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Microeconomics Core Concepts: Consumer and Producer Behavior, Market Equilibrium, and Efficiency

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Terms in this set (31)

  • Buyer’s Problem
    Consumers choose combinations of goods and services to maximize satisfaction given limited income and prices.
  • Budget Set
    All possible bundles of goods and services a consumer can afford with a given income and prices.
  • Budget Constraint
    Equation representing all combinations of goods that exactly exhaust the consumer’s income.
  • Opportunity Cost
    The value of the next best alternative forgone when making a choice.
  • Decisions at the Margin
    Consumers compare the additional benefit of one more unit to its additional cost before deciding.
  • Example of Budget Constraint
    If books cost \$20 and movies \$10 with \$100 income, budget constraint is \(20B + 10M = 100\).
  • Consumer Surplus
    Difference between what consumers are willing to pay and what they actually pay.
  • Price Elasticity of Demand
    Measures responsiveness of quantity demanded to a change in price.
  • Price Elasticity of Demand Formula
    \(\varepsilon = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}\)
  • Arc Elasticity
    Calculates elasticity over a range of prices and quantities.
  • Arc Elasticity Formula
    \(\varepsilon = \frac{(Q_2 - Q_1)/[(Q_2 + Q_1)/2]}{(P_2 - P_1)/[(P_2 + P_1)/2]}\)
  • Cross-Price Elasticity
    Measures how quantity demanded of one good responds to a price change in another good.
  • Cross-Price Elasticity Formula
    \(\varepsilon_{xy} = \frac{\%\ \text{change in } Q_x}{\%\ \text{change in } P_y}\)
  • Income Elasticity of Demand
    Measures how quantity demanded responds to a change in consumer income.
  • Income Elasticity Formula
    \(\varepsilon_I = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}}\)
  • Types of Price Elasticity
    Elastic: |ε| > 1, Inelastic: |ε| < 1, Unit Elastic: |ε| = 1, Perfectly Elastic: |ε| = ∞, Perfectly Inelastic: |ε| = 0.
  • Substitutes vs Complements
    Substitutes have positive cross-price elasticity; complements have negative cross-price elasticity.
  • Normal vs Inferior Goods
    Normal goods have positive income elasticity; inferior goods have negative income elasticity.
  • Perfect Competition Characteristics
    Many buyers and sellers, homogeneous products, free entry and exit, perfect information.
  • Short Run vs Long Run in Production
    Short run: at least one input fixed; Long run: all inputs variable.
  • Marginal Product
    Additional output from using one more unit of input.
  • Law of Diminishing Returns
    Adding more of a variable input to a fixed input eventually yields lower additional output.
  • Total Cost (TC)
    Sum of all costs incurred in production.
  • Average Total Cost (ATC) Formula
    \(ATC = \frac{TC}{Q}\)
  • Marginal Cost (MC) Formula
    \(MC = \frac{\Delta TC}{\Delta Q}\)
  • Profit Formula
    \(\text{Profit} = \text{Total Revenue} - \text{Total Cost}\)
  • Shutdown Rule (Short Run)
    Firm should shut down if price is less than average variable cost.
  • Producer Surplus
    Difference between the price received and the minimum price a producer is willing to accept.
  • Economies of Scale
    Long-run average total cost decreases as output increases.
  • Deadweight Loss
    Loss of total surplus due to market distortions like taxes or price controls.
  • Pareto Efficiency
    No one can be made better off without making someone else worse off.