Economics Lecture Review: Supply, Demand, Elasticity, Consumer Behavior, and Firm Production

Flashcards covering key vocabulary and concepts from lectures on Supply, Demand, Market Equilibrium, Comparative Statics, Price Elasticity of Demand, Consumer Behavior, and the Theory of the Firm.

Production Possibility Frontier (PPF)

A graph showing the various combinations of two goods that an economy can possibly produce given its available resources and technology, illustrating scarcity, efficiency, and trade-offs.

Opportunity Cost

What must be given up to obtain some item; on a PPF, it's the amount of one good sacrificed to produce more of another.

Law of Demand

The fundamental rule stating that, all other things being equal, the quantity demanded of a good falls when the price of the good rises, explaining the downward-sloping demand curve.

Law of Supply

The rule that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, explaining the upward-sloping supply curve.

Equilibrium

The point where the supply and demand curves intersect, indicating a market is 'in balance' because the quantity buyers are willing to buy equals the quantity sellers are willing to sell (QD=QS).

Surplus (Excess Supply)

A situation where price is above the equilibrium price, causing quantity supplied to be greater than quantity demanded.

Shortage (Excess Demand)

A situation where price is below the equilibrium price, causing quantity demanded to be greater than quantity supplied.

Economic Growth

Shown by an outward shift of the entire Production Possibility Frontier (PPF), made possible by technological advances or an increase in the labor force.

Change in Quantity Demanded

A movement along the demand curve caused ONLY by a change in the good's own price.

Change in Demand

A shift of the entire demand curve caused by a non-price factor like tastes, income, price of related goods, expectations, or number of buyers.

Change in Quantity Supplied

A movement along the supply curve caused ONLY by a change in the good's own price.

Change in Supply

A shift of the entire supply curve caused by factors like input prices, technology, number of sellers, or expectations.

Comparative Statics

The analysis of comparing two equilibrium states (an initial one and a new one) after a change in an external factor, without analyzing the path or time it takes to get to the new state.

Price Floor

A government-imposed minimum price; to be effective (binding), it must be set above the equilibrium price, creating a surplus.

Price Ceiling

A government-imposed maximum price; to be effective (binding), it must be set below the equilibrium price, creating a shortage.

Tax Incidence

Refers to who bears the actual economic burden of a tax, which is rarely the person who physically pays the government.

Elasticity

A general measure of responsiveness, representing the percentage change in one variable resulting from a percentage change in another.

Price Elasticity of Demand (Ed)

Measures how much the quantity demanded of a good responds to a change in its price, calculated as (%Change in Quantity Demanded) / (%Change in Price).

Elastic Demand (Ed>1)

Quantity demanded is highly responsive or 'stretchy' to price changes, indicating consumers are very price-sensitive.

Inelastic Demand (Ed<1)

Quantity demanded is not very responsive to price changes, meaning consumers will continue to buy even if the price goes up.

Unit Elastic Demand (Ed=1)

The percentage change in quantity demanded is exactly equal to the percentage change in price, leading to unchanged total revenue.

Total Revenue (TR)

The total income a firm receives from selling its product, calculated by the formula: Price × Quantity (P×Q).

Total Revenue Test

A practical application of elasticity that predicts how changes in price will affect total revenue based on whether demand is elastic, inelastic, or unit elastic.

Income Elasticity

Measures how demand changes when consumer income changes.

Normal Goods (EI>0)

Goods for which quantity demanded increases as consumer income rises.

Luxury Goods (EI>1)

A special type of normal good where spending on it increases by a larger percentage than the increase in income.

Inferior Goods (EI<0)

Goods for which quantity demanded decreases as consumer income rises.

Cross-Price Elasticity

Measures how the demand for one good changes when the price of another good changes.

Substitutes (EXY>0)

Goods where an increase in the price of one leads to an increase in the demand for the other.

Complements (EXY<0)

Goods where an increase in the price of one leads to a decrease in the demand for the other.

Law of Diminishing Marginal Utility

A fundamental principle stating that as you consume more of a particular good, the extra satisfaction (marginal utility) you get from each additional unit will eventually decline.

Utility

A measure of the happiness or satisfaction a consumer derives from consuming a good or service, sometimes measured in hypothetical 'utils'.

Total Utility (TU)

The total amount of satisfaction received from consuming a certain quantity of a good.

Marginal Utility (MU)

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

Budget Constraint

The limit on what a consumer can purchase, defined by their income and the prices of goods.

Income Effect

The change in consumption resulting from a price change that alters the consumer's real income or purchasing power.

Substitution Effect

The change in consumption resulting from a price change that makes a good relatively more or less expensive than other goods.

Consumer Equilibrium Rule

A consumer maximizes total utility when they allocate their budget such that the marginal utility per dollar is equal across all goods purchased (MUx/Px = MUy/Py).

Economic Profit

Total Revenue - Total Opportunity Cost (explicit costs + implicit costs), representing the firm's true profitability.

Accounting Profit

Total Revenue - Explicit Costs (out-of-pocket expenses).

Implicit Costs

Input costs that do not require a direct outlay of money, such as the value of the owner's time or forgone interest on capital.

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Marginal Product (MP)

The increase in output that arises from an additional unit of input.

Law of Diminishing Marginal Product

The principle that the marginal product of an input declines as the quantity of the input increases.

Fixed Costs (FC)

Costs that do not vary with the quantity of output produced (e.g., rent).

Variable Costs (VC)

Costs that vary with the quantity of output produced (e.g., ingredients, wages for hourly workers).

Total Cost (TC)

The sum of Fixed Costs and Variable Costs (FC + VC).

Marginal Cost (MC)

The increase in total cost that arises from producing one additional unit of output, calculated as Change in Total Cost / Change in Quantity (ΔTC/ΔQ).

Average Fixed Cost (AFC)

Fixed Costs divided by the quantity of output (FC/Q); it always falls as output rises.

Average Variable Cost (AVC)

Variable Costs divided by the quantity of output (VC/Q); it is typically U-shaped.

Average Total Cost (ATC)

Total Costs divided by the quantity of output (TC/Q); it is typically U-shaped.

Profit Maximization Rule

A competitive firm maximizes its profit by producing the quantity where Marginal Revenue equals Marginal Cost (MR = MC).

Short-Run Shutdown Rule

A firm should shut down temporarily if the price is less than its Average Variable Cost (P < AVC).

Long-Run Exit Rule

A firm should exit the market permanently if the price is less than its Average Total Cost (P < ATC).