CLEP Principles of Microeconomics flashcards
CLEP Principles of Microeconomics · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- The value of the best alternative given up when a choice is made; it includes implicit costs and is the correct basis for comparing options.
- Production possibilities frontier
- A curve showing maximum combinations of two goods an economy can produce with given resources and technology; points outside are unattainable, inside are inefficient.
- Comparative advantage
- The ability to produce a good at a lower opportunity cost than another producer; it is the basis for mutually beneficial specialization and trade.
- Absolute advantage
- The ability to produce more output with the same resources, or the same output with fewer resources, than another producer; it does not by itself determine trade patterns.
- Marginal analysis
- Comparing the additional benefit of one more unit with its additional cost; the optimal decision occurs where marginal benefit equals marginal cost.
- Positive versus normative statements
- Positive statements describe testable facts about what is; normative statements express value judgments about what ought to be and cannot be tested.
- Law of demand
- Other things equal, quantity demanded falls as price rises; the inverse relationship produces a downward-sloping demand curve.
- Demand shift factors
- Income, tastes, prices of substitutes and complements, expectations, and number of buyers change demand itself, shifting the curve rather than moving along it.
- Price ceiling
- A legal maximum price; if set below equilibrium it binds, creating a shortage, reduced quality, and possible black markets.
- Price floor
- A legal minimum price; if set above equilibrium it binds, creating a surplus, as with minimum wages producing excess labor supply.
- Price elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in price; demand is elastic when the absolute value exceeds one.
- Total revenue test
- If a price cut raises total revenue, demand is elastic; if revenue falls, demand is inelastic; unchanged revenue indicates unit elasticity.
- Cross-price elasticity
- The percentage change in quantity demanded of one good divided by the percentage change in price of another; positive for substitutes, negative for complements.
- Income elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in income; positive for normal goods, negative for inferior goods.
- Profit maximization rule
- A firm maximizes profit by producing where marginal revenue equals marginal cost, provided price covers average variable cost in the short run.
- Perfect competition
- A market with many small firms, identical products, and free entry and exit; firms are price takers and earn zero economic profit in long-run equilibrium.
- Monopoly pricing
- A single seller with barriers to entry faces downward-sloping demand; marginal revenue lies below price, so output is lower and price higher than under competition.
- Monopolistic competition
- Many firms sell differentiated products with easy entry; short-run profits attract entrants, shifting each firm's demand left until long-run economic profit is zero.
- Oligopoly
- A market dominated by a few interdependent firms; strategic behavior, collusion incentives, and the prisoner's dilemma explain pricing decisions.
- Consumer surplus
- The difference between what consumers are willing to pay and the price they actually pay; shown as the area below demand and above price.
- Derived demand
- Demand for a factor of production that exists because of demand for the goods the factor helps produce; it shifts when product demand shifts.
- Marginal revenue product
- The extra revenue from hiring one more unit of a factor, equal to marginal product times marginal revenue; firms hire until it equals the factor price.
- Marginal factor cost
- The additional cost of employing one more unit of a factor; for a competitive buyer it equals the wage, for a monopsonist it exceeds the wage.
- Monopsony
- A market with a single buyer of a factor; it faces an upward-sloping factor supply, pays a wage below marginal revenue product, and hires less than competitive markets.
- Economic rent
- Payment to a factor above its transfer earnings, the minimum needed to keep it in its current use; it is the area above the factor supply curve.
- Human capital
- Skills and knowledge acquired through education and training that raise productivity; investment in it shifts labor demand outward and raises wages.
- Negative externality
- A cost of production or consumption borne by third parties, making marginal social cost exceed marginal private cost and causing market overproduction.
- Positive externality
- A benefit of production or consumption enjoyed by third parties, making marginal social benefit exceed marginal private benefit and causing market underproduction.
- Public good
- A good that is both nonrival and nonexcludable, such as national defense; free riding causes private markets to undersupply it.
- Common resource
- A good that is rival but nonexcludable, such as ocean fisheries; unrestricted access leads to overuse known as the tragedy of the commons.
- Coase theorem
- With clearly defined property rights and low transaction costs, private bargaining can resolve externalities regardless of who holds the rights.
- Antitrust policy
- Government action, such as blocking mergers or breaking up cartels, intended to preserve competition and prevent the exercise of monopoly power.