Microeconomics Final

1. Production Possibility Curve (PPC):
   The PPC shows the maximum combination of two goods or services that can be produced within a given economy, assuming full utilization of resources.
   
   

2. Absolute Advantage:
   The ability of a country or entity to produce more of a good with the same amount of resources.
   
   

3. Comparative Advantage:
   The ability of a country or entity to produce a good at a lower opportunity cost than another producer.
   
   

4. Circular Flow Model:
   A model that shows the movement of goods and services, resources, and money in an economy, involving households, businesses, government, and foreign markets.
   
   

5. Substitutes:
   Goods that can replace each other (e.g., butter and margarine).
   
   

6. Complements:
   Goods that are used together (e.g., cars and gasoline).
   
   

7. Normal Goods:
   Goods for which demand increases as income increases.
   
   

8. Inferior Goods:
   Goods for which demand decreases as income increases.
   
   

9. Elasticity:
   A measure of how much the quantity demanded or supplied of a good changes in response to a change in price.
   
   

10. Consumer Surplus:
    The difference between what consumers are willing to pay for a good and what they actually pay.
    
    

11. Producer Surplus:
    The difference between the price at which producers are willing to sell a good and the price they actually receive.
    
    

12. Price Ceilings:
    Maximum legal prices that can be charged for a good or service (e.g., rent control).
    
    

13. Price Floors:
    Minimum legal prices that can be charged for a good or service (e.g., minimum wage).
    
    

14. Trade:
    The exchange of goods and services between countries or entities, which can benefit all parties by allowing them to specialize in what they do best.
    
    

15. Taxes:
    Payments imposed on goods or services that increase the price paid by consumers and decrease the price received by producers, often reducing the quantity exchanged in the market.
    
    

16. Maximizing Utility:
    Making choices that maximize satisfaction or happiness given budget constraints.
    
    

17. Inputs:
    Resources used in production, such as labor, capital, and land.
    
    

18. Outputs:
    Goods and services produced from inputs.
    
    

19. Law of Diminishing Marginal Returns:
    As more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decline.
    
    

20. Fixed Costs:
    Costs that do not change with the level of output.
    
    

21. Variable Costs:
    Costs that change with the level of output.
    
    

22. Economies of Scale:
    When increasing production leads to lower per-unit costs due to efficiencies.
    
    

23. Perfect Competition:
    A market structure where many firms sell identical products, and no single firm can influence the market price.
    
    

24. Profit-Maximizing Rule (MR = MC):
    Firms maximize profit by producing the quantity of output where marginal revenue equals marginal cost.
    
    

25. Shut Down Rule:
    A firm should cease production in the short run if the price is less than average variable cost (P < AVC).
    
    

26. Accounting Profit:
    Total revenue minus explicit costs.
    
    

27. Economic Profit:
    Total revenue minus both explicit and implicit costs (including opportunity costs).
    
    

28. Short-Run:
    A period in which at least one factor of production is fixed.
    
    

29. Long-Run:
    A period in which all factors of production can be varied.
    
    

30. Productive Efficiency:
    When goods are produced at the lowest possible cost.
    
    

31. Allocative Efficiency:
    When resources are allocated to maximize total societal welfare (P = MC).
    
    

32. Monopoly:
    A market structure where a single firm controls the entire supply of a good or service with no close substitutes.
    
    

33. Natural Monopoly:
    A single firm can supply the entire market at a lower cost than multiple firms due to economies of scale.
    
    

34. Price Discrimination:
    Charging different prices to different consumers for the same good or service.
    
    

35. Oligopoly:
    A market structure where a small number of firms dominate the market and can influence prices.
    
    

36. Game Theory:
    The study of strategic decision-making where individuals or firms consider the potential responses of others.
    
    

37. Monopolistic Competition:
    A market structure with many firms selling differentiated products, with some control over prices.
    
