Principles of Microeconomics: Market Structures, Welfare, Externalities, and Consumer Theory

Comprehensive vocabulary flashcards covering fundamental microeconomics topics including market structures, costs of production, tax incidence, externalities, public goods, consumer choice theory, and labor market dynamics.

Perfect Competition

A market structure characterized by many firms selling homogenous (identical) goods, with no barriers to entry or exit, making all firms price takers.

Price Taker

A firm that has no influence over the market price and must sell its entire output at the prevailing market price ($MR = P^*$).

Homogenous Goods

Identical or undifferentiated products offered by different firms such that consumers view them as perfect substitutes.

Marginal Revenue ($MR$)

The additional revenue gained by a firm from selling one more unit of output ($\Delta TR / \Delta Q$). In perfect competition, $MR = P^*$.

Profit-Maximizing Rule ($MR = MC$)

The principle that a firm maximizes profit by producing the output level where marginal revenue equals marginal cost.

Shutdown Rule (Short-Run)

A rule stating that a firm should temporarily shut down in the short run if the market price falls below Average Variable Cost ($P < AVC$), because revenue fails to cover variable costs.

Zero-Profit Point

The point on a firm's cost curve where price equals minimum Average Total Cost ($P = \min ATC$), earning zero economic profit in the long run.

Invisible Hand

The economic principle that self-interested profit maximization in competitive markets leads to a socially optimal and allocatively efficient outcome without central planning.

Monopoly

A market structure in which a single firm is the sole seller of a product with no close substitutes and high barriers to entry.

Price Maker

A firm (like a monopolist) that possesses market power and chooses the market price by altering its quantity supplied.

Barriers to Entry

Obstacles that prevent potential competitors from entering a market, allowing monopolies to sustain positive economic profits in the long run.

Legal Barriers

Patents, copyrights, government licenses, and regulations that grant exclusive rights to prevent market entry.

Natural Monopoly

A market where high fixed costs and low/constant marginal costs cause Average Total Cost ($ATC$) to continually decline, making one firm the lowest-cost producer.

Network Effects

The phenomenon where a product or service becomes more valuable as more people use it.

Patent

A legal barrier granting an inventor exclusive rights to produce and sell an invention for a fixed period (e.g., $20$ years) in exchange for public disclosure.

Price Discrimination

The practice of charging different prices to different buyers for the exact same good to extract more consumer surplus and increase profit.

Perfect Price Discrimination

Charging every individual buyer their exact maximum willingness to pay, eliminating consumer surplus and deadweight loss.

Arbitrage

The practice of buying a good at a low price in one market/discount group and reselling it at a higher price, which undermines price discrimination.

Explicit Costs

Direct, out-of-pocket monetary payments made by a firm for inputs (e.g., wages, rent, raw materials).

Implicit Costs

The opportunity costs of using resources owned by the firm or owner that do not involve a direct monetary payment (e.g., forgone salary, forgone rental income).

Accounting Profit

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

Economic Profit

Total revenue minus economic costs ($\text{Economic Profit} = TR - (\text{Explicit Costs} + \text{Implicit Costs})$).

Fixed Costs ($FC$)

Costs that do not vary with the quantity of output produced (e.g., equipment leases, insurance).

Variable Costs ($VC$)

Costs that change directly as the firm alters the quantity of output produced (e.g., raw materials, hourly labor).

Total Cost ($TC$)

The sum of fixed and variable costs at a given output level ($TC = FC + VC$).

Average Fixed Cost ($AFC$)

Fixed cost per unit of output ($AFC = \frac{FC}{Q}$), which declines continuously as output grows.

Average Variable Cost ($AVC$)

Variable cost per unit of output ($AVC = \frac{VC}{Q}$).

Average Total Cost ($ATC$)

Total cost per unit of output ($ATC = \frac{TC}{Q} = AVC + AFC$).

Marginal Cost ($MC$)

The increase in total cost resulting from producing one additional unit of output ($\Delta TC / \Delta Q$).

Diminishing Marginal Productivity

The economic property whereby the marginal output generated from adding one more unit of an input (e.g., labor) eventually declines as the input quantity increases.

Efficient Scale

The quantity of output that minimizes Average Total Cost ($\min ATC$).

Short Run

A time horizon in which at least one production input/cost is fixed.

Long Run

A time horizon in which all inputs and costs are fully variable.

Specific Tax

A fixed dollar tax amount charged per unit of a good sold (e.g., $\$0.184$ per gallon of gasoline).

Ad Valorem Tax

A tax assessed as a percentage of the value or price of a transaction (e.g., sales tax, income tax).

Statutory Incidence

The party legally required by statute to write the tax check to the government.

Economic Incidence

The true distribution of the tax burden between buyers and sellers, which is independent of statutory incidence and determined by relative elasticity.

Tax Wedge

The difference between the price paid by buyers ($P_b$) and the price received by sellers ($P_s$) caused by a tax ($P_b - P_s = \text{Tax}$).

Consumer Burden

The portion of a tax borne by buyers ($P_b - P^*$).

Producer Burden

The portion of a tax borne by sellers ($P^* - P_s$).

Deadweight Loss ($DWL$)

The fall in total social surplus resulting from a market distortion (such as a tax or monopoly) that reduces output below the socially efficient equilibrium level.

Efficiency vs. Equity Trade-off

The policy conflict between minimizing deadweight loss (efficiency) and achieving a fair distribution of income/burdens across society (equity).

