Microeconomics: 7 Core Principle + 64 Key Concepts

Front 1

The scarcity principle ('no-free-lunch')

Back 1

Although we have boundless needs and wants, the resources available to us are limited. Having more of one thing usually means having less of another.

Front 2

The cost-benefit principle

Back 2

An individual (firm, society) should undertake an action if, an only if, the extra benefits from undertaking that action are at least as great as the extra costs.

Front 3

The incentive principle

Back 3

A person (firm, society) is more likely to undertake an action if its benefit rises and less likely to undertake it if its cost rises. Incentives matter.

Front 4

The principle of comparative advantage

Back 4

Everyone can do better when each person (country) concentrates on the activities for which their opportunity cost is the lowest (or for which they have comparative advantage).

Front 5

The principle of increasing opportunity cost ('low-hanging-fruit')

Back 5

In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.

Front 6

The efficiency principle

Back 6

Efficiency is an important social goal. because when the economic pie grows larger, it is possible for everyone to have a larger slice.

Front 7

The equilibrium principle ('no cash on the table')

Back 7

A market in equilibrium leaves no unexploited opportunities for individuals , but may not exploit all gains achievable through collective action.

Front 8

average cost

Back 8

the total cost of undertaking n units of an activity divided by n.

Front 9

average benefit

Back 9

the total benefit of undertaking n units of an activity divided by n.

Front 10

cash on the table

Back 10

a metaphor used to describe unexploited gains from exchange.

Front 11

ceteris paribus (or 'all else being equal)

Back 11

the assumption that everything that could affect a variable of interest, other than the thing being studied, stays the same.

Front 12

comparative advantage

Back 12

when one person's opportunity cost of producing a good or service, or of performing a given task, is lower that another person's opportunity cost.

Front 13

economics

Back 13

the study of how people make choices under conditions of scarcity and of the results of those choices for society.

Front 14

elasticity

Back 14

a measure of how responsive one variable is to a change in one of the other things that determines it.

Front 15

economic surplus

Back 15

the gain that results from undertaking an action when the benefits outweigh the costs.

Front 16

opportunity cost

Back 16

the value of the next-best alternative to undertaking a particular action.

Front 17

macroeconomics

Back 17

the study of the performance of national economies and the policies of that the governments use to try to improve that performance.

Front 18

marginal benefit

Back 18

the increase in benefits associated with a small increase in the level of a particular activity.

Front 19

marginal cost

Back 19

the change in total cost divided by the corresponding change in output.

Front 20

sunk cost

Back 20

a cost that cannot be recovered at the moment a decision is made.

Front 21

normative economics

Back 21

economic analysis that states what should or ought to happen.

Front 22

positive economics

Back 22

economic analysis that explains what happens and why, but does not state what should happen.

Front 23

economic decision

Back 23

any decision whereby securing something of value means going without some other thing of value.

Front 24

economic naturalist

Back 24

someone who uses basic economic concepts to make sense of observations about all aspects of everyday life.

Front 25

absolute advantage

Back 25

when one person is able to produce a good or service, or perform a given task, with less resource than another person.

Front 26

attainable point

Back 26

any combination of goods that can be produced using currently available resources; all points either on or below and to the left of the PPC are attainable.

Front 27

efficient point

Back 27

any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction of the other; any point on the PPC is an efficient point.

Front 28

inefficient point

Back 28

any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other; any point that lies below and to the left of the PPC is inefficient.

Front 29

production possibilities curve (PPC)

Back 29

a graph that describes the maximum amount of one good that can be produced for every possible level of production of another good.

Front 30

buyer's reservation price

Back 30

the largest dollar amount that the buyer would be willing to pay for a particular good or service.

Front 31

buyer's surplus

Back 31

the difference between that buyer's reservation price and the price they actually pay.

Front 32

change in demand

Back 32

a shift of the entire demand curve.

Front 33

change in supply

Back 33

a shift of the entire supply curve.

Front 34

change in the quantity demanded

Back 34

a movement along the demand curve that occurs in response to a change in price.

Front 35

change in the quantity supplied

Back 35

a movement along the supply curve that occurs in response to a change in price.

Front 36

complements

Back 36

two goods are complements in consumption if an increase in the price of one causes a fall in demand for the other, as shown by a leftward shift in the demand curve for the other.

