Microeconomics Concepts Quiz

Microeconomics

Definition:
- Branch of economics that studies individual agents and markets.
Key Concepts:
- Supply and Demand:
  - Laws of supply (higher prices lead to higher quantities supplied) and demand (lower prices lead to higher quantities demanded).
  - Equilibrium: point where supply equals demand.
- Elasticity:
  - Price Elasticity of Demand: responsiveness of quantity demanded to price changes.
    - Elastic (> 1), Inelastic (< 1), Unitary (= 1).
  - Income Elasticity of Demand: responsiveness of quantity demanded to changes in consumer income.
- Consumer Behavior:
  - Utility: satisfaction derived from consumption.
    - Marginal Utility: additional satisfaction from consuming one more unit.
    - Diminishing Marginal Utility: as consumption increases, additional satisfaction decreases.
- Production and Costs:
  - Factors of production: land, labor, capital, and entrepreneurship.
  - Short-run vs. Long-run costs.
    - Fixed vs. variable costs.
    - Average cost vs. marginal cost.
- Market Structures:
  - Perfect Competition: many firms, identical products, easy entry and exit.
  - Monopolistic Competition: many firms, differentiated products.
  - Oligopoly: few firms, interdependent pricing.
  - Monopoly: single firm dominating the market, unique product, high barriers to entry.
- Market Failures:
  - Occurs when markets fail to allocate resources efficiently.
  - Types: externalities, public goods, and monopolies.
    - Externalities: costs/benefits affecting third parties (positive & negative).
    - Public Goods: non-excludable and non-rivalrous goods (e.g., national defense).
- Government Intervention:
  - Taxation and subsidies to correct market failures.
  - Regulation to promote competition and protect consumers.
Decision-Making:
- Rational Choice Theory: consumers aim to maximize utility, firms aim to maximize profit.
- Cost-benefit analysis in individual decision-making and business practices.

Microeconomics Definition

Studies individual agents and markets, their interactions, and resource allocation.

Key Concepts

Supply and Demand:
- Law of Supply: As prices rise, producers supply more goods.
- Law of Demand: As prices fall, consumers demand more goods.
- Equilibrium: The point where supply and demand curves intersect, achieving a balanced market price.
Elasticity:
- Price Elasticity of Demand: Measures how much quantity demanded changes in response to price changes.
  - Elastic: Demand changes significantly with price changes.
  - Inelastic: Demand changes little with price changes.
  - Unitary: Demand changes proportionally to price changes.
- Income Elasticity of Demand: Measures how much demand changes in response to income changes.
Consumer Behavior:
- Utility: The satisfaction a consumer gains from consuming a good or service.
- Marginal Utility: The additional satisfaction from consuming one more unit of a good.
- Diminishing Marginal Utility: As consumption increases, the extra satisfaction gained from each additional unit decreases.
Production and Costs:
- Factors of Production: Resources used in production: land, labor, capital, and entrepreneurship.
- Short-Run Costs: Costs that can change with production levels in the short term.
- Long-Run Costs: Costs that can change in the long run, allowing for adjustments to all factors of production.
- Fixed Costs: Costs that remain constant regardless of production volume.
- Variable Costs: Costs that change with the level of production.
- Average Cost: Total cost divided by the quantity produced.
- Marginal Cost: The change in total cost associated with producing one additional unit.
Market Structures:
- Perfect Competition: Many firms sell identical products, with easy entry and exit.
- Monopolistic Competition: Many firms, but they differentiate their products, creating market power.
- Oligopoly: A few firms dominate the market, leading to interdependence in pricing strategies.
- Monopoly: A sole firm with unique products and high barriers to entry dominating the market.
Market Failures:
- Occur when markets fail to allocate resources efficiently.
- Externalities: Costs or benefits that affect third parties not involved in the transaction.
  - Positive Externalities: Benefit third parties (e.g., vaccination).
  - Negative Externalities: Harm third parties (e.g., pollution).
- Public Goods: Goods that are non-excludable (everyone can use them) and non-rivalrous (one person's use doesn't prevent others from using them) (e.g., national defense).
Government Intervention:
- Taxation and Subsidies: Used to correct market failures by influencing costs and benefits.
- Regulation: Used to promote competition, protect consumer interests, and manage externalities.
Decision-Making:
- Rational Choice Theory: Assumes individuals make decisions to maximize their utility (satisfaction).
- Cost-Benefit Analysis: Weighing the costs and benefits of different options to make informed decisions.