    

38. Derived Demand:
    Demand for labor driven by the demand for the goods and services that labor helps produce.
    
    

39. Minimum Wage:
    The lowest legal wage that an employer can pay workers.
    
    

40. Marginal Revenue Product (MRP):
    The additional revenue generated by employing one more unit of labor.
    
    

41. Marginal Resource Cost (MRC):
    The additional cost of hiring one more unit of labor.
    
    

42. Monopsony:
    A market with a single buyer (employer) of labor, giving them control over wages and employment.
    
    

43. Least-Cost Rule:
    A firm's goal to allocate resources efficiently to minimize costs in production.
    
    

44. Market Failure:
    When the market fails to allocate resources efficiently, leading to suboptimal outcomes.
    
    

45. Public Goods:
    Goods that are non-excludable and non-rivalrous (e.g., national defense).
    
    

46. Externalities:
    Costs or benefits of a market activity that affect third parties not involved in the transaction (e.g., pollution).
    
    

47. Lorenz Curve:
    A graphical representation of income or wealth distribution in an economy.
    
    

48. Deadweight Loss:
    Loss of societal welfare due to inefficient production or consumption, often caused by taxes or monopolies.
    
    

49. Cross-Price Elasticity:
    Measures how the quantity demanded of one good responds to a change in the price of another good.
    
    

50. Quasi-Public Goods:
    Goods that are partially rivalrous and excludable, such as education and highways.
    
    

1. Average Total Cost (ATC)
Q: What is the formula for Average Total Cost (ATC)?
A: ATC = TC / Q
Definition: Average total cost is the total cost (TC) divided by the quantity (Q) of output produced.

2. Average Variable Cost (AVC)
Q: What is the formula for Average Variable Cost (AVC)?
A: AVC = VC / Q
Definition: Average variable cost is the variable cost (VC) divided by the quantity (Q) of output produced.

3. Average Fixed Cost (AFC)
Q: What is the formula for Average Fixed Cost (AFC)?
A: AFC = FC / Q
Definition: Average fixed cost is the fixed cost (FC) divided by the quantity (Q) of output produced.

4. Marginal Cost (MC)
Q: What is the formula for Marginal Cost (MC)?
A: MC = ΔTC / ΔQ
Definition: Marginal cost is the additional cost incurred by producing one more unit of output.

5. Profit
Q: What is the formula for Profit?
A: Profit = TR – TC
Definition: Profit is total revenue (TR) minus total cost (TC). If TC includes implicit and explicit costs, it is economic profit.

6. Consumer Surplus (CS)
Q: What is the formula for Consumer Surplus (CS)?
A: CS = ½(Base × Height)
Definition: Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, represented as the area under the demand curve and above the price.

7. Producer Surplus (PS)
Q: What is the formula for Producer Surplus (PS)?
A: PS = Price received – Minimum price producer would accept
Definition: Producer surplus is the difference between the price producers actually receive and the minimum price at which they are willing to sell.

8. Deadweight Loss (DWL)
Q: What is the formula for Deadweight Loss (DWL)?
A: DWL = ½(Base × Height of loss triangle)
Definition: Deadweight loss is the loss of total surplus (consumer and producer) that occurs when a market is not producing at the socially optimal quantity.

9. Elasticity of Demand
Q: What is the formula for Elasticity of Demand?
A: Ed = |(%ΔQd) / (%ΔP)|
Definition: Elasticity measures the responsiveness of quantity demanded (Qd) to a change in price (P).

10. Price Elasticity of Supply (Es)
Q: What is the formula for Price Elasticity of Supply (Es)?
A: Es = (%ΔQs) / (%ΔP)
Definition: Measures the responsiveness of quantity supplied (Qs) to a change in price (P).

11. Cross-Price Elasticity of Demand (Exy)
Q: What is the formula for Cross-Price Elasticity of Demand (Exy)?
A: Exy = (%ΔQd of Good X) / (%ΔP of Good Y)
Definition: Measures the responsiveness of demand for one good to a change in the price of another good.

12. Income Elasticity of Demand (Ei)
Q: What is the formula for Income Elasticity of Demand (Ei)?
A: Ei = (%ΔQd) / (%ΔIncome)
Definition: Measures the responsiveness of demand to a change in income.

13. Percent Change
Q: What is the formula for Percent Change?
A: %Δ = [(New value – Old value) / Old value] × 100
Definition: Calculates the percentage change between two values.

14. Least-Cost Rule
Q: What is the formula for the Least-Cost Rule?
A: (MP of Labor / Wage) = (MP of Capital / Rental Rate)
Definition: Firms minimize costs by allocating resources such that the marginal product per dollar spent is equal across all inputs.

15. Utility-Maximizing Rule
Q: What is the formula for the Utility-Maximizing Rule?
A: (MUx / Px) = (MUy / Py)
Definition: Consumers maximize utility by consuming goods in a way that the marginal utility per dollar spent is equal for all goods.

16. Price
Q: What is the formula for Price?
A: P = AR (in perfect competition, Price = Average Revenue)
Definition: The amount of money exchanged for a good or service.

17. Total Revenue (TR)
Q: What is the formula for Total Revenue (TR)?
A: TR = P × Q
Definition: Total revenue is the total amount of money received from the sale of goods or services.

1. Production Possibilities Curve (PPC): A graph showing the different combinations of two goods or services that an economy can produce with its available resources.
   
   

2. Price Floors: A government-imposed minimum price that must be paid for a good or service, such as minimum wage.
   
   

3. Price Ceilings: A government-imposed maximum price that can be charged for a good or service, such as rent control.
   
   

4. Excise Taxes: Taxes imposed on specific goods or services, typically to reduce consumption of those goods.
   
   

5. International Trade: The exchange of goods and services across international borders.
   
   

6. Tariffs: Taxes on imported goods to protect domestic industries or raise government revenue.
   
   

7. Perfect Competition: A market structure with many buyers and sellers, identical products, and no barriers to entry.
   
   

8. Monopoly: A market structure where a single seller controls the entire market, often due to barriers to entry.
   
   

9. Monopolistic Competition: A market structure with many firms selling differentiated products with some control over prices.
   
   

10. Perfectly Competitive Factor Markets: Markets where firms hire factors of production, like labor, at the market wage with many buyers and sellers.
    
    

11. Monopsony: A market structure with only one buyer for a factor of production, such as labor.
    
    

12. Negative Externality: A cost to third parties resulting from the consumption or production of a good or service.
    
    

13. Positive Externality: A benefit to third parties resulting from the consumption or production of a good or service.
    
    

14. Marginal Social Benefit (MSB): The additional benefit to society from consuming one more unit of a good or service.
    
    

15. Marginal Private Benefit (MPB): The additional benefit to an individual or firm from consuming one more unit of a good or service.
    
    

16. Marginal Social Cost (MSC): The additional cost to society from producing one more unit of a good or service.
    
    

17. Marginal Private Cost (MPC): The additional cost to an individual or firm from producing one more unit of a good or service.
    
    

18. Deadweight Loss: The loss of economic efficiency when the equilibrium quantity is not achieved due to market distortions like taxes or externalities.
    
    

19. Allocatively Efficient Point: The point where marginal social benefit equals marginal social cost, maximizing societal welfare.
    
    

20. Per Unit Tax: A tax imposed on each unit of a good or service sold to correct market failures, such as externalities.
    
    

21. Subsidy: A payment made by the government to encourage the production or consumption of a good or service, typically to address positive externalities.
    
    

22. Lorenz Curve: A graphical representation of income distribution within an economy, showing the cumulative income earned by different percentages of the population.
    
    

23. Line of Equality: A 45-degree line on the Lorenz curve representing perfect income equality, where every percentage of the population earns the same percentage of income.
    
    

24. Gini Coefficient: A numerical measure of income inequality based on the Lorenz curve, ranging from 0 (perfect equality) to 1 (maximum inequality).
    
    

25. Progressive Tax: A tax system where higher-income earners pay a higher percentage of their income in taxes, aimed at reducing income inequality.
    
    

26. Proportional Tax: A tax system where all income earners pay the same percentage of their income in taxes.
    
    

27. Regressive Tax: A tax system where lower-income earners pay a higher percentage of their income in taxes, exacerbating income inequality.
    
