Microeconomics Study Guide

Economics

The social science concerned with making optimal choices under conditions of scarcity.

Scarcity

The condition in which resources are limited, yet human wants exceed society's productive capacity.

Opportunity cost

The value of the next-best alternative given up when a choice is made.

Utility

The satisfaction or benefit a consumer receives from consuming a good or service.

Marginal analysis

Decision-making centered on comparing the additional benefit of an action against its additional cost.

Other-things-equal assumption

The practice of assuming all factors other than the ones under study remain unchanged; also called ceteris paribus.

Microeconomics

The study of individual consumers, firms, and specific markets within an economy.

Macroeconomics

The study of the entire economy or major aggregates, such as national production and inflation.

Positive economics

Economic statements that describe factual, objective, and testable relationships.

Normative economics

Economic statements involving value judgments, opinions, or assertions about what ought to be.

Budget line

A schedule or line showing combinations of goods a consumer can afford given a fixed income and market prices.

Economic resources (Factors of production)

Land, labor, capital, and entrepreneurial ability used to manufacture goods and provide services.

Capital

Human-produced physical objects and intangible ideas used in the production of other goods and services.

Entrepreneurial ability

The human resource that combines factors of production, makes strategic decisions, innovates, and bears financial risk.

Production possibilities curve (PPC)

A model showing the maximum output combinations of two goods an economy can produce given fixed resources and technology.

Law of increasing opportunity costs

The principle that as more of a particular good is produced, the marginal cost of producing additional units rises.

Optimal output

The level of output achieved when marginal benefit equals marginal cost ($MB = MC$).

Capital accumulation

The process of increasing the stock of capital goods to expand an economy's future production possibilities.

Fallacy of composition

The mistaken belief that what is true for an individual or sub-group must also be true for the whole entity.

Post hoc fallacy

The logical error of concluding that because Event B occurred after Event A, Event A must have caused Event B.