Unit 2 Microeconomics – Chapters 6-10 Vocabulary

Vocabulary flashcards covering essential microeconomics terms and concepts from Unit 2 (Chapters 6-10).

Total Utility

The overall satisfaction a consumer receives from consuming a specific quantity of goods or services.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good or service.

Utility-Maximizing Rule

A consumer allocates spending so the marginal utility per dollar is equal across all goods (MU₁/P₁ = MU₂/P₂ …).

Budget Constraint

The limited combination of goods and services a consumer can purchase with a given income and prices.

Indifference Curve

A graph showing all bundles of two goods that provide the consumer the same level of utility.

Behavioral Economics

The study of how psychological factors cause actual choices to deviate from traditional rational-choice models.

Law of Diminishing Marginal Utility

As additional units of a good are consumed, the marginal utility from each new unit eventually decreases.

Substitution Effect

The change in quantity demanded of a good when its price changes, holding utility constant, because consumers switch toward relatively cheaper goods.

Income Effect

The change in quantity demanded resulting from the effect of a price change on the consumer’s real purchasing power.

Explicit Costs

Direct, out-of-pocket payments for inputs to production (e.g., wages, rent, materials).

Implicit Costs

The opportunity costs of using resources owned by the firm (e.g., owner’s time, self-owned capital).

Accounting Profit

Total revenue minus explicit costs only.

Economic Profit

Total revenue minus both explicit and implicit costs.

Fixed Costs

Costs that do not vary with the level of output in the short run (e.g., rent).

Variable Costs

Costs that change with the level of output (e.g., raw materials, hourly labor).

Total Cost

The sum of fixed and variable costs at each output level.

Marginal Cost

The additional cost of producing one more unit of output.

Average Cost (Average Total Cost)

Total cost divided by the quantity produced (TC/Q).

Short Run

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

Long Run

A period long enough for all inputs to be varied; no fixed costs exist.

Economies of Scale

A situation where long-run average cost decreases as output increases.

Diseconomies of Scale

A situation where long-run average cost rises as output increases beyond a certain point.

Perfect Competition

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

Price Taker

A firm that cannot influence the market price and must sell at the prevailing price.

Marginal Revenue

The additional revenue gained from selling one more unit of output; equals price in perfect competition.

Shutdown Point

The output and price at which a firm’s total revenue just covers variable cost; below this, it ceases production in the short run.

Long-Run Equilibrium (Perfect Competition)

The state where firms earn zero economic profit, and no incentive exists for entry or exit.

Productive Efficiency

Producing at the lowest possible cost (minimum ATC).

Allocative Efficiency

Producing the mix of goods most desired by society; achieved when P = MC.

Monopoly

A market with a single seller of a unique product and high barriers to entry.

Barriers to Entry

Obstacles that prevent new firms from entering a market (e.g., patents, high fixed costs).

Market Power

The ability of a firm to influence the market price of its product.

Price Maker

A firm that sets its own price because it faces the market demand curve (typical of a monopoly).

Deadweight Loss (Monopoly)

The reduction in total surplus that occurs because monopoly price exceeds marginal cost.

Monopolistic Competition

A market structure with many firms selling differentiated products and free entry and exit.

Product Differentiation

Real or perceived differences among goods that allow firms to distinguish their products.

Oligopoly

A market dominated by a small number of interdependent firms.

Cartel

A group of firms that collude to act as a monopoly and restrict output or fix prices.

Collusion

Cooperative agreements among firms to limit competition, often to raise prices.

Game Theory

The study of strategic behavior when the outcome depends on the actions of multiple decision makers.

Prisoner’s Dilemma

A game where rational, self-interested behavior leads each player to a worse outcome than cooperative behavior would.

Interdependence (Oligopoly)

A condition in which each firm’s profits depend on the actions of rival firms, prompting strategic decision-making.

Anti-competitive Behavior

Actions by firms designed to limit competition, such as predatory pricing or exclusive contracts.