    

28. Market Quantity: The amount of a good or service bought and sold at the equilibrium price in an unregulated market.
    
    

29. Socially Optimal Quantity: The quantity of a good or service that maximizes total social welfare, where marginal social benefit equals marginal social cost.
    
    

30. External Cost: A cost imposed on third parties that is not reflected in the price of a good or service.
    
    

31. External Benefit: A benefit received by third parties that is not reflected in the price of a good or service.
    
    

32. Correcting Negative Externality: Addressing a negative externality by imposing taxes or regulations to bring private costs in line with social costs.
    
    

33. Correcting Positive Externality: Addressing a positive externality by providing subsidies or incentives to encourage production or consumption.
    
    

34. Monopoly Price: The price charged by a monopolist, which is typically higher than the competitive market price due to lack of competition.
    
    

35. Monopolistic Competition Price: The price set by firms in monopolistic competition, where products are differentiated and firms have some control over prices.
    
    

36. Oligopoly: A market structure with a small number of large firms that dominate the market, often with barriers to entry.
    
    

37. Price Elasticity of Demand (PED): A measure of how much the quantity demanded of a good changes in response to a price change.
    
    

38. Profit Maximization: The level of output where marginal revenue equals marginal cost, ensuring the highest possible profit for a firm.
    
    

39. Monopoly Barriers to Entry: Factors that prevent other firms from entering a market, such as high start-up costs or government regulations.
    
    

40. Perfect Competition Characteristics: Many buyers and sellers, identical products, no barriers to entry, and perfect information.
    
    

41. Monopolistic Competition Characteristics: Many firms, differentiated products, and low barriers to entry.
    
    

42. Oligopoly Characteristics: A small number of large firms, potential for collusion, and high barriers to entry.
    
    

43. Monopoly Characteristics: Single seller, high barriers to entry, and the ability to control prices.
    
    

44. Marginal Revenue (MR): The additional revenue a firm earns from selling one more unit of a good or service.
    
    

45. Market Equilibrium: The point at which the quantity demanded equals the quantity supplied at a particular price.
    
    

46. Consumer Surplus: The difference between the amount consumers are willing to pay and the amount they actually pay for a good or service.
    
    

47. Producer Surplus: The difference between the amount producers are willing to sell a good for and the amount they actually receive.
    
    

48. Social Welfare: The overall well-being of society, often measured as the sum of consumer surplus and producer surplus.
    
    

49. Price Discrimination: The practice of charging different prices to different consumers for the same good or service based on willingness to pay.
    
    

50. Market Failure: A situation in which the market fails to allocate resources efficiently, often due to externalities or public goods.

51. Market Power: The ability of a firm or group of firms to influence the price of a good or service in the market.
    
    

52. Barriers to Entry: Factors that prevent or hinder new firms from entering a market, such as high costs, legal restrictions, or strong brand loyalty.
    
    

53. Total Revenue (TR): The total income a firm receives from selling its product, calculated as price times quantity sold.
    
    

54. Fixed Costs (FC): Costs that do not change with the level of output, such as rent or salaries.
    
    

55. Variable Costs (VC): Costs that change with the level of output, such as raw materials or hourly labor.
    
    

56. Total Cost (TC): The sum of fixed costs and variable costs at a given level of output.
    
    

57. Average Total Cost (ATC): Total cost divided by the quantity of output produced, also known as per-unit cost.
    
    

58. Average Variable Cost (AVC): Variable cost divided by the quantity of output produced.
    
    

59. Marginal Cost (MC): The additional cost incurred from producing one more unit of a good or service.
    
    

60. Diminishing Marginal Returns: The decrease in the additional output produced as more units of a variable factor are added to fixed factors.
    
    

61. Economies of Scale: The cost advantages that firms experience as they increase the scale of their production, leading to lower average costs.
    
    

62. Diseconomies of Scale: The disadvantages that firms experience when their scale of production becomes too large, causing average costs to rise.
    
    

63. Price Taker: A firm in a perfectly competitive market that must accept the market price because it cannot influence it.
    