Front 37

demand curve

Back 37

a representation of the relationship between the amount of a particular good or service that buyers want to purchase in a give period and the price of that good or service.

Front 38

efficiency (economic efficiency)

Back 38

when all goods and services are produced an consumed at their respective socially optimal levels.

Front 39

equilibrium

Back 39

any situation in which a system is at rest, for example, where neither the price nor the quantity produced of a particular good or service is changing.

Front 40

equilibrium price and equilibrium quantity

Back 40

the values of price and quantity for which quantity supplied and quantity demanded are equal.

Front 41

excess demand (shortage)

Back 41

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.

Front 42

excess supply (surplus)

Back 42

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.

Front 43

horizontal interpretation of the demand curve

Back 43

a reading of the demand curve where we start with price on the vertical axis and read the corresponding quantity demanded on the horizontal axis.

Front 44

income effect

Back 44

the change in the quantity demanded of a good or service caused by a change in price, which results because of the change in the purchasing power of a buyer's income.

Front 45

inferior good

Back 45

a good whose demand curve shifts leftwards when the incomes of buyers increase, and rightwards when the incomes of buyers decrease.

Front 46

market

Back 46

the market for any good or service consists of all the buyers and sellers of that good or service.

Front 47

market equilibrium

Back 47

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price.

Front 48

normal good

Back 48

a good whose demand curve shifts rightwards when the incomes of buyers increase and leftwards when the incomes of buyers decrease.

Front 49

price ceiling

Back 49

a maximum allowable price, specified by law.

Front 50

price floor

Back 50

a minimum allowable price specified by law.

Front 51

seller's reservation price

Back 51

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost.

Front 52

seller's surplus

Back 52

the difference between the price received by the seller and their reservation price.

Front 53

socially optimal quantity

Back 53

the quantity of a good or service that results in the maximum possible difference between the total benefits and total costs from producing and consuming that good or service.

Front 54

substitutes

Back 54

two goods are substitutes in consumption if an increase in the price of one causes a rise in demand for another, as shown by a rightward shift in the demand curve for the other.

Front 55

substitution effect

Back 55

the change in the quantity demanded of a good or service caused by a change in price, which results because the good or service becomes more or less expensive relative to other goods and services.

Front 56

supply curve

Back 56

a representation of the relationship between the amount of a particular good or service that sellers want to supply in a given time period and the price of that good or service.

Front 57

total surplus (total economic surplus)

Back 57

the sum of the buyer's surplus and the seller's surplus or, equivalently, the difference between the buyer's reservation price and the seller's reservation price.

Front 58

vertical interpretation of the demand curve

Back 58

a reading of the demand curve where we start with quantity on the horizontal axis and then read the marginal buyer's reservation price on the vertical axis.

Front 59

cross-price elasticity of demand

Back 59

the percentage by which the quantity demanded of a good change in response to a 1 per cent change in the price of a second good.

Front 60

econometrics

Back 60

a branch of economics that uses statistical techniques to analyse data on economic variables in order to test economic theories.

Front 61

elasticity demand

Back 61

demand is elastic with respect to price if price elasticity of demand is greater than 1.

Front 62

elasticity

Back 62

a measure of how responsive one variable is to a change of the other things that determines.

Front 63

income elasticity of demand

Back 63

the percentage by which the quantity demanded of a good changes in response to a 1 per cent change in income.

Front 64

inelastic demand

Back 64

demand is inelastic with respect to price if price elasticity of demand is less than 1.

Front 65

perfectly elastic demand

Back 65

demand is perfectly elastic with respect to price if price elasticity of demand is infinite.; this occurs when the demand curve is horizontal.

Front 66

perfectly elastic supply

Back 66

supply is perfectly elastic with respect to price if elasticity is infinite; this occurs when the supply curve is horizontal.

Front 67

perfectly inelastic demand

Back 67

demand is perfectly inelastic with respect to price if price elasticity of demand is zero; this occurs when the demand curve is vertical.

Front 68

perfectly inelastic supply

Back 68

supply is perfectly inelastic with respect to price if elasticity is zero; this occurs when the supply curve is vertical.

Front 69

price elasticity of demand

Back 69

the percentage change in quantity demanded that results from a 1 per cent change in price; denoted as e.

Front 70

price elasticity of supply

Back 70

the percentage change in quantity supplied that occurs in response to a 1 per cent change in price.

Front 71

total expenditure = total revenue

Back 71

the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive.