Microeconomics

Cards (24)

• 1
  Front

  What does the Law of Demand state?

  Back

  As the price of a good increases, the quantity demanded decreases, ceteris paribus; price and quantity demanded have an inverse relationship.

• 2
  Front

  What is the difference between a change in quantity demanded and a change in demand?

  Back

  A change in quantity demanded is movement along the demand curve caused by a price change; a change in demand is a shift of the entire curve caused by non-price factors (income, preferences, prices of related goods).

• 3
  Front

  What is the utility-maximizing rule for a consumer?

  Back

  A consumer maximizes utility when the marginal utility per dollar spent is equal across all goods: MU_A/P_A = MU_B/P_B.

• 4
  Front

  What is the income effect in consumer theory?

  Back

  When a good's price falls, the consumer's real purchasing power rises, allowing them to buy more of that good (and other goods), holding money income constant.

• 5
  Front

  What is the substitution effect in consumer theory?

  Back

  When a good's price falls, it becomes relatively cheaper than substitutes, so consumers buy more of it and less of the substitutes.

• 6
  Front

  What is the Law of Diminishing Marginal Utility?

  Back

  As a consumer consumes successive units of a good, each additional unit provides less additional satisfaction (marginal utility) than the previous one.

• 7
  Front

  What is the Law of Supply?

  Back

  As the price of a good increases, the quantity supplied increases, ceteris paribus; price and quantity supplied have a direct (positive) relationship.

• 8
  Front

  What is producer surplus?

  Back

  The difference between the price a producer receives for a good and the minimum price they would accept (their marginal cost); it represents the producer's gain from trade.

• 9
  Front

  How is price elasticity of demand (PED) calculated?

  Back

  PED = (% change in quantity demanded) / (% change in price). A value greater than 1 in absolute terms indicates elastic demand; less than 1 indicates inelastic demand.

• 10
  Front

  What determines whether demand for a good is elastic or inelastic?

  Back

  Key determinants include availability of substitutes (more substitutes → more elastic), necessity vs. luxury status, proportion of income spent, and time horizon (longer time → more elastic).

• 11
  Front

  What is cross-price elasticity of demand, and what do positive vs. negative values indicate?

  Back

  Cross-price elasticity measures how quantity demanded of good A changes when the price of good B changes. Positive values indicate substitutes; negative values indicate complements.

• 12
  Front

  What are the key characteristics of a perfectly competitive market?

  Back

  Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and no individual firm has pricing power (price takers).

• 13
  Front

  In perfect competition, what is the profit-maximizing output rule?

  Back

  Firms produce where Marginal Revenue (MR) equals Marginal Cost (MC), which also equals the market price (P = MR = MC).

• 14
  Front

  What happens to economic profit in a perfectly competitive market in the long run?

  Back

  Economic profits attract entry, increasing supply and driving price down until economic profit equals zero; losses cause exit until firms earn normal (zero economic) profit.

• 15
  Front

  What is a natural monopoly?

  Back

  A market where a single firm can supply the entire market at a lower cost than multiple competing firms, due to continuously declining average total costs (large economies of scale).

• 16
  Front

  How does a monopolist determine its profit-maximizing price and output?

  Back

  A monopolist sets output where MR = MC, then charges the highest price consumers will pay for that quantity, as read from the demand curve.

• 17
  Front

  What is deadweight loss in a monopoly?

  Back

  The loss of economic efficiency (total surplus) that occurs because the monopolist produces less than the socially optimal quantity, resulting in mutually beneficial trades that do not occur.

• 18
  Front

  What is price discrimination in a monopoly?

  Back

  Charging different prices to different consumers or groups for the same good based on their willingness to pay, to capture more consumer surplus as producer surplus.

• 19
  Front

  What are the defining characteristics of an oligopoly?

  Back

  A few large firms dominate the market, products may be homogeneous or differentiated, there are significant barriers to entry, and firms are mutually interdependent in their pricing decisions.

• 20
  Front

  What is the Prisoner's Dilemma in the context of oligopoly?

  Back

  A game-theory scenario where two firms, acting in their own self-interest, both choose to compete (defect) rather than collude, resulting in a worse outcome for both than if they had cooperated.

• 21
  Front

  What is a negative externality, and how does it cause market failure?

  Back

  A cost imposed on third parties not involved in a transaction (e.g., pollution). It causes the market to overproduce the good relative to the socially optimal quantity because private costs are below social costs.

• 22
  Front

  What is the Coase Theorem?

  Back

  If property rights are well-defined and transaction costs are negligible, private parties can negotiate to internalize externalities and reach a socially efficient outcome regardless of who holds the property rights.

• 23
  Front

  What is a Pigouvian tax?

  Back

  A tax equal to the marginal external cost of a negative externality, designed to make producers internalize the social cost and reduce output to the socially optimal level.

• 24
  Front

  What is the derived demand for labor?

  Back

  The demand for labor is derived from (dependent on) the demand for the goods and services that workers produce; firms hire workers because of the value of their output, not for labor itself.