    

64. Price Maker: A firm in a market with some degree of market power, such as a monopoly, that can influence the price of its product.
    
    

65. Cartel: A group of firms that collude to fix prices, limit production, or divide markets to reduce competition and increase profits.
    
    

66. Price Leadership: A situation where one firm sets the price for the industry and other firms follow suit.
    
    

67. Kinked Demand Curve: A model of oligopoly pricing where firms face a demand curve with different elasticities above and below the current price level.
    
    

68. Excess Capacity: The condition in which a firm is not producing at the level that minimizes its average total cost, often associated with monopolistic competition.
    
    

69. Welfare Economics: The study of how the allocation of resources affects social welfare, focusing on efficiency and equity.
    
    

70. Consumer Behavior: The study of how individuals make decisions about the allocation of their resources, like money and time, to maximize utility.
    
    

71. Utility: A measure of satisfaction or happiness that a consumer derives from consuming goods and services.
    
    

72. Marginal Utility (MU): The additional satisfaction or benefit received from consuming one more unit of a good or service.
    
    

73. Law of Diminishing Marginal Utility: The principle that as a person consumes more of a good, the additional satisfaction gained from each additional unit decreases.
    
    

74. Budget Constraint: A representation of the combinations of goods and services a consumer can purchase, given their income and the prices of goods.
    
    

75. Indifference Curve: A graph showing the different combinations of two goods that provide the same level of satisfaction or utility to a consumer.
    
    

76. Perfectly Elastic Demand: A situation where the price elasticity of demand is infinite, meaning any price increase will lead to zero quantity demanded.
    
    

77. Perfectly Inelastic Demand: A situation where the price elasticity of demand is zero, meaning quantity demanded does not change regardless of price.
    
    

78. Cross-Price Elasticity of Demand: A measure of how the quantity demanded of one good responds to the price change of another good.
    
    

79. Income Elasticity of Demand: A measure of how the quantity demanded of a good responds to changes in consumer income.
    
    

80. Short-Run: The time period in which at least one factor of production is fixed, preventing firms from fully adjusting to changes in market conditions.
    
    

81. Long-Run: The time period in which all factors of production can be varied, allowing firms to fully adjust to changes in the market.
    
    

82. Break-Even Price: The price at which a firm's total revenue equals its total costs, resulting in zero profit.
    
    

83. Shut-Down Price: The price below which a firm will cease production in the short run because it cannot cover its variable costs.
    
    

84. Normal Profit: The minimum profit necessary for a firm to remain in business, where total revenue equals total costs, including both explicit and implicit costs.
    
    

85. Economic Profit: Profit that exceeds the normal profit, calculated as total revenue minus both explicit and implicit costs.
    
    

86. Implicit Costs: The opportunity costs of using resources owned by the firm, such as the owner's time or capital invested.
    
    

87. Explicit Costs: Actual out-of-pocket expenses that a firm pays for inputs, such as wages, rent, and materials.
    
    

88. Natural Monopoly: A market where a single firm can produce the entire output at a lower cost than multiple firms due to economies of scale.
    
    

89. Regulation of Monopoly: Government intervention in monopolistic markets to prevent price gouging and ensure consumer welfare, often through price caps or service requirements.
    
    

90. Price Discrimination: The practice of charging different prices to different consumers for the same good or service based on their willingness to pay.
    
    

91. First-Degree Price Discrimination: Charging each consumer the maximum price they are willing to pay, capturing all consumer surplus.
    
    

92. Second-Degree Price Discrimination: Offering different prices based on the quantity consumed or product version, such as bulk discounts.
    
    

93. Third-Degree Price Discrimination: Charging different prices to different groups of consumers based on observable characteristics, such as age or location.
    
    

94. Consumer Surplus: The difference between the maximum price consumers are willing to pay for a good and the price they actually pay.
    
    

95. Producer Surplus: The difference between the price at which producers are willing to sell a good and the price they actually receive.
    
    

96. Deadweight Loss in Monopoly: The reduction in total welfare that occurs when a monopolist produces less than the socially optimal quantity, leading to higher prices and reduced consumer surplus.
    
