MACRO/MICRO exam 1

Scarcity

Limited nature of resources; choices must be made.

Economics

Study of how society allocates scarce resources.

Microeconomics

Study of individual decision-making and markets.

Macroeconomics

Study of overall economy-wide phenomena.

Trade-offs

Giving up one benefit to gain another.

Opportunity Cost

The next best alternative given up when making a choice.

Marginal Benefit

The additional benefit of consuming/producing one more unit.

Marginal Cost

The additional cost of consuming/producing one more unit.

Rational Decision Rule

Take action if marginal benefit ≥ marginal cost.

Incentives

Factors that motivate individuals to act.

Market Economy

Economy where supply and demand determine prices.

Command Economy

Economy where government controls production/pricing.

Law of Demand

When price increases, quantity demanded decreases.

Demand Curve

Downward-sloping; shows inverse relationship between price & quantity demanded.

Normal Goods

Demand increases as income increases (e.g., organic food).

Inferior Goods

Demand decreases as income increases (e.g., fast food).

Substitutes

An increase in price of one good increases demand for another (e.g., Coke vs. Pepsi).

Complements

An increase in price of one good decreases demand for another (e.g., gas & cars).

Law of Supply

When price increases, quantity supplied increases.

Supply Curve

Upward-sloping; shows direct relationship between price & quantity supplied.

Equilibrium Price (P)*

Where supply and demand intersect.

Equilibrium Quantity (Q)*

Quantity bought and sold at equilibrium price.

Shortage

Demand exceeds supply → Prices rise.

Surplus

Supply exceeds demand → Prices fall.

Price Elasticity of Demand (PED)

Measures responsiveness of demand to price changes.

Price Elasticity of Supply (PES)

Measures responsiveness of supply to price changes.

Consumer Surplus

Difference between the highest price a consumer is willing to pay and the price actually paid.

Producer Surplus

Difference between the lowest price a seller is willing to accept and the price received.

Deadweight Loss (DWL)

Lost total surplus due to market inefficiencies (e.g., taxes, price controls).

Price Ceiling

Government-imposed maximum price (e.g., rent control, can lead to shortages).

Price Floor

Government-imposed minimum price (e.g., minimum wage, can lead to surpluses).

Subsidies

Government payments to encourage production or consumption.

Production Possibilities Frontier (PPF)

Graph showing maximum possible production combinations of two goods.

Perfect Competition

Many firms, identical products, price-takers.

Monopoly

Single seller, high barriers to entry, price-setter.

Oligopoly

Few firms dominate, strategic interactions (e.g., airlines).

Monopolistic Competition

Many firms, differentiated products, some pricing power (e.g., restaurants).

Externalities

Costs or benefits affecting third parties (e.g., pollution, education).

Negative Externality

Causes overproduction; corrected with taxes.

Positive Externality

Causes underproduction; corrected with subsidies.