Microeconomics: Market Equilibrium, Efficiency, Externalities, and Consumer Choice

Comprehensive vocabulary flashcards covering market surplus, allocative and productive efficiency, externalities, price controls, taxes, consumer choice, utility theory, and resource allocation methods.

Consumer Surplus (CS)

The maximum price a consumer is willing to pay minus the price they actually pay, summed over the total quantity consumed. Graphically, it is the triangular area below the demand curve and above the market price.

Producer Surplus (PS)

The market price minus the marginal cost of production, summed over the quantity produced. Graphically, it is the area above the supply curve and below the market price.

Total Surplus

The sum of consumer surplus and producer surplus.

Allocative Efficiency

Occurs when Marginal Benefit ($MB$) equals Marginal Cost ($MC$), meaning society is producing the optimal mix of goods. In a competitive market with no externalities, market equilibrium achieves this.

Production Efficiency

Occurs when goods are produced at the lowest possible cost, represented by any point directly on the Production Possibilities Frontier or supply curve.

Deadweight Loss (DWL)

A net loss of total economic surplus that occurs when a market operates at an inefficient quantity due to taxes, price controls, or externalities.

Negative Externalities

A market failure where production imposes uncompensated costs on third parties, meaning Marginal Social Cost ($MSC$) exceeds Marginal Private Cost ($MC$). Unregulated markets overproduce relative to the efficient level ($Q_{\text{market}} > Q_{\text{efficient}}$), creating deadweight loss.

Positive Externalities

A situation where consumption benefits third parties. Because individuals ignore external benefits, the market underproduces or underconsumes relative to the socially efficient quantity.

Tax Incidence

The division of the tax burden between buyers and sellers, which falls more heavily on the side of the market that is more inelastic.

Tax Revenue

The amount calculated by multiplying the tax per unit by the post-tax quantity sold.

Price Ceiling

A legal maximum price that, to be binding, must be set below the equilibrium price. It causes a shortage, increased non-price competition (search activity), and deadweight loss.

Price Floor

A legal minimum price that, to be binding, must be set above the equilibrium price. It results in a surplus where quantity supplied exceeds quantity demanded.

Budget Line

A line showing all affordable combinations of two goods given income and prices. Its slope is the negative ratio of the prices ($-\frac{P_x}{P_y}$), representing the relative price of the goods.

Total Utility (TU)

The total satisfaction derived from consuming a quantity of a good.

Marginal Utility (MU)

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

Law of Diminishing Marginal Utility

The economic principle stating that as consumption of a good increases, the marginal utility derived from each additional unit decreases.

Utility-Maximizing Rule

The condition where consumers maximize satisfaction by spending their entire budget such that the marginal utility per dollar spent is equalized across all goods: $\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$.

Relative Price

The price of one good expressed in terms of another (for example, how many units of good B it takes to buy $1$ unit of good A).

Market Price Allocation

A resource allocation method where scarce resources go to those who are willing and able to pay the market price.

Command Allocation

A resource allocation method where the allocation of resources is determined by an authority, such as a government.

First-Come, First-Served

A resource allocation method based on arrival order, such as standing in line for free tickets.

Sharing Equally

A resource allocation method where everyone receives an equal share of the scarce resources.