    

97. Social Welfare Maximization: The goal of allocating resources in such a way that total surplus (consumer plus producer) is maximized, and the market is efficient.
    
    

98. Pareto Efficiency: A state where it is impossible to make someone better off without making someone else worse off.
    
    

99. Public Goods: Goods that are non-excludable and non-rivalrous, meaning they are available to all without reducing their availability to others, like national defense.
    
    

100. Free Rider Problem: A situation where individuals benefit from a good or service without paying for it, often seen with public goods.
     
     

To effectively prepare for your microeconomics midterm, it’s essential to understand and be able to illustrate various market structures, cost analyses, and profit maximization strategies. Below is a guide to the key concepts and the corresponding graphs you should be familiar with:

1. Imperfectly Competitive Industries:

• Market Structures:

• Monopoly: A single firm dominates the market with significant control over price and high barriers to entry.

• Oligopoly: A few large firms control the market, often leading to strategic interactions and potential collusion.

• Monopolistic Competition: Many firms offer differentiated products with some degree of market power, but free entry and exit exist.

• Cost Curves to Understand:

• Marginal Cost (MC): The additional cost of producing one more unit.

• Average Variable Cost (AVC): The variable cost per unit of output.

• Average Total Cost (ATC): The total cost per unit of output.

• Fixed Costs (FC): Costs that do not vary with the level of output.

• Key Graphical Representations:

• Long-Run Equilibrium: Firms earn normal profits; in monopolistic competition, the demand curve is tangent to the ATC curve.

• Operating with a Loss: The price is below ATC but above AVC; firms may continue operating in the short run.

• Profit Maximization (P and Q): Occurs where MR = MC; the price is determined from the demand curve at this quantity.

• Shut Down Point: The point where the price falls below AVC; firms will cease production in the short run.

• Making a Profit: The price is above ATC; firms earn economic profits.

• Consumer & Producer Surplus: Areas representing the benefits to consumers and producers; changes under different market structures.

2. Side-by-Side Graphs:

• Firm and Industry (Market): Illustrate how individual firms operate within the broader market context, especially in perfect competition.

• Monopoly/Oligopoly: Show the firm’s demand, MR, MC, and ATC curves to determine pricing and output decisions.

3. Marginal Analysis – Number of Workers to be Hired:

• Key Concepts:

• Total Product (TP): The total output produced by the firm.

• Marginal Product (MP): The additional output from employing one more unit of labor.

• Marginal Revenue Product (MRP): The additional revenue generated from employing one more unit of labor; calculated as MP × Price of the product.

• Marginal Resource Cost (MRC): The additional cost of employing one more unit of labor.

• Profit Maximization Rule: Hire workers up to the point where MRP = MRC.

4. Perfectly Competitive Firm Analysis:

• Short-Run Profit Maximization: Determine the output level where MR = MC; identify areas of profit or loss.

• Long-Run Adjustments: Firms enter or exit the market based on profit signals, leading to zero economic profit in the long run.

5. Cross-Price Elasticity:

• Definition: Measures the responsiveness of the quantity demanded for one good to a change in the price of another good.

• Interpretation:

• Positive Cross-Price Elasticity: Indicates substitute goods.

• Negative Cross-Price Elasticity: Indicates complementary goods.

Study Recommendations:

• Practice Drawing Graphs: Ensure you can accurately depict and interpret the various cost curves and market structures.

• Work Through Marginal Analysis Tables: Be comfortable calculating TP, MP, MRP, and MRC to determine optimal hiring decisions.

• Understand Elasticities: Be able to calculate and interpret different elasticity measures and their implications for consumer and producer behavior.

By mastering these concepts and their graphical representations, you’ll be well-prepared for your microeconomics midterm.

Flashcards are a study tool that consists of cards with information on one side and a prompt or question on the other. They are used for reviewing and memorizing concepts by testing oneself on the material. Flashcards can be created for a variety of subjects, including vocabulary, key concepts, and definitions. They promote active recall, enhance memory, and are great for spaced repetition study techniques, which involve reviewing the material at increasing intervals.