Microeconomics and Economic Principles Vocabulary Flashcards

Comprehensive vocabulary flashcards covering key microeconomic terms, efficiency concepts, behavioral paradigms, and cost/revenue formulas.

Microeconomics Marginal Analysis

Analyzes how individuals, businesses, and governments make decisions by evaluating additional benefits and additional costs.

Law of Diminishing Marginal Utility

As consumption of a good or service increases, each additional unit consumed provides less satisfaction.

Law of Demand

There is an inverse relationship between price and quantity demanded; when price increases, quantity demanded decreases.

Substitution Effect

The principle that consumers switch to substitute goods when the price of a primary good increases.

Income Effect

The principle that a higher price reduces purchasing power, causing consumers to afford less with the same income.

Law of Supply

There is a direct relationship between price and quantity supplied; when price increases, quantity supplied increases.

Shortage

A condition that occurs when quantity demanded is greater than quantity supplied.

Diamond-Water Paradox

The observation that water is more useful than diamonds, but diamonds command a higher market value because value depends on scarcity and marginal utility.

Elasticity of Demand

A measure showing how sensitive quantity demanded is to a change in price.

Productive Efficiency

A state where products are made at the lowest possible cost with no wasted resources, raw materials, or machines.

Allocative Efficiency

The state of the economy in which production represents consumer preferences and each asset is employed in its highest-value use.

Price Gouging

The practice where sellers raise prices for essential items to a much higher level than is considered reasonable.

Predatory Pricing

Setting prices so low that competitors cannot sustain the same prices and may be forced out of the market.

Rational-Actor Paradigm

A model of behavior assuming that people act rationally, optimally, and self-interestedly, responding to incentives.

Efficiency

When society gets the most from its scarce resources.

Equality

The condition in which prosperity is distributed uniformly among members of society.

Marginal Change

A small incremental adjustment to an existing plan.

Scarcity

The limited nature of society's resources relative to human desires.

Market Failure

A situation where the market fails to allocate society's resources efficiently on its own.

Externality

An uncompensated impact on bystanders resulting from the production or consumption of a good, such as pollution.

Market Power

The ability of a single buyer or seller to have substantial influence over market prices.

Productivity

The key determinant of living standards, defined by the goods and services produced per unit of input and dependent on equipment, skills, and technology.

Inflation

An increase in the general level of prices, almost always caused by excessive growth in the quantity of money.

Zero-Sum Fallacy

The incorrect belief that if one person makes money, someone else must be losing out.

Black Market

An underground economy where economic transactions are hidden from the government, often thriving when property rights or voluntary trades are restricted.

Price Ceiling

A legal maximum on the price at which a good can be sold, outlawing trade at prices above the ceiling.

Price Floor

A legal minimum on the price at which a good can be sold, outlawing trade at prices below the floor.

Opportunity Cost

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

Explicit Cost

Actual monetary payments made by a business, such as rent, salaries, electricity, and raw materials.

Implicit Cost

The opportunity cost of self-owned resources used by a business or individual where no actual money is directly paid.

Economic Cost

The sum of explicit costs and implicit costs: $\text{Economic Cost} = \text{Explicit Cost} + \text{Implicit Cost}$.

Accounting Profit

Total revenue minus explicit costs: $\text{Accounting Profit} = \text{TR} - \text{Explicit Cost}$.

Economic Profit

Total revenue minus both explicit and implicit costs: $\text{Economic Profit} = \text{TR} - \text{Explicit Cost} - \text{Implicit Cost}$.

Total Revenue (TR)

The total monetary value of sales, calculated as price multiplied by quantity: $\text{TR} = P \times Q$.

Total Cost (TC)

The total monetary outlay for production, calculated as fixed cost plus variable cost: $\text{TC} = \text{FC} + \text{VC}$.

Fixed Cost (FC)

Costs that do not change with the quantity produced in the short run: $\text{FC} = \text{TC} - \text{VC}$.

Variable Cost (VC)

Costs that change directly as production output changes: $\text{VC} = \text{TC} - \text{FC}$.

Average Fixed Cost (AFC)

Fixed cost divided by the quantity produced: $\text{AFC} = \text{FC} \times Q^{-1}$.

Average Variable Cost (AVC)

Variable cost divided by the quantity produced: $\text{AVC} = \text{VC} \times Q^{-1}$.

Average Total Cost (ATC)

Total cost divided by quantity produced: $\text{ATC} = \text{TC} \times Q^{-1}$.

Marginal Cost (MC)

The additional cost of producing one more unit: $\text{MC} = \frac{\bigtriangleup \text{TC}}{\bigtriangleup Q}$.

Marginal Revenue (MR)

The additional revenue generated from selling one additional unit: $\text{MR} = \frac{\bigtriangleup \text{TR}}{\bigtriangleup Q}$.

Marginal Benefit (MB)

The additional benefit obtained from consuming or producing one extra unit: $\text{MB} = \frac{\bigtriangleup \text{TB}}{\bigtriangleup Q}$.

Profit Maximization Condition

The operational rule where a firm maximizes total profit by producing where marginal revenue equals marginal cost: $\text{MR} = \text{MC}$.

Consumer Surplus (CS)

The difference between willingness to pay and actual price paid: $\text{CS} = \text{WTP} - \text{Price}$.

Producer Surplus (PS)

The difference between actual price received and cost: $\text{PS} = \text{Price} - \text{Cost}$.

Total Surplus

The combined economic surplus derived from market exchange: $\text{Total Surplus} = \text{CS} + \text{PS}$.

Price Elasticity of Demand (PED)

Percentage change in quantity demanded divided by percentage change in price: $\text{PED} = \frac{\frac{\bigtriangleup Q_d}{Q_d}}{\frac{\bigtriangleup P}{P}}$.

Marginal Utility (MU)

The change in total utility resulting from consuming one extra unit: $\text{MU} = \frac{\bigtriangleup \text{TU}}{\bigtriangleup Q}$.

Average Product (AP)

Total product divided by total quantity of input used: $\text{AP} = \frac{\text{TP}}{\text{Input}}$.

Marginal Product (MP)

The additional product generated by adding one more unit of input: $\text{MP} = \frac{\bigtriangleup \text{TP}}{\bigtriangleup \text{Input}}$.