Introduction to Microeconomics (1)

Economics

The study of how societies manage scarce resources to meet unlimited wants, focusing on decisions and trade-offs in production, distribution, and consumption.

Microeconomics

The branch of economics that studies individual decisions, supply, demand, and pricing.

Macroeconomics

The branch of economics that examines the economy as a whole, addressing issues like inflation, unemployment, and economic growth.

Opportunity Cost

The value of what you sacrifice to choose something else.

Incentives

Rewards or penalties that influence choices.

Trade

Allows people or countries to focus on what they do best, increasing overall efficiency.

Comparative Advantage

Producing a good with the lowest opportunity cost.

Absolute Advantage

Producing more with the same resources.

Market Economy

Resources allocated naturally by prices reflecting scarcity and consumer preferences.

Centrally Planned Economy

The government controls decisions, often causing inefficiency and less innovation.

Adam Smith’s Invisible Hand

Indicates that individual self-interest in free markets results in efficient resource allocation without central planning.

Externalities

Costs or benefits that affect others who are not involved in the transaction.

Negative Externalities

Harmful effects on others due to market activity.

Positive Externalities

Beneficial effects on others due to market activity.

Information Asymmetry

Occurs when one party in a transaction has more or better information than the other.

Market Power

The ability of a firm to control prices or production.

Monopoly

A market structure where a single seller dominates the market.

Oligopoly

A market structure where a few firms control most of the market.

Ceteris Paribus

A Latin phrase meaning 'all other things being equal' used to focus on the effect of one variable.

Demand Curve Shift

Occurs due to factors other than price change, such as income, preferences, or consumer expectations.

Law of Demand

As the price of a good rises, the quantity demanded falls.

Income Effect

The change in quantity demanded because a price change alters consumers’ purchasing power.

Substitution Effect

The change in quantity demanded when consumers switch to a cheaper alternative.

Correlation

A statistical relationship where two variables move together but one does not cause the other.

Causality

A direct cause-and-effect relationship where one variable influences another.

Normal Good

A good where demand increases as consumer income rises.

Inferior Good

A good where demand decreases as consumer income rises.

Complementary Goods

Goods that are consumed together, where demand for one increases the demand for the other.

Substitute Goods

Goods that can replace each other, where an increase in the price of one leads to an increase in demand for the other.

Individual Demand

The quantity of a good or service a single consumer is willing to buy at different prices.

Market Demand

The total quantity of a good or service all consumers in the market are willing to buy at different prices.

Elasticity

The measure of how much the quantity demanded or supplied changes when the price changes.

Total Revenue

The overall income generated from the sale of goods or services.

Welfare Economics

Studies how resource allocation affects overall economic well-being.

Allocative Efficiency

Achieved when resources produce the goods and services most desired by society.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between what producers receive and their production costs.

Deadweight Loss

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Price Ceiling

A maximum price set by the government to make goods affordable.

Price Floor

A minimum price set by the government to protect producers.

Free Rider Problem

Occurs when individuals benefit from a good without contributing to its cost.

Tragedy of the Commons

The overuse of common resources due to individual incentives leading to depletion.

Merit Goods

Goods society values and believes should be consumed more.

De-Merit Goods

Goods considered harmful, leading to overconsumption without intervention.