Microeconomics Flashcards

Vocabulary flashcards generated from microeconomics lecture notes covering PPF, elasticity, surplus, market equilibrium, and externalities.

Production Possibilities Frontier (PPF)

A curve showing the maximum production output given one's resources, which usually bows outward because resources are not equally good at making both goods.

Opportunity Cost of Good X

The amount of good $Y$ you have to give up to produce $1$ more unit of good $X$, calculated as $OC_X = \frac{\Delta y}{\Delta x} = \frac{\text{y/hr}}{\text{x/hr}} = \frac{\text{hrs/x}}{\text{hrs/y}}$.

Surplus (Excess Supply)

A market condition occurring when $P > P^*$ where sellers want to sell at $(Q_S, P)$ but buyers are only willing to buy at $(Q_D, P)$, resulting in $Q_{\text{transacted}} = Q_D < Q_S$.

Shortage (Excess Demand)

A market condition occurring when $P < P^*$ where buyers want to buy at $(Q_D, P)$ but sellers only have $(Q_S, P)$, resulting in $Q_{\text{transacted}} = Q_S < Q_D$.

Total Surplus

The overall economic welfare generated in a market, given by the formula $TS = CS + PS - DWL$.

Deadweight Loss (DWL)

The loss of total economic welfare or potential trades that fail to occur when a market is not at equilibrium.

Price Elasticity of Demand

A measure of consumer responsiveness calculated as $\frac{\%\Delta Q}{\%\Delta P}$, categorized as elastic ($|E_D^P| > 1$), unit elastic ($|E_D^P| = 1$), or inelastic ($|E_D^P| < 1$).

Income Elasticity ($E_I$)

The percentage change in quantity demanded divided by the percentage change in income ($\frac{\%\Delta Q}{\%\Delta \text{income}}$), where $E_I > 0$ indicates a normal good and $E_I < 0$ indicates an inferior good.

Cross-Price Elasticity ($E_{XY}$)

Measures how the quantity demanded of good $A$ changes when the price of good $B$ changes ($\frac{\%\Delta Q_A}{\%\Delta P_B}$); positive for substitutes ($> 0$) and negative for complements ($< 0$).

Determinants of Demand Price Elasticity

Key factors affecting price elasticity of demand: availability of close substitutes, passage of time, luxuries versus necessities, definition of the market, and willingness to engage in search.

Determinants of Supply Price Elasticity

Key factors affecting price elasticity of supply: availability of inputs, inventories, extra capacity, ease of entry and exit, and time.

Marginal Private Benefit (MPB)

The extra value a consumer receives from consuming one extra unit of a good, which is reflected in the demand curve and consumer willingness to pay.

Marginal Private Cost (MPC)

The extra cost to the producer to produce one extra unit of a good, which is reflected in the supply curve and supplier willingness to produce.

Marginal Societal Cost (MSC)

The total cost to society from producing one more unit of a good, defined as $MSC = MPC + MEC$.

Marginal Societal Benefit (MSB)

The total benefit to society from producing one more unit of a good, defined as $MSB = MPB + MEB$.

Absolute Advantage

The ability to produce more goods with the same amount of inputs, or the ability to produce the same amount of goods with less inputs.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than competitors.

Law of Demand

The principle that as prices rise, quantity demanded falls, driven by the substitution effect, income effect, and diminishing marginal benefit.

Law of Supply

The principle that as prices rise, quantity supplied increases.

Market Failure

An inefficient outcome in a market, commonly caused by externalities, public goods, common-property resources, market power, imperfect information, or irrationality.

Pigouvian Tax

A corrective tax placed on an activity that creates external costs (negative externalities) to adjust market production to the social optimum.

Pigouvian Subsidy

A corrective subsidy placed on an activity that creates external benefits (positive externalities) to adjust market production to the social optimum.

Coase Theorem

The theorem stating that in the absence of transaction costs, private bargaining will lead to an efficient outcome in the case of externalities regardless of who holds property rights.

Competitive Market

A market where no single buyer or seller can influence the market price.

Quota

An upper limit on how much of a good can be sold.