Purdue ECON 25100 Exam 1 Vocabulary Study Guide

Vocabulary flashcards covering core microeconomic principles, supply, demand, elasticity, price controls, and efficiency based on Dr. Banan's Purdue ECON 25100 course.

Opportunity Cost

The true cost of any choice, which is what must be given up to obtain it, including both explicit (out-of-pocket) and implicit (foregone alternatives) costs.

Marginal Analysis

Decision-making that involves comparing marginal benefit ($MB$) and marginal cost ($MC$), where rational agents take action if and only if $MB \ge MC$.

Incentives

Opportunities that people exploit to make themselves better off, responding predictably to shifts in rewards or punishments.

Law of Demand

The principle that, ceteris paribus, as price rises, the quantity demanded falls, causing the demand curve to slope downward due to substitution and income effects.

Law of Supply

The principle that, ceteris paribus, as price rises, the quantity supplied increases, causing the supply curve to slope upward reflecting increasing marginal opportunity costs.

Movement Along a Curve

A change in quantity demanded or quantity supplied that is caused exclusively by a change in the product's own price.

Shift in Demand

A change in the entire demand curve caused by changes in income (normal vs. inferior goods), prices of related goods (substitutes vs. complements), tastes, expectations, or the number of buyers.

Shift in Supply

A change in the entire supply curve caused by changes in input prices, technology, taxes/subsidies, expectations, or the number of sellers.

Market Equilibrium

The market state that occurs where Quantity Demanded ($Qd$) equals Quantity Supplied ($Qs$).

Surplus

A market condition that occurs when $Price > Equilibrium\,Price$ (or when a binding price floor is enacted), resulting in quantity supplied exceeding quantity demanded.

Shortage

A market condition that occurs when $Price < Equilibrium\,Price$ (or when a binding price ceiling is enacted), resulting in quantity demanded exceeding quantity supplied.

Price Elasticity of Demand ($Ed$)

Measures the responsiveness of quantity demanded ($Qd$) to a change in price, calculated using the Midpoint Method formula $Ed = \frac{\frac{Q_2 - Q_1}{(Q_1 + Q_2)/2}}{\frac{P_2 - P_1}{(P_1 + P_2)/2}}$.

Elastic Demand

A demand condition where $Ed > 1$, meaning price and total revenue ($TR$) move in opposite directions (a price cut increases $TR$).

Inelastic Demand

A demand condition where $Ed < 1$, meaning price and total revenue ($TR$) move in the same direction (a price cut decreases $TR$).

Unit-Elastic Demand

A demand condition where $Ed = 1$.

Total Revenue (TR) Test

A test used to evaluate demand elasticity where price cuts increase $TR$ under elastic demand and decrease $TR$ under inelastic demand.

Cross-Price Elasticity ($Exy$)

Measures responsiveness of demand for one good to changes in price of another; positive ($Exy > 0$) for substitutes and negative ($Exy < 0$) for complements.

Income Elasticity ($Ei$)

Measures responsiveness of demand to changes in income; positive ($Ei > 0$) for normal goods and negative ($Ei < 0$) for inferior goods.

Consumer Surplus (CS)

Willingness to Pay ($WTP$) minus actual price paid; graphically represented as the area below the demand curve and above the market price.

Producer Surplus (PS)

Market price received minus marginal cost of production; graphically represented as the area above the supply curve and below the market price.

Price Ceiling

A legal maximum price that is binding only if set BELOW equilibrium price, resulting in a persistent shortage, inefficient allocation, wasted resources, and black markets.

Price Floor

A legal minimum price that is binding only if set ABOVE equilibrium price, resulting in a persistent surplus and wasted resources.

Deadweight Loss (DWL)

The reduction in total economic surplus ($CS + PS$) resulting from an inefficient market intervention or market failure.

Substitutes

Goods that have a Cross-Price Elasticity greater than zero ($Exy > 0$), where an increase in the price of Good X causes an increase in demand for Good Y.

Complements

Goods that have a Cross-Price Elasticity less than zero ($Exy < 0$), where an increase in the price of Good X causes a decrease in demand for Good Y.

Inferior Good

A good that has an Income Elasticity less than zero ($Ei < 0$), where an increase in income causes a decrease in demand.