microeconomics vocab

Economics

Allocate scarce resources, make choices

diminishing marginal returns/product (DMR/DMP)

more workers sharing fixed resources, MP goes down—MC goes up

Profit maximization

MR=MC (All firms)

Normal profits

P=ATC, zero economic profit, long-run equilibrium

allocative efficiency

P=MC, socially optimal, no DWL, only PC

absolute advantage

more output produced, less input needed (can do more w/ less inputs)

comparative advantage

lower opportunity (implicit) cost (to find: cross multiply)

market economy (free market)

CAPITALISM, private, voluntary, individual property, price system (S+D)

command economy

COMMUNISM, public, government, centralized, price controls (gov. control)

factor market

households supply land, labor, capital (earn wages)

consumer surplus

equilibrium price up to demand curve, extra benefit, what consumers were willing to pay but didn’t have to

producer surplus

equilibrium price down to supply curve, what producers were willing to sell for but didn’t have to

inelastic demand

NEEDY, few substitutes, E < 1, Q changes less than P

elastic demand

CHOOSY, E > 1, Q changes more than P

total revenue test

if higher P causes revenue or expenditures to increase, it’s inelastic (& vise versa)

income elasticity

change in Q_D/change in income, positive: normal good, negative: inferior good

cross price elasticity

change in quantity of good X/change in price of good Y, positive: substitutes, negative: complements

excise tax/per-unit tax

increased MC, supply left, lower output

lump sum tax

higher ATC, does not affect MC or output only profits

effective price floor

price cannot get DOWN to equilibrium, surplus

effective price ceiling

price cannot go UP to equilibrium, shortage

monopoly

P > MC, under-produce and overcharge, one firm, price maker, unique product

natural monopoly

economies of scale, regulation (force P=MC=ATC), NOT antitrust

economies of scale

decreasing ATC

oligopoly

interdependence, game theory, nash equilibrium, few firms, high barriers to entry (airlines!)

monopolistic competition

P > MC like monopoly, but P=ATC in LR like PC (looks like a monopoly)

marginal revenue product (MRP)

Output (MPP) x product price (MR), demand or value of worker

profit maximizing hiring

MRP=MRC, hire as long as you are worth the W

marginal resource cost (MRC)

wage or cost in a competitive labor market (MRC=wages=S)

maximizing utility

MU/P=MU/P, bang for buck is equal

productive efficiency

lowest ATC, only PC firms

positive externality

MSB > MB, must subsidize—want more

negative externality

MSC > MC, must tax—want less

deadweight loss (DWL)

triangle pointing to allocative efficiency, loss of consumer+producer surplus when equilibrium is not achieved

free rider

someone who doesn’t pay for a public good

variable costs (VC)

TC-FC, costs that go up as a firm increases production (workers+materials)

fixed costs (FC)

TC-VC, costs that DO NOT change as a firm increases production (factories + major equipment)

explicit costs

accounting costs, what the firm actually spends money on

economic profit

profit/revenue minus BOTH explicit and implicit costs

implicit costs

opportunity costs! forgone opportunities, things you missed out on/could’ve been doing

accounting profit

profit/revenue minus ONLY explicit costs

average product (AP)

when MP is below it, it is pulled down, MP hits at its maximum

marginal product (MP)

change in total product

marginal cost (MC)

EXTRA cost it takes to make one more unit, goes down first due to increasing marginal returns (specialization), then goes up due to DMR, hits ATC & AVC at their mins.

total product curve (TP)

increased when MP/MR is increasing, flattens when MP/MR is diminishing, decreases when MP/MR is negative

average total costs (ATC)

TC/Q, separated from AVC by AFC

average variable costs (AVC)

VC/Q, separated from ATC by AFC

average fixed costs (AFC)

FC/Q, starts high up then decreases quickly as FCs get divided up, never reaches zero

total costs (TC)

FC+VC

Law of demand

price goes up, Q_D goes down, income effect, substitution effect, diminishing marginal utility

law of supply

price goes up, Q_s goes up, profit incentive, increasing marginal costs