Regressive Tax

A tax that takes a larger percentage of income from low-income earners than from high-income earners (e.g., taxing basic necessities).

Progressive Tax

A tax structure where higher-income earners pay a larger percentage of their income in taxes.

Market Failure

A situation in which a free market, left on its own, fails to allocate resources efficiently.

Externality

An uncompensated cost or benefit imposed by a market transaction on an uninvolved third party.

Negative Externality

Spillovers that impose an uncompensated cost on third parties, where Marginal Social Cost exceeds Marginal Private Cost ($MSC > MPC$).

Positive Externality

Spillovers that confer an uncompensated benefit on third parties, where Marginal Social Benefit exceeds Marginal Private Benefit ($MSB > MPB$).

Marginal Private Cost ($MPC$)

The direct cost incurred by the seller/producer for producing one more unit.

Marginal Social Cost ($MSC$)

The total cost to society of producing one more unit, including private costs and external environmental/social damage ($MSC = MPC + \text{External Cost}$).

Pigouvian Tax

A tax levied on a market with negative externalities equal to the external cost per unit, designed to internalize the externality and restore social efficiency.

Internalizing an Externality

Altering incentives so that market actors take into account the external effects of their actions.

Rivalry in Consumption

The property of a good whereby one person's use diminishes or prevents another person's use.

Excludability

The property of a good whereby a person can be prevented from using or consuming it if they do not pay for it.

Private Goods

Goods that are both rival and excludable (e.g., food, clothing, housing).

Public Goods

Goods that are non-rival and non-excludable (e.g., national defense, public fireworks displays).

Club Goods

Goods that are non-rival but excludable (e.g., Netflix, Spotify, cable TV).

Common Resources

Goods that are rival in consumption but non-excludable (e.g., fish in the ocean, shared pastures, groundwater).

Free-Rider Problem

A market failure occurring with non-excludable goods where individuals have an incentive to consume the good without paying for it, leading to under-provision by private markets.

Tragedy of the Commons

The economic tendency for common resources to be overused, depleted, and degraded because private users enjoy the full benefit of usage while sharing the depletion costs across society.

Property Rights

Clear legal ownership rights over a resource that incentivize individuals to conserve and optimize its value for the future.

Consumption Bundle

A specific combination of two or more goods chosen by a consumer.

Budget Constraint

The limit on the consumption bundles that a consumer can afford given their income ($B$) and market prices ($P_1, P_2$).

Budget Line

A graphical line representing all affordable combinations of goods that exhaust a consumer's total budget ($P_1 X_1 + P_2 X_2 = B$), with a slope equal to $-\frac{P_1}{P_2}$.

Indifference Curve ($IC$)

A curve showing all consumption bundles that yield the exact same level of utility/satisfaction to a consumer.

Marginal Rate of Substitution ($MRS$)

The rate at which a consumer is willing to trade one good for another while maintaining the same level of utility, equal to the absolute slope of the indifference curve ($MRS = \frac{MU_1}{MU_2}$).

Diminishing Marginal Utility ($MU$)

The principle that the extra satisfaction gained from consuming an additional unit of a good declines as more of that good is consumed.

Tangency Optimum

The utility-maximizing bundle where the consumer's budget line is tangent to the highest attainable indifference curve ($MRS = \frac{P_1}{P_2}$).

Perfect Substitutes

Goods with straight-line indifference curves and a constant Marginal Rate of Substitution ($MRS$) (e.g., Coke vs. Pepsi).

Perfect Complements

Goods with right-angled (L-shaped) indifference curves consumed in fixed proportions (e.g., left shoes and right shoes).

Normal Good

A good for which demand increases as income increases.

Inferior Good

A good for which demand decreases as income increases.

Giffen Good

A rare, strongly inferior good whose upward-sloping demand curve violates the law of demand because its negative income effect outweighs its substitution effect when price changes.

Substitution Effect ($SE$)

The change in consumption resulting from a relative price change, holding utility constant along the original indifference curve.

Income Effect ($IE$)

The change in consumption resulting from a change in real purchasing power caused by a price change.

Marginal Revenue Product of Labor ($MRPL$)

The additional revenue a firm earns from hiring one additional worker ($MRPL = MPL \times \text{Net Price/Value}$), representing the maximum wage a profit-maximizing firm is willing to pay.

Compensating Differential

A wage difference that arises to compensate workers for non-monetary job characteristics, such as unpleasant, dangerous, or risky working conditions (e.g., oil rig work vs. farming).

Human Capital

The accumulation of skills, education, knowledge, and experience that increases a worker's productivity and Marginal Revenue Product of Labor ($MRPL$).

Signaling Theory

The concept that educational attainment (e.g., a college degree) serves as a signal to employers about an applicant's inherent ability, discipline, and productivity, rather than solely building job skills.

Invidious / Employer Discrimination

Treating otherwise identical workers differently based purely on demographic attributes like race or gender, which competitive markets tend to erode over time as non-discriminating firms gain a cost advantage.

Consumer Discrimination

Discriminatory preferences held by customers that reduce demand for businesses employing certain groups.

Employee Discrimination

Discriminatory attitudes held by co-workers that create workplace conflict and disrupt productivity.

Greedy Jobs

High-paying jobs that disproportionately reward long, inflexible hours and constant availability (e.g., corporate law, finance), contributing to persistent gender earnings gaps due to structural domestic divisions of labor.

Intergenerational Income Mobility

The degree to which an individual's financial status and income level depend on the income and economic standing of their parents across generations.