What is a binding price floor in the standard competitive market model?

An enforced minimum price above the uncontrolled equilibrium price. Quantity supplied exceeds quantity demanded. Without purchases of the excess by another buyer, sales are limited by demand; lost trades can create deadweight loss. Government purchasing changes the outcome.

What is opportunity cost?

The value of the best alternative given up when a choice is made.

What causes movement along a demand curve rather than a shift?

A change in the good's own price causes movement along a fixed demand curve. Changes in income, preferences or related goods' prices can shift the curve, changing demand at each own price.

When does competitive equilibrium yield allocative efficiency in the basic market model?

When demand and supply reflect marginal social benefit and cost, without externalities or other distortions, their intersection maximizes total surplus. At an interior efficient quantity, marginal social benefit equals marginal social cost. Efficiency does not mean equal distribution.

How do demand-elasticity magnitudes define elastic, inelastic and unit-elastic demand?

|PED| > 1 is elastic, 0 ≤ |PED| < 1 is inelastic, and |PED| = 1 is unit elastic. Perfectly inelastic demand has |PED| = 0; ordinary inelastic demand can still respond to price.

How does higher income affect normal and inferior goods?

Holding prices and preferences fixed, demand rises for a normal good and falls for an inferior good over the income range considered. Inferior describes the income response, not product quality.

What is a market surplus, and what price pressure does it create in the standard model?

Quantity supplied exceeds quantity demanded at the current price. With downward-sloping demand and upward-sloping supply, a price above equilibrium creates a surplus and downward price pressure if prices can adjust.

When does the equimarginal condition MUx/Px = MUy/Py apply?

It is a necessary condition at a differentiable interior utility maximum with positive prices, divisible goods and a binding budget: marginal utility per unit of money is equal across the two goods. Corner solutions, kinks and indivisible goods require separate treatment; equality alone need not prove a maximum.

What makes a good a Giffen good in standard consumer theory?

Over a relevant range, a higher own price increases quantity demanded while nominal income, other prices and preferences stay fixed. The good is inferior, and its income effect outweighs the opposing substitution effect. Not every inferior good is Giffen.

What influences the price elasticity of demand?

Availability of close substitutes, the share of the budget spent, necessity versus luxury, the time available to adjust, and how narrowly the market is defined. More substitutes and more adjustment time often increase responsiveness.

What is price elasticity of supply, and how can time affect it?

PES = percentage change in quantity supplied / percentage change in price, other things equal. Supply is often more elastic over longer horizons as capacity and inputs can adjust, but this is not guaranteed; storage, spare capacity and resource constraints also matter.

What does diminishing marginal utility mean?

In a specified utility model, each additional unit of a good adds less utility than the preceding unit, holding other consumption fixed. It is a common modeling assumption, not a universal claim about every good or every numerical representation of preferences.

How is midpoint price elasticity of demand calculated?

PED = [(Q2 − Q1)/((Q1 + Q2)/2)] / [(P2 − P1)/((P1 + P2)/2)]. Use distinct positive prices and positive quantities along a fixed demand curve. PED is negative for downward-sloping demand; classifications usually use |PED|.

How does a price rise affect total revenue when demand is inelastic?

Along a downward-sloping demand curve, a small price rise increases TR = P × Q where |PED| < 1. For a larger rise, the same conclusion holds if demand remains inelastic throughout the relevant range; other demand determinants stay fixed.

What is consumer surplus in the standard supply-and-demand diagram?

Buyers' willingness to pay minus their actual payments, summed over purchased units. At a competitive equilibrium, it is the area below demand and above the market price, up to the quantity traded.

What does cross-price elasticity of demand measure?

XED = percentage change in quantity demanded of Y / percentage change in price of X, other things equal. Positive XED indicates substitutes; negative XED indicates complements. Zero means no measured cross-price response in the range considered, not proof of no relationship in every setting.

What is the marginal rate of substitution of Y for X?

