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Microeconomics
45 flashcards
Microeconomics is the branch of economics that studies the behavior of individual economic agents such as consumers, producers, and firms in making decisions on the allocation of limited resources.
Utility is a measure of the satisfaction or happiness that consumers derive from consuming a good or service. It represents the perceived benefits of consumption.
The law of diminishing marginal utility states that as consumption of a good or service increases, the marginal utility derived from each additional unit decreases.
The main factors that influence consumer demand are income, prices, tastes and preferences, expectations, and the number of consumers in the market.
A change in demand refers to a shift in the entire demand curve due to changes in factors other than price. A change in quantity demanded refers to a movement along the same demand curve due to a change in price.
The production function describes the relationship between the inputs or factors of production (labor, capital, land, and entrepreneurship) and the maximum possible output that can be produced with those inputs.
The law of diminishing marginal returns states that as additional units of a variable input are added to fixed inputs, the marginal output will eventually decrease.
Accounting costs refer to the explicit monetary costs incurred by a firm, while economic costs include both the explicit costs and the opportunity costs of using resources in a particular way.
The main market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. They differ in the number of firms, product differentiation, and barriers to entry and exit.
In a perfectly competitive market, there are many buyers and sellers, homogeneous products, and easy entry and exit. In a monopoly, there is a single seller with high barriers to entry and no close substitutes.
Economic efficiency refers to the optimal allocation of resources in an economy to maximize the production of goods and services and ensure that resources are not wasted.
A normal good is a good for which demand increases as consumer income increases. An inferior good is a good for which demand decreases as consumer income increases.
Elasticity measures the responsiveness of one variable to a change in another variable. Examples include price elasticity of demand and income elasticity of demand.
Prices play a crucial role in a market economy by serving as signals that guide the allocation of resources and the distribution of goods and services among consumers and producers.
Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good or service and the actual amount they pay. It represents the benefit or welfare gained by the consumer.
Producer surplus is the difference between the actual amount a producer receives for a good or service and the minimum amount they would be willing to accept. It represents the benefit or welfare gained by the producer.
Market failure is a situation where the free market fails to allocate resources efficiently, leading to a loss of economic welfare. Examples include externalities, public goods, and information asymmetries.
The principle of profit maximization states that a firm will choose the level of output at which the difference between total revenue and total cost is greatest.
Monopolistic competition is a market structure characterized by many sellers offering differentiated products, with relatively easy entry and exit, and some degree of market power.
An oligopoly is a market structure characterized by a few large firms that dominate the market, with high barriers to entry and interdependence in decision-making.
Game theory is used in microeconomics to analyze strategic decision-making by firms and individuals in situations of interdependence, such as oligopolies and bargaining situations.
Asymmetric information is a situation where one party in a transaction has more or better information than the other party, which can lead to market failures such as adverse selection and moral hazard.
Behavioral economics is a field that incorporates insights from psychology and other social sciences to study how individuals make economic decisions, often deviating from the assumptions of rational behavior in traditional economic models.
Government intervention in microeconomics can be justified in cases of market failure, such as regulating monopolies, imposing taxes or subsidies to correct for externalities, and providing public goods.
Fixed costs are costs that do not change with the level of output, while variable costs are costs that change in proportion to the level of output.
Economies of scale refer to the cost advantages that a firm can exploit by increasing its scale of production, typically through lower average costs per unit as output increases.
The short-run is a period of time in which at least one factor of production is fixed, while the long-run is a period of time in which all factors of production are variable.
A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of future actions. Sunk costs should be ignored in future decision-making.
Opportunity cost is the value of the next-best alternative that is given up when a particular choice is made. It represents the cost of forgone opportunities.
Marginal analysis is the study of the additional or incremental changes in variables such as costs, revenues, and utility resulting from a small change in the level of an activity or consumption.
Price discrimination is the practice of charging different prices to different customers for the same good or service, often based on factors such as their willingness to pay or location.
Network effects refer to the phenomenon where the value of a good or service increases as more people use it, creating a positive feedback loop that can lead to market dominance.
Signaling is the idea that economic agents use observable characteristics or actions to convey information about their unobservable qualities, such as education levels or product quality.
Moral hazard is a situation where one party takes more risks because they do not bear the full consequences of their actions, often due to insurance or other risk-sharing arrangements.
Adverse selection is a situation where asymmetric information leads to a disproportionate participation of higher-risk individuals in a market, often resulting in market failure.
The principal-agent problem arises when the interests of the principal (e.g., an employer) and the agent (e.g., an employee) are not aligned, leading to potential conflicts and inefficiencies.
The free-rider problem occurs when individuals can benefit from a public good without contributing to its provision, leading to an undersupply of the good.
Externalities are the positive or negative effects of economic activities that are not reflected in market prices, leading to a divergence between private and social costs or benefits.
Public goods are goods that are non-excludable and non-rivalrous in consumption, meaning that it is difficult or impossible to exclude people from consuming them, and one person's consumption does not reduce the amount available to others.
Tax incidence is the study of who bears the burden of a tax, which may differ from who is legally responsible for paying it, depending on the elasticities of supply and demand.
Deadweight loss is the loss of economic welfare or efficiency that occurs when the allocation of resources is not optimal, such as in the presence of market failures or distortionary taxes.
Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than others, suggesting that specialization and trade can be mutually beneficial.
Risk aversion is the tendency of individuals or firms to prefer a lower but more certain payoff over a higher but less certain payoff, reflecting their dislike for risk.
In game theory, the Nash equilibrium is a situation where each player's strategy is an optimal response to the strategies of the other players, and no player has an incentive to unilaterally change their strategy.
Pareto efficiency is a state where it is impossible to make any individual better off without making at least one individual worse off, representing an optimal allocation of resources.