Microeconomics Midterm Review

Price ceiling

A legally determined maximum price that sellers may charge

price floor

a legally determined minimum price that sellers may receive

consumer surplus

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service.

marginal cost

the additional cost to a firm of producing one more unit of a good or service

producer surplus

the difference between the lowest price a firm would be willing to accept and the price it actually receives

economic surplus

the sum of consumer surplus and producer surplus

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

black market

a market in which buying and selling takes place at prices violate government price regulations.

Perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Demand schedule

A table showing the relationship between the price of a product and the quantity of the product demanded

Quantity demanded

the amount of a good or service that a consumer is willing and able to purchase at a given price

demand curve

a curve that shows the relationship between the price of a product and the quantity of the product demanded.

market demand

the demand by all the consumers of a given good or service.

law of demand

the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of the product rises, the quantity demaded of the product will decrease

substitution effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to the other goods that are substitutes

income effect

the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.

Ceteris paribus ("all else equal")

the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant

Normal good

A good for which the demand increases as income rises and decreases as income falls.

inferior good

a good for which the demand increases as income falls and decreases as income rises.

substitutes

goods and services that can be used for the same purpose.

complements

goods and services that are used together.

demographics

the characteristics of a population with respect to age, race, and gender.

quantity supplied

the amount of a good or service that a firm is willing and able to supply at a given price

supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied

supply curve

a curve that shows the relationship between the price of a product and the quantity of the product supplied.

law of supply

The rule that, holding everything else constant, increases in price causes increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a give quality or inputs.

market equilibrium

a situation in which quantity demanded equals quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and many sellers

surplus

a situation in which quantity supplied is greater than the quantity demanded

shortage

a situation in which the quantity demanded is greater than the quantity supplied

scarcity

The situation in which unlimited wants exceed the limited resources available to fulfill those wants.

economics

the study of the choices people make to attain their goals, given scarce resources

economic model

a simplified version of reality used to analyze real-world economic situations

market

a group of buyers and sellers of a good or service and the instition or arrangement by which they come together to trade.

Marginal analysis

analysis that involves comparing marginal benefits and marginal costs.

trade-off

the idea that because of scarcity, producing more of one service or good means producing less of another good or service.

opportunity cost

the highest valued alternative that must be given up to engage in an activity

centrally planned economy/controll demand

an economy in which the government decides how economic resources will be allocated

market economy

an economy in which the decisions of households and firms interacting in markets allocate economic resources

mixed economy

an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

productive efficiency

the situation in which a good or service is produced at the lowest possible cost

allocative efficiency

a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides marginal benefit to society equal to the marginal cost of producing it

voluntary exchange

the situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction

equity

the fair distribution of economic benefits

economic variable

something measurable that can have different values, such as the wages of software programmers

positive analysis

analysis concerned with what is

normative analysis

analysis concerned with what ought be

microeconomics

the study of how households and firms make choices, how the interact in markets, and how the government attempts to influence their choices

macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment and economic growth

economic growth

the ability of an economy to produce increasing quantities of goods and services

trade

the act of buying or selling

absolute advantage

the ability of an individual, a firm, or country to produce more of a good or service than competitiors, using the same amount of resources

comparative advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

product markets

markets for goods- such as computers- and services- such as medical treatment

factor markets

markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

factors of production

the inputs used to makegoods and services

free market

a market with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed.

entrepreneur

someone who operates a business, bringing together the factor of production-labor, capital, and natural resources-to produce goods and services.

property rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Explicit costs

input costs that require an outlay of money by the firm

Implicit costs

Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.

Accounting Profits

A firm's total revenue minus its explicit costs

Economic profits

total revenues minus total opportunity costs of all inputs used, or the total of all implicit and explicit costs.

Zero economic profit

a condition for long-run equilibrium; all inputs make exactly their opportunity costs so that no firm wants to enter or exit the industry

Sunk costs

Costs that have already been incurred and cannot be recovered

short run

A period during which at least one of a firm's resources is fixed

long run

a period of time long enough for all inputs to be varied (no fixed costs)

production function

relationship between the quantity of inputs a firm uses and the quantity of output it produces

Marginal product

extra output due to the addition of one more unit of input

Law of diminishing returns

increasing one factor of production will increase output up to a point, then begin to decrease

Fixed cost

a cost that does not change, no matter how much of a good is produced

Variable cost

a cost that rises or falls depending on how much is produced

Average fixed cost (AFC)

Fixed cost divided by the quantity produced

Average variable cost (AVC)

total variable costs divided by quantity of output

Average total cost (ATC)

total costs divided by quantity of output

Marginal costs (MC)

The change in total cost that results from a change in output: MC= ΔTC/ΔQ

profit

the total revenue a firm receives from the sale of its product minus all costs incurred (implicit and explicit) producing it

profit maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

factor of production

an input used in the production of a good or service

perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

price taker (perfectly competitive firm)

a firm that has no influence over the price at which it sells its product

four conditions of a perfectly competitive market

1. all firms sell the same standardized product 2. the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged 3. productive resources are mobile 4. buyers and sellers are well informed

short run

a period of time sufficiently short that at least one of the firm's factors of production cannot be varied

long run

a period of time sufficient in length so that all the firm's factors of production are variable

production function

a technological relationship between inputs and outputs

marginal product

the increase in total output caused by an increase of one unit in the variable factor of production, holding all else constant

variable factor of production

an input whose quantity can be altered in the short run

fixed factor of production

an input whose quantity cannot be altered in the short run

average product

total output divided by units of the variable factor of production

marginal revenue

the increase in total revenue obtained by producing and selling one more unit of output

marginal cost

the increase in total cost incurred by producing one more unit of output

variable cost

any cost that changes as the firm changes its output

formula for marginal cost

Change in total cost / change in quantity

formula for average variable cost

total variable cost / quantity

short run cost minimizing quantity of output

the quantity of output at which a factory reaches minimum average total cost

short run shutdown point

a firm's minimum average variable cost; if price drops below minimum average variable cost, the firm will minimize its losses by shutting down

price elasticity of supply

the change in quantity supplied arising from a one percent change in price