The marginal amount of Y a consumer is willing to give up per extra unit of X while utility stays constant. For differentiable utility with MUy > 0, MRS = −dY/dX = MUx/MUy along the indifference curve; this uses the positive trade-off convention for goods with positive marginal utilities.

How does a higher price of X affect demand for its substitute or complement Y?

Other things equal, demand for Y rises if Y is a substitute for X and falls if Y is a complement. These classifications describe the relevant range of prices and consumption.

What does an indifference curve represent?

Combinations of two goods that the consumer ranks equally, represented by the same utility level. Its shape depends on preferences; not every indifference curve is smooth or strictly curved.

How do substitution and income effects differ when a good's price falls?

The substitution effect reflects the lower relative price, holding utility fixed; it weakly increases consumption of that good. The income effect reflects greater purchasing power: it reinforces consumption for a normal good and opposes it for an inferior good. The total change combines both effects.

What is the law of demand, and is it exceptionless?

Other things equal, a higher own price usually reduces quantity demanded. This produces a downward-sloping demand curve. A sufficiently strong opposing income effect can produce Giffen demand, so the rule is not exceptionless.

What is deadweight loss?

The reduction in total surplus relative to an efficient allocation, caused by missed beneficial trades or units whose social cost exceeds their social benefit. A transfer between buyers, sellers and government is not itself deadweight loss.

What is economic scarcity?

Available resources cannot satisfy all competing wants, so people must make choices and trade-offs. Scarcity is different from a temporary market shortage.

How do elasticities affect the burden of a small per-unit tax in a competitive market?

The side that responds less to price bears more of the price burden: buyers if demand is relatively inelastic, sellers if supply is relatively inelastic. Economic incidence depends on price responses, not simply on who must legally remit the tax.

What is a market shortage, and what price pressure does it create in the standard model?

Quantity demanded exceeds quantity supplied at the current price. With downward-sloping demand and upward-sloping supply, a price below equilibrium creates a shortage and upward price pressure if prices can adjust.

What does a production possibilities frontier bowed outward from the origin illustrate?

Increasing opportunity cost: producing more of one good requires giving up progressively more of the other, as resources are not equally suited to both uses. Resources and technology are held fixed.

What is the law of supply in the usual competitive model?

Other things equal, a higher output price usually increases quantity supplied. With rising marginal production costs, the higher price makes additional output worthwhile; the resulting supply curve slopes upward.

How does income elasticity classify goods?

YED = percentage change in quantity demanded / percentage change in income, other things equal. YED 0 a normal good. Commonly, 0 1 a luxury; YED = 1 is unit income elasticity and YED = 0 is no income response.

What is an Engel curve?

The relationship between income and the quantity demanded of a good, holding prices and preferences fixed. With income on the horizontal axis, it slopes upward where the good is normal and downward where it is inferior; a good's classification can change across income ranges.

What is producer surplus, and is it the same as profit?

Revenue minus the variable opportunity costs of supplying the units sold. In the standard competitive diagram, it is the area above supply and below price up to the quantity traded. Profit also subtracts fixed costs, so the two need not be equal.

What is a binding price ceiling in the standard competitive market model?

An enforced maximum price below the uncontrolled equilibrium price. It creates excess demand; the scarce supply must be rationed. It can reduce gains from trade and encourage queues or illegal resale, but these outcomes depend on enforcement, allocation and supply responses.

How does a price rise affect total revenue when demand is elastic?

Along a downward-sloping demand curve, a small price rise decreases TR = P × Q where |PED| > 1. For a larger rise, the same conclusion holds if demand remains elastic throughout the relevant range; other demand determinants stay fixed.

Microeconomics: Markets, Elasticity & Consumer Choice

32 introductory microeconomics review cards on scarcity, comparative advantage, supply and demand, market equilibrium, welfare and deadweight loss, elasticity, price controls, tax incidence, and consumer-choice theory.

