delta} ext{Total Cost}}{ ext{\Delta} ext{Quantity}}$), representing the cost of producing one more unit of output.

Fixed Cost

The cost of producing zero units; it does not change with the quantity produced.

Variable Cost

The sum of each unit's marginal cost; this cost increases as quantity produced increases.

Total Cost

The sum of Explicit Cost and Implicit Cost, or the sum of Variable Cost and Fixed Cost.

Profit Maximizing Point

The point where $MC = MR$. Firms should continue to produce more output until they reach this point.

Economic Profit

$ext{Total Revenue} - ext{Total Cost}$. On a firm graph, it is the rectangle from the Profit Maximizing Output up to demand and up to ATC.

Accounting Profit

$ext{Total Revenue} - ext{Explicit Cost}$.

Marginal Benefit

The change in total benefit divided by the change in quantity ($rac{ ext{\Delta} ext{Total Benefit}}{ ext{\Delta} ext{Quantity}}$).

Benefit Maximizing Behavior

The principle that you should continue doing something until the $MC = MB$.

Utility per Dollar Maximization

To maximize benefit when goods have different costs, consume until rac{MU_A}{P_A} = rac{MU_B}{P_B}.

Lowest Cost Resource Combination

A production strategy using more of the resource with a greater Marginal Product per dollar until rac{MP_L}{P_L} = rac{MP_C}{P_C}.

Marginal Revenue Product (MRP)

Calculated as $rac{ ext{\Delta} ext{Total Revenue}}{ ext{\Delta} ext{Quantity of resource}}$ or $ext{Marginal Product} imes MR$ (where $MR$ is usually product price).

Gini Coefficient

A measure of income distribution where $1$ indicates complete inequality and $0$ indicates complete equality. A lower coefficient indicates a more equal distribution.