ECON 101: Microeconomics Core Concepts - Production, Markets, Interventions, Elasticity, and Taxation

Comprehensive practice flashcards defining foundational microeconomic vocabulary across costs of production, welfare analysis, price controls, elasticity, and the deadweight loss of taxation.

Total Revenue

The total amount of money a firm receives from selling its output, calculated as price multiplied by quantity ($\text{Total Revenue} = P \times Q$).

Total Cost

The market value of all inputs a firm uses in production, composed of both fixed costs and variable costs ($TC = FC + VC$).

Profit

The financial gain left over from total revenue after a firm pays for all its inputs, calculated as $\text{Profit} = \text{Total revenue} - \text{Total cost}$.

Explicit Costs

Production costs that require a direct monetary outflow by the firm, such as payments for ingredients, employee wages, and shop rent.

Implicit Costs

Opportunity costs of production that do not require an out-of-pocket cash outlay, representing the forgone income from resources the firm already owns (such as an owner's forgone salary and forgone bank interest).

Accounting Profit

Total revenue minus explicit costs ($\text{Accounting profit} = \text{Total revenue} - \text{Explicit costs}$), which excludes implicit opportunity costs.

Economic Profit

Total revenue minus all opportunity costs, both explicit and implicit ($\text{Economic profit} = \text{Total revenue} - \text{Explicit costs} - \text{Implicit costs}$).

Production Function

The technological relationship between the quantity of inputs used to produce a good and the resulting quantity of output of that good.

Marginal Product (MP)

The additional output generated by employing one additional unit of an input, calculated as the change in output divided by the change in input ($MP = \frac{\Delta Q}{\Delta L}$).

Diminishing Marginal Product

The economic property whereby the marginal product of an input declines as the quantity of that input increases, causing the production function to flatten and the total cost curve to steepen.

Fixed Costs (FC)

Costs that do not vary with the quantity of output produced, such as facility rent.

Variable Costs (VC)

Costs that change directly as the firm alters the quantity of output produced, such as wages paid to production workers.

Average Fixed Cost (AFC)

Fixed costs divided by the quantity of output ($AFC = \frac{FC}{Q}$), which continually declines as output increases because the fixed expense is spread over more units.

Average Variable Cost (AVC)

Variable costs divided by the quantity of output ($AVC = \frac{VC}{Q}$), which typically rises as output increases due to diminishing marginal product.

Average Total Cost (ATC)

Total cost divided by the quantity of output ($ATC = \frac{TC}{Q} = AFC + AVC$), yielding a U-shaped curve determined by the interplay of falling $AFC$ and rising $AVC$.

Marginal Cost (MC)

The increase in total cost arising from producing one additional unit of output ($MC = \frac{\Delta TC}{\Delta Q}$), representing the slope of the total cost curve and crossing $ATC$ at its minimum point.

Efficient Scale

The quantity of output that minimizes average total cost, located precisely where marginal cost equals average total cost ($MC = ATC$).

Welfare Analysis

The study of how the allocation of resources affects the economic well-being of market participants and society.

Willingness to Pay (WTP)

The maximum amount of money a buyer is willing and able to give up to acquire a good or service, reflecting the buyer's valuation of that good.

Consumer Surplus (CS)

The difference between a buyer's willingness to pay and the market price actually paid ($\text{Consumer Surplus} = \text{Willingness to Pay} - \text{Market Price}$), graphically represented as the area under the demand curve and above the market price.

Seller's Valuation

The minimum price a seller is willing to accept to supply a good or service, which equals the seller's cost of production.

Producer Surplus (PS)

The difference between the market price received by a seller and the seller's valuation or cost ($\text{Producer Surplus} = \text{Market Price} - \text{Seller's Valuation}$), shown graphically as the area above the supply curve and below the market price.

Total Surplus

The sum of consumer surplus and producer surplus ($\text{Total Surplus} = \text{Consumer Surplus} + \text{Producer Surplus}$), representing the total economic benefit generated by market trade.