Level: basic
Languages: en → en
Cards: 32
Markdown: Microeconomics: Markets, Elasticity & Consumer Choice (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	What is a binding price floor in the standard competitive market model?	An enforced minimum price above the uncontrolled equilibrium price. Quantity supplied exceeds quantity demanded. Without purchases of the excess by another buyer, sales are limited by demand; lost trades can create deadweight loss. Government purchasing changes the outcome.
2	What is opportunity cost?	The value of the best alternative given up when a choice is made.
3	What causes movement along a demand curve rather than a shift?	A change in the good's own price causes movement along a fixed demand curve. Changes in income, preferences or related goods' prices can shift the curve, changing demand at each own price.
4	When does competitive equilibrium yield allocative efficiency in the basic market model?	When demand and supply reflect marginal social benefit and cost, without externalities or other distortions, their intersection maximizes total surplus. At an interior efficient quantity, marginal social benefit equals marginal social cost. Efficiency does not mean equal distribution.
5	How do demand-elasticity magnitudes define elastic, inelastic and unit-elastic demand?	\|PED\| > 1 is elastic, 0 ≤ \|PED\| < 1 is inelastic, and \|PED\| = 1 is unit elastic. Perfectly inelastic demand has \|PED\| = 0; ordinary inelastic demand can still respond to price.
6	How does higher income affect normal and inferior goods?	Holding prices and preferences fixed, demand rises for a normal good and falls for an inferior good over the income range considered. Inferior describes the income response, not product quality.
7	What is a market surplus, and what price pressure does it create in the standard model?	Quantity supplied exceeds quantity demanded at the current price. With downward-sloping demand and upward-sloping supply, a price above equilibrium creates a surplus and downward price pressure if prices can adjust.
8	When does the equimarginal condition MUx/Px = MUy/Py apply?	It is a necessary condition at a differentiable interior utility maximum with positive prices, divisible goods and a binding budget: marginal utility per unit of money is equal across the two goods. Corner solutions, kinks and indivisible goods require separate treatment; equality alone need not prove a maximum.
9	What makes a good a Giffen good in standard consumer theory?	Over a relevant range, a higher own price increases quantity demanded while nominal income, other prices and preferences stay fixed. The good is inferior, and its income effect outweighs the opposing substitution effect. Not every inferior good is Giffen.
10	What influences the price elasticity of demand?	Availability of close substitutes, the share of the budget spent, necessity versus luxury, the time available to adjust, and how narrowly the market is defined. More substitutes and more adjustment time often increase responsiveness.
11	What is price elasticity of supply, and how can time affect it?	PES = percentage change in quantity supplied / percentage change in price, other things equal. Supply is often more elastic over longer horizons as capacity and inputs can adjust, but this is not guaranteed; storage, spare capacity and resource constraints also matter.
12	What does diminishing marginal utility mean?	In a specified utility model, each additional unit of a good adds less utility than the preceding unit, holding other consumption fixed. It is a common modeling assumption, not a universal claim about every good or every numerical representation of preferences.
13	How is midpoint price elasticity of demand calculated?	PED = [(Q2 − Q1)/((Q1 + Q2)/2)] / [(P2 − P1)/((P1 + P2)/2)]. Use distinct positive prices and positive quantities along a fixed demand curve. PED is negative for downward-sloping demand; classifications usually use \|PED\|.
14	How does a price rise affect total revenue when demand is inelastic?	Along a downward-sloping demand curve, a small price rise increases TR = P × Q where \|PED\| < 1. For a larger rise, the same conclusion holds if demand remains inelastic throughout the relevant range; other demand determinants stay fixed.
15	What is consumer surplus in the standard supply-and-demand diagram?	Buyers' willingness to pay minus their actual payments, summed over purchased units. At a competitive equilibrium, it is the area below demand and above the market price, up to the quantity traded.
16	What does cross-price elasticity of demand measure?	XED = percentage change in quantity demanded of Y / percentage change in price of X, other things equal. Positive XED indicates substitutes; negative XED indicates complements. Zero means no measured cross-price response in the range considered, not proof of no relationship in every setting.
