Microeconomics Module Review

Comprehensive vocabulary flashcards covering Microeconomics Module 1, Module 2, and Module 7, including market structures, supply and demand, elasticity, and production costs.

Negative Externality

A cost imposed on a third party, such as pollution.

Positive Externality

A benefit enjoyed by a third party, such as education or public goods.

Common Resources

Resources that are not excludable and are rival in consumption, such as fish in the ocean.

Public Goods

Goods that are not excludable and not rival in consumption, such as roads.

Private Goods

Goods that are excludable and rival in consumption, such as ice cream.

Club Goods

Goods that are excludable and not rival in consumption, such as a movie theater.

Gini Coefficient

A tool to measure income inequality on a scale between $0$ (perfect equality) and $1$ (maximum inequality).

Free Riders

Those who benefit from public goods without paying for them.

Coase Theorem

Suggests that with defined rights and low transaction costs, parties can negotiate efficient outcomes.

Tradgedy of the Commons

Occurs when shared resources are used without restraint and depleted.

Market Failure

Results in a misallocation of resources.

Opportunity Cost

What is given up when choosing between alternatives.

Scarcity

Requires tradeoffs which entails opportunity costs.

Production Possibilities Frontier (PPF)

Represents the opportunity costs an economy faces in the production of two goods due to limited resources.

PPC Inefficient Point

Any point under the curve that does not use all available resources.

PPC Impossible Point

Any point above the curve representing a combination requiring more resources than are available.

Bias Shift of PPF

When one industry is affected more by a change in resources than the other industry.

Economic Self Sufficency

Producing all of the goods we need and want to consume ourselves.

Specialization & Trade

Producing one good in which we have a comparative advantage and trading for others.

Absolute Advantage

When an agent produces more of a good in the same amount of time than another agent.

Comparative Advantage

Assigned to the agent who has the lower opportunity cost in making a specific good.

Capitalism

An economic system characterized by private ownership and allocation of goods.

Socialism

An economic system characterized by planned or government ownership and allocation of goods.

Command Capatlist Economy

An economy with private ownership but planned allocation of goods.

Market Socialism

An economy with planned ownership but private allocation of goods.

Marginal Anaylsis

Evaluating how cost per unit or benefits will change when a firm decides to change its business activity.

Competitive Markets

Markets that bring together decentralized decisions of buyers and sellers to yield the best price and efficient resource allocation.

Law of Demand

The principle that as price declines, quantity demanded rise.

Normal Goods

Goods for which quantity demanded increases when income increases.

Inferior Goods

Goods for which quantity demanded decreases when income increases, such as canned coffee.

Compliments

Related goods where an increase in price for one leads to a decrease in quantity demanded for both, such as hotdogs and buns.

Substitute

A related good where an increase in the price of the original good leads to an increase in demand for the substitute, such as hot dogs and hamburgers.

Law of Supply

The principle that as price increases, quantity supplied increases.

Market Equilibrium

The optimal price ($P^*$) where quantity supplied equals quantity demanded ($Q_s = Q_d$).

Surplus

Scenario where P>P^{e} and quantity demanded is less than quantity supplied (Q_d < Q_s).

Shortage

Scenario where P<P^{e} and quantity demanded is greater than quantity supplied (Q_d > Q_s).

Price Cealing

The maximum price a good can be sold for.

Price Floor

The minimum price a good can be sold for, such as minimum wage.

Price Elasticity of Demand

The responsiveness of quantity demanded to a price change, calculated as the absolute value of the percentage change in quantity over the percentage change in price.

Elastic Demand

When the responsiveness of quantity demanded is greater than $1$, typical for luxury goods.

Inelastic Demand

When the responsiveness of quantity demanded is less than $1$, typical for necessary goods.

Total Revenue

Calculated as $P \times Q$.

Consumer Surplus

The difference between the willingness to pay and the actual price paid.

Producer Surplus

The difference between the price received and the price the seller is willing to except to cover costs.

Dead Weight Loss

A loss of total surplus or economic well-being as a result of a policy, such as a tax wedge.

Total Utility

The total level of satisfaction from consuming a given quantity of a good.

Marginal Utility (MU)

The additional satisfaction derived from consuming one more unit of a good.

Diminishing Marginal Utility

The principle that as you consume additional units of a good, the marginal utility becomes less and less.

Production Function

The relationship $Q = f(K, L)$ where $Q$ is quantity produced, $K$ is capital (fixed cost), and $L$ is labor (variable cost).

Marginal Product (MPL)

The additional output associated with adding one more unit of input for production, calculated as $\frac{Q_2 - Q_1}{L_2 - L_1}$.

Fixed Costs

Costs that stay the same regardless of the quantity of output, such as rent.

Variable Costs

Costs that vary based on the quantity of output, such as wages paid to employees.

Marginal Cost (MC)

The change in total cost when producing one more unit of the good: $MC = \frac{\text{TC}_2 - \text{TC}_1}{Q_2 - Q_1}$.

Economies of Scale

When average total cost (ATC) is falling with an increase in output.

Constant Returns to Scale

When average total cost (ATC) remains the same regardless of output.

Diseconomies of Scale

When average total cost (ATC) is increasing as output increases.

Law of Diminishing Marginal Returns

As more units of a variable input are added to fixed inputs, the additional output from each new module eventually decreases.

Explict Costs

Financial costs associated with production.

Implicit Costs

Opportunity costs associated with production.

Marginal Revenue (MR)

The change in firm revenue from producing one more unit

Perfectly Competitive Markets

Markets with many buyers and sellers, identical goods, and free entry and exit, where firms are price takers.

Natural Monopoly

When one firm can provide a good at a lower cost than two or more firms.

Nash Equilibrium

A situation in an oligopoly where both firms cheat on collaboration to avoid lower profits if they were the only ones to cooperate.

Monopolostic Competition

A market structure where many buyers and sellers sell similar but differentiated products with free entry and exit.

Herfindahl-Hirschman Index

A tool used to measure industry concentration.

Allocative Efficency

Achieved when price equals marginal cost ($P = MC$).

Marginal Factor Cost (MFC)

The additional cost the firm incurs by employing one more input, calculated as $\frac{\text{C}_2 - \text{C}_1}{L_2 - L_1}$.

Monopsony

A labor market that has only one employer.

Perfectly Elastic Demand Curve

Horizontal

Perfectly Inelastic Demand Curve

Vertical