Microeconomics Concepts and Terms

These flashcards cover key economic concepts and terminology from microeconomics, helping students to understand fundamental principles related to consumer and producer behavior, market structures, and efficiency.

Buyer’s Problem

The consumer’s decision-making process to choose what to buy in order to maximize benefit given prices and budget.

Tastes and Preferences

Individual likes and dislikes that influence consumption choices.

Prices of Goods and Services

The cost consumers must pay to obtain goods and services.

Budget

The total amount of money available for spending.

Budget Set

All combinations of goods a consumer can afford given their income.

Budget Constraint

The combinations of goods that fully use up the consumer’s income.

Opportunity Cost

The value of the next best alternative given up when making a decision.

Marginal Benefit

The additional satisfaction or benefit a consumer receives from consuming one more unit of a good.

Diminishing Marginal Benefit

The principle that additional units of a good provide less additional benefit than previous units.

Consumer Surplus

The difference between what a consumer is willing to pay and what they actually pay.

Price Elasticity of Demand

The responsiveness of quantity demanded to a change in price.

Elastic Demand

Large change in quantity demanded for a small change in price.

Inelastic Demand

Small change in quantity demanded for a large change in price.

Cross-Price Elasticity of Demand

The responsiveness of demand for one good to a change in price of another good.

Substitute Goods

Goods with positive cross-price elasticity; as the price of one rises, demand for the other increases.

Complementary Goods

Goods with negative cross-price elasticity; as the price of one rises, demand for the other decreases.

Income Elasticity of Demand

The responsiveness of demand to a change in consumer income.

Normal Goods

Goods with positive income elasticity; demand increases as income increases.

Inferior Goods

Goods with negative income elasticity; demand decreases as income increases.

Law of Demand

As price increases, quantity demanded decreases, all else equal.

Perfectly Competitive Market

A market with many buyers and sellers offering identical products with free entry and exit.

Price Taker

A firm or individual who must accept the market price as given.

Production Decision

The choice of how to produce goods using inputs.

Cost Management

The process of managing production costs to maximize profit.

Output Decision

The choice of how much to produce to maximize profit.

Short Run

A period in which at least one factor of production is fixed.

Long Run

A period in which all inputs can be varied.

Marginal Product of Labor

Additional output from employing one more unit of labor.

Law of Diminishing Marginal Returns

As more of a variable input is added, marginal product eventually decreases.

Negative Marginal Product

When adding more of an input decreases total output.

Total Cost (TC)

The sum of variable and fixed costs.

Variable Costs (VC)

Costs that change with the level of output.

Fixed Costs (FC)

Costs that do not change with the level of output.

Average Total Cost (ATC)

Total cost divided by quantity of output.

Average Variable Cost (AVC)

Variable cost divided by quantity of output.

Marginal Cost (MC)

The change in total cost resulting from producing one more unit of output.

Profit Maximization

Producing where marginal cost equals marginal revenue (MC = MR).

Marginal Revenue (MR)

The additional revenue from selling one more unit of output.

Shutdown Point

The point where price equals minimum AVC; below this, the firm stops producing.

Elasticity of Supply

The responsiveness of quantity supplied to a change in price.

Elastic Supply

Large change in quantity supplied for a small change in price.

Inelastic Supply

Small change in quantity supplied for a large change in price.

Producer Surplus

The difference between the market price and the minimum price a producer is willing to accept.

Economies of Scale

When average total cost decreases as output increases.

Diseconomies of Scale

When average total cost increases as output increases.

Constant Returns to Scale

When average total cost stays the same as output increases.

Long-Run Competitive Equilibrium

The market condition where firms earn zero economic profit and no firm has incentive to enter or exit.

Invisible Hand

The self-regulating mechanism where individuals pursuing self-interest lead to efficient market outcomes.

Social Surplus (Total Surplus)

The sum of consumer and producer surplus, representing total benefits to society.

Pareto Efficiency

A situation where no one can be made better off without making someone else worse off.

Deadweight Loss

The loss of total surplus due to market inefficiency, such as price controls or taxes.

Reservation Value

The highest price a buyer is willing to pay or the lowest price a seller is willing to accept.

Efficiency

The maximization of total output or surplus in an economy.

Equity

The fairness of the distribution of resources across society.

Trade-Off Between Efficiency and Equity

The balance between making total output large and distributing it fairly.

Prices

Signals that guide the allocation of resources and direct the invisible hand.