17	What is the marginal rate of substitution of Y for X?	The marginal amount of Y a consumer is willing to give up per extra unit of X while utility stays constant. For differentiable utility with MUy > 0, MRS = −dY/dX = MUx/MUy along the indifference curve; this uses the positive trade-off convention for goods with positive marginal utilities.
18	How does a higher price of X affect demand for its substitute or complement Y?	Other things equal, demand for Y rises if Y is a substitute for X and falls if Y is a complement. These classifications describe the relevant range of prices and consumption.
19	What does an indifference curve represent?	Combinations of two goods that the consumer ranks equally, represented by the same utility level. Its shape depends on preferences; not every indifference curve is smooth or strictly curved.
20	How do substitution and income effects differ when a good's price falls?	The substitution effect reflects the lower relative price, holding utility fixed; it weakly increases consumption of that good. The income effect reflects greater purchasing power: it reinforces consumption for a normal good and opposes it for an inferior good. The total change combines both effects.
21	What is the law of demand, and is it exceptionless?	Other things equal, a higher own price usually reduces quantity demanded. This produces a downward-sloping demand curve. A sufficiently strong opposing income effect can produce Giffen demand, so the rule is not exceptionless.
22	What is deadweight loss?	The reduction in total surplus relative to an efficient allocation, caused by missed beneficial trades or units whose social cost exceeds their social benefit. A transfer between buyers, sellers and government is not itself deadweight loss.
23	What is economic scarcity?	Available resources cannot satisfy all competing wants, so people must make choices and trade-offs. Scarcity is different from a temporary market shortage.
24	How do elasticities affect the burden of a small per-unit tax in a competitive market?	The side that responds less to price bears more of the price burden: buyers if demand is relatively inelastic, sellers if supply is relatively inelastic. Economic incidence depends on price responses, not simply on who must legally remit the tax.
25	What is a market shortage, and what price pressure does it create in the standard model?	Quantity demanded exceeds quantity supplied at the current price. With downward-sloping demand and upward-sloping supply, a price below equilibrium creates a shortage and upward price pressure if prices can adjust.
26	What does a production possibilities frontier bowed outward from the origin illustrate?	Increasing opportunity cost: producing more of one good requires giving up progressively more of the other, as resources are not equally suited to both uses. Resources and technology are held fixed.
27	What is the law of supply in the usual competitive model?	Other things equal, a higher output price usually increases quantity supplied. With rising marginal production costs, the higher price makes additional output worthwhile; the resulting supply curve slopes upward.
28	How does income elasticity classify goods?	YED = percentage change in quantity demanded / percentage change in income, other things equal. YED < 0 indicates an inferior good; YED > 0 a normal good. Commonly, 0 < YED < 1 denotes a necessity and YED > 1 a luxury; YED = 1 is unit income elasticity and YED = 0 is no income response.
29	What is an Engel curve?	The relationship between income and the quantity demanded of a good, holding prices and preferences fixed. With income on the horizontal axis, it slopes upward where the good is normal and downward where it is inferior; a good's classification can change across income ranges.
30	What is producer surplus, and is it the same as profit?	Revenue minus the variable opportunity costs of supplying the units sold. In the standard competitive diagram, it is the area above supply and below price up to the quantity traded. Profit also subtracts fixed costs, so the two need not be equal.
31	What is a binding price ceiling in the standard competitive market model?	An enforced maximum price below the uncontrolled equilibrium price. It creates excess demand; the scarce supply must be rationed. It can reduce gains from trade and encourage queues or illegal resale, but these outcomes depend on enforcement, allocation and supply responses.
32	How does a price rise affect total revenue when demand is elastic?	Along a downward-sloping demand curve, a small price rise decreases TR = P × Q where \|PED\| > 1. For a larger rise, the same conclusion holds if demand remains elastic throughout the relevant range; other demand determinants stay fixed.