Efficiency Condition

The market condition achieved when marginal benefit equals marginal cost ($MB = MC$), maximizing total surplus at the equilibrium quantity ($q^*$).

Price Ceiling

A legal maximum on the price at which a good or service can be sold.

Binding Price Ceiling

A price ceiling set below the free-market equilibrium price ($P_c < P^*$), preventing the price from reaching equilibrium and causing a persistent market shortage ($Q^D > Q^S$).

Price Floor

A legal minimum on the price at which a good or service can be sold.

Binding Price Floor

A price floor set above the free-market equilibrium price ($P_F > P^*$), preventing the price from dropping to equilibrium and causing a persistent market surplus ($Q^S > Q^D$).

Tax Wedge

The difference created by a tax between the price paid by buyers and the price received by sellers ($\tau = P_b - P_s$), driving market trade down regardless of whether buyers or sellers legally pay the tax.

Tax Incidence

The distribution of the financial burden of a tax between buyers and sellers, which is determined by the relative price elasticities of supply and demand rather than by legislation.

Subsidy

A government payment made to buyers or sellers that acts as a negative tax wedge, setting $P_b = P_s - \text{subsidy}$ and expanding the equilibrium quantity traded.

Elasticity

A general measure of the responsiveness or sensitivity of one economic variable to changes in another, expressed as a ratio of percentage changes.

Price Elasticity of Demand ((\varepsilon_d))

The percentage change in quantity demanded resulting from a one-percent change in the price of the good ($\varepsilon_d = \frac{\%\Delta Q}{\%\Delta P}$).

Midpoint Method

A mathematical technique that calculates elasticity between two points ($q_1, p_1$) and ($q_2, p_2$) by dividing the changes by the average of the initial and final values: $\frac{(q_2 - q_1) / [(q_2 + q_1) / 2]}{(p_2 - p_1) / [(p_2 + p_1) / 2]}$.

Elastic Demand

A condition where the absolute value of the price elasticity of demand is greater than $1$ ($|\varepsilon_d| > 1$), indicating that consumers change quantity demanded by a larger percentage than the price change.

Inelastic Demand

A condition where the absolute value of the price elasticity of demand is less than $1$ ($|\varepsilon_d| < 1$), indicating that consumers change quantity demanded by a smaller percentage than the price change.

Unit Elastic

A condition where elasticity equals $1$ in absolute value ($|\varepsilon| = 1$), representing the geometric midpoint of a linear demand curve where business total revenue is maximized.

Perfectly Inelastic

A boundary case where elasticity equals $0$, shown as a vertical curve on a graph indicating that quantity does not respond at all to changes in price.

Perfectly Elastic

A boundary case where elasticity is infinite ($\infty$), shown as a horizontal line on a graph indicating that any small price increase drops quantity demanded to zero.

Income Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in consumer income ($\frac{\%\Delta Q}{\%\Delta I}$), being positive for normal goods and negative for inferior goods.

Cross-Price Elasticity of Demand

The percentage change in the quantity demanded of Good 1 relative to the percentage change in the price of Good 2 ($\frac{\%\Delta Q_1}{\%\Delta P_2}$), which is positive for substitutes and negative for complements.

Price Elasticity of Supply ((\varepsilon_s))

The percentage change in quantity supplied divided by the percentage change in price ($\varepsilon_s = \frac{\%\Delta Q}{\%\Delta P}$), measuring how responsive sellers are to price changes.

Deadweight Loss (DWL)

The reduction in total economic surplus resulting from a market distortion (such as a tax, price ceiling, or price floor) that prevents mutually beneficial trades where buyers' value exceeds sellers' cost.

Tax Revenue

The total financial collection earned by the government from an excise or commodity tax, calculated as the tax per unit multiplied by the quantity traded after tax ($\text{Tax Revenue} = q_\tau \times \tau$).

Laffer Curve

A curve illustrating the relationship between the size of a tax and total tax revenue, showing that tax revenue first increases with tax size up to an optimal rate ($\tau^*$), and then decreases as higher taxes excessively shrink the quantity traded.