#separator:tab #html:false #tags column:4 Law of demand As price rises, quantity demanded falls tp-ap-microeconomics Law of supply As price rises, quantity supplied rises tp-ap-microeconomics Equilibrium price Price where quantity demanded equals quantity supplied tp-ap-microeconomics Shortage Quantity demanded exceeds quantity supplied tp-ap-microeconomics Surplus Quantity supplied exceeds quantity demanded tp-ap-microeconomics Substitute goods Goods used in place of each other; price of one up raises demand for the other tp-ap-microeconomics Complementary goods Goods used together; price of one up lowers demand for the other tp-ap-microeconomics Normal good Demand rises as income rises tp-ap-microeconomics Inferior good Demand falls as income rises tp-ap-microeconomics Price elasticity of demand How sensitive quantity demanded is to a price change tp-ap-microeconomics Elastic demand Elasticity greater than 1 tp-ap-microeconomics Inelastic demand Elasticity less than 1 tp-ap-microeconomics Total revenue test If price and total revenue move opposite ways, demand is elastic tp-ap-microeconomics Cross-price elasticity Response of demand for one good to another good's price tp-ap-microeconomics Income elasticity Response of demand to a change in income tp-ap-microeconomics Consumer surplus Difference between what buyers would pay and what they do pay tp-ap-microeconomics Producer surplus Difference between price received and the minimum a seller would accept tp-ap-microeconomics Deadweight loss Lost total surplus from inefficiency tp-ap-microeconomics Price ceiling Legal maximum price tp-ap-microeconomics Price floor Legal minimum price tp-ap-microeconomics Tax incidence Who actually bears a tax tp-ap-microeconomics Marginal utility Added satisfaction from one more unit tp-ap-microeconomics Diminishing marginal utility Each extra unit gives less added satisfaction tp-ap-microeconomics Utility-maximizing rule MU per dollar equal across goods tp-ap-microeconomics Budget constraint The combinations of goods affordable with income tp-ap-microeconomics Explicit cost Out-of-pocket payment tp-ap-microeconomics Implicit cost Opportunity cost of using one's own resources tp-ap-microeconomics Accounting profit Revenue minus explicit costs tp-ap-microeconomics Economic profit Revenue minus explicit and implicit costs tp-ap-microeconomics Marginal product Extra output from one more unit of input tp-ap-microeconomics Law of diminishing returns Adding more of a variable input eventually adds less output tp-ap-microeconomics Fixed cost Cost that does not change with output tp-ap-microeconomics Variable cost Cost that changes with output tp-ap-microeconomics Marginal cost Cost of producing one more unit tp-ap-microeconomics Average total cost Total cost divided by quantity tp-ap-microeconomics MC crosses ATC Marginal cost meets average total cost at ATC's minimum tp-ap-microeconomics Economies of scale Falling long-run average cost as output grows tp-ap-microeconomics Diseconomies of scale Rising long-run average cost as output grows tp-ap-microeconomics Profit-maximizing rule Produce where marginal revenue equals marginal cost tp-ap-microeconomics Perfect competition Many sellers, identical products, price takers, free entry tp-ap-microeconomics Price taker A firm that cannot affect market price tp-ap-microeconomics Shutdown rule Shut down if price falls below average variable cost tp-ap-microeconomics Long-run competitive equilibrium Price equals minimum ATC; zero economic profit tp-ap-microeconomics Monopoly A single seller with barriers to entry tp-ap-microeconomics Barriers to entry Obstacles that prevent new firms from joining a market tp-ap-microeconomics Natural monopoly One firm can supply the market at lower cost than several tp-ap-microeconomics Price discrimination Charging different customers different prices for the same good tp-ap-microeconomics Monopolistic competition Many sellers with differentiated products and free entry tp-ap-microeconomics Oligopoly A few large interdependent firms tp-ap-microeconomics Collusion Firms cooperating to restrict competition tp-ap-microeconomics Cartel A group of firms that agree to limit output and set prices tp-ap-microeconomics Game theory Study of strategic decision-making tp-ap-microeconomics Dominant strategy Best choice regardless of what others do tp-ap-microeconomics Nash equilibrium No player can gain by changing their own strategy alone tp-ap-microeconomics Prisoner's dilemma A game where individual incentives lead to a worse shared outcome tp-ap-microeconomics Kinked demand curve Oligopoly model with sticky prices tp-ap-microeconomics Herfindahl-Hirschman Index Measure of market concentration tp-ap-microeconomics Derived demand Demand for a resource that comes from demand for the product tp-ap-microeconomics Marginal revenue product Extra