Microeconomics Notes Chapter 1 Flashcards

Microeconomics Overview

• Microeconomics studies individual economic decisions and interactions among households, firms, and markets, as well as government influences.

Market Structures

• Four primary market structures:
  • Perfect Competition: Many firms sell identical products, easy market entry and exit.
  • Monopoly: Single firm dominates, setting prices.
  • Monopolistic Competition: Many firms sell similar but differentiated products.
  • Oligopoly: A few firms dominate the market, often with interdependent pricing.

Perfect Competition

• Characterized by numerous competitors and identical products.
• Firms act as price takers, unable to set prices independently.
• Results in efficient resource allocation and a perfectly elastic demand curve.

Price Taker vs. Price Maker

• Price Taker: Firms in perfect competition accept market prices.
• Price Maker: Monopolies can set prices anywhere along the demand curve.

Opportunity Cost

• Represents the potential benefits foregone when choosing one option over another.

Production Possibilities Frontier (PPF)

• A curve showing maximum possible outputs for two goods, indicating efficiency, scarcity, and trade-offs.
• The PPF can shift due to changes in resource quantity/quality or technological advancements.

Commodities

• Basic goods traded interchangeably in commerce, such as oil or gold.

Scarcity

• The fundamental economic issue arising from unlimited wants and limited resources.

Consumer vs. Capital Goods

• Consumer Goods: Products intended for direct consumption.
• Capital Goods: Products used to produce consumer goods.

Elasticity

• Measures how demand changes in response to price changes.
• Inelastic Demand: Quantity demanded is relatively insensitive to price changes (e.g., gas).
• Elastic Demand: Quantity demanded significantly changes with price (e.g., luxury items).
• Unit Elastic: Equal percentage change in quantity and price.

Demand Curves

• Perfectly Inelastic: Vertical curve, coefficient of 0.
• Relatively Inelastic: Slightly inclined, coefficient < 1.
• Unit Elastic: 45° angle, coefficient = 1.
• Relatively Elastic: Almost horizontal, coefficient > 1.
• Perfectly Elastic: Horizontal curve, coefficient ∞.

Economic Analysis Method

• Economic models are built using scientific approaches to identify issues and variables of interest.

Allocative Efficiency

• Occurs when resources are distributed such that consumer satisfaction is maximized.

Marginal Concepts

• Marginal Benefit: Maximum price a consumer is willing to pay for one more unit.
• Marginal Cost: Cost incurred from producing one more unit.
• Marginal Analysis: Evaluates additional benefits versus costs for decision-making.

Absolute vs. Comparative Advantage

• Absolute Advantage: Ability to produce more efficiently than another producer.
• Comparative Advantage: Ability to produce at a lower opportunity cost.

Terms of Trade

• Established when countries specialize in the production of goods and agree on a trade ratio that benefits both.

The Law of Diminishing Marginal Returns

• States that adding workers can lead to less output per worker after a certain point due to limited resources.

Price Elasticity

• A key metric assessing how demand or supply responds to price fluctuations.

Capital

• Wealth or assets available for investment or entrepreneurial activities.

Test your knowledge on key concepts from Microeconomics with these flashcards focusing on Chapter 1. Learn important definitions and understand the four types of market structures, including perfect competition and monopoly. Perfect for beginners and those revising the basics of microeconomic principles.