Microeconomics Notes Chapter 1 Flashcards

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Questions and Answers

What is microeconomics?

The part of economics concerned with single factors and the effects of individual decisions. The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Which of the following are considered the four market structures?

Perfect Competition (correct)

Oligopoly (correct)

Monopoly (correct)

Monopolistic Competition (correct)

What characterizes perfect competition?

Many competitors selling identical products with no barriers to entry.

What is a price taker?

Firms in perfect competition that accept the market price and cannot set their own prices. Signup and view all the answers

What is a price maker?

In pure monopolies, the firm has the ability to set the price based on its own demand curve. Signup and view all the answers

What is opportunity cost?

The benefit that a person could have received but gave up to take another course of action. Signup and view all the answers

What does the production possibilities frontier (PPF) represent?

A curve depicting all maximum output possibilities for two goods given a set of resources. Signup and view all the answers

What is a commodity?

A basic good used in commerce that is interchangeable with other commodities of the same type. Signup and view all the answers

What fundamental economic problem does scarcity represent?

The issue of having unlimited human wants and needs in a world of limited resources. Signup and view all the answers

What are consumer goods?

Products created for direct consumption. Signup and view all the answers

What are capital goods?

Products that create consumer goods. Signup and view all the answers

The law of demand states that there is an inverse relationship between price and _____

quantity. Signup and view all the answers

What does elasticity measure?

How sensitive quantity demanded is to a change in price. Signup and view all the answers

What is inelastic demand?

Quantity is insensitive to a change in price. Signup and view all the answers

What does the elasticity of demand coefficient represent?

The percentage change in quantity divided by the percentage change in price. Signup and view all the answers

What does unit elastic mean?

The percent change in quantity demanded is exactly the same as the percent change in price. Signup and view all the answers

What is marginal benefit?

What people are willing to give up to obtain one more unit of a good. Signup and view all the answers

What is marginal cost?

The value of what is given up in order to produce an additional unit. Signup and view all the answers

What does absolute advantage refer to?

The ability of an individual or group to carry out a particular economic activity more efficiently than another. Signup and view all the answers

What does comparative advantage mean?

The ability to produce a good at a lower opportunity cost than another producer. Signup and view all the answers

What is the law of diminishing marginal returns?

An increasing number of new employees causes the marginal product of another employee to be smaller than the previous employee. Signup and view all the answers

What is price elasticity?

A measure of the responsiveness of demand or supply of a good to changes in price. Signup and view all the answers

Study Notes

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.

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Description

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.