Microeconomics Vocabulary Flashcards

Vocabulary flashcards for Microeconomics lecture review.

Economics

The study of how people interact to allocate scarce resources.

Social Science

Using scientific methods to answer questions about people.

Positive statements

Observed results; what did people do?

Normative statements

Opinions; what should people do?

Microeconomics

Individual decision makers; consumers and producers interacting in markets.

Macroeconomics

The Economy; aggregated measures of micro-markets; government policy.

Adam Smith and the Invisible Hand

Doing something good for others is how you get money from them.

Cost

Benefits measured by what you are willing to give up.

Opportunity cost

The value of the best forgone alternative.

Sunk cost

Costs that were previously incurred and irreversible.

Marginal Benefit (MB)

Additional benefit from an additional unit.

Marginal Cost (MC)

Additional cost required to get another unit.

Production possibilities frontier (PPF)

Graph that shows the limits of production.

Absolute Advantage

More productive.

Firm

Business organized to produce and sell goods and services.

Profit

Profit = Total Revenue – Total Costs.

Explicit Costs

Paid with money.

Implicit Costs

Opportunity costs that are implied.

Normal profit

Profit that one would normally expect.

Long-run

Enough time to change levels of any factor.

Short-run

Some factors can’t be changed.

Fixed Factors

Can’t be changed in the short-run.

Variable Factors

Can be changed in the short-run.

Total Product (Q)

Total output in given period of time

Average Product (AP)

Output per unit of input (i.e. labor).

Marginal Product (MP)

Additional output from additional input

Increasing Marginal Returns

When additional workers add more to the total output than the ones before.

Diminishing Marginal Returns

When additional workers add less to the total output than the ones before.

Total costs

The sum of all costs for all resources required to reach a given level of output.

Unit costs

Costs per unit of output

Average Fixed Cost (AFC)

TFC / Q

Average Variable Cost (AVC)

TVC / Q

Average Total Cost (ATC)

TC / Q = (TFC+TVC)/Q = AFC + AVC

Marginal Cost (MC)

TC / Q = TVC / Q

Optimization

Increase output when MR>MC. Decrease output when MR<MC. Doing the best when MR=MC !!!!!

Long‐Run

Enough time to change all factors.

Economies of scale

When larger firms with more output can lower the average total cost of production.

Law of supply

Direct relationship between P & Qs

Law of demand

Inverse relationship between P & Qd

Supply

Relationship between the price of a good and the quantity producers are willing and able to sell. (P ‐> Qs)

Law of Supply

When the price of a good rises, the quantity supplied increases and vice versa; as long as nothing else is changing.

Ceteris Paribus

The technical term for “all else equal” or “as long as nothing else changes”

Market

The market is made up of individual firms

Demand

Relationship between the price of a good and the corresponding quantity buyers are willing and able to buy

Law of Demand:

When the price of a good rises, the quantity demanded falls and vice versa; as long as nothing else is changing.

Market

The market is made up of individuals.

Normal goods

Demand increases when income increases and vice versa.

Inferior goods

Demand decreases when income increases and vice versa.

Substitutes

Goods consumed in place of one another.

Complements

Goods consumed together

Price takers

Too many firms for any of them to directly affect the price.

Price ceiling

Maximum price to protect buyers.

Price floor

Minimum price to protect sellers.

Terms of Trade

Ratio of price of goods traded.

Tariff

Tax on imports.

Quota

Limit the amount imported.

Externalities

Not all costs & benefits included in decisions.

Positive Consumption Externalities

Consumption activity produces an unintended benefit for others (“spillover”).

Negative Consumption Externalities

Consumption activity imposes a cost on others.

Positive Production Externalities

Production activity produces a benefit for others.

Negative Production Externalities

Consumption activity produces an unintended benefit for others (“spillover”).

Internalizing the Externality

Make the externality part of the decision…

Pigouvian Taxes

Those that penalize the activity creating the externality.

Excludability

When people can be excluded from consumption of the good

Free Riders

When people consume the good or service without paying.

Tragedy of the Commons

People will use more than their “share” and neglect the maintenance of a common resource until it is used up and no longer available for anyone.

Market Power

Ability to influence market prices.

Rent seeking

Tactics to prevent competition.

Single Price

Set one price and sell as much as buyers willing to buy.

Market Power

Ability to influence market prices.

Legal Monopoly

Legal protection from competition.

Ownership Monopoly

Control of a resource.

Natural Monopoly

Economies of scale.

Monopolistic competition

Product differentiation.

Cartel

Group of firms working together to gain market power.

Collusion

Firms working together.

Econs

Tribe of rational, self-interested, utility maximizers

Seeking “good enough” instead of “best”

Bounded rationality

is a binding constraint to “keep you on the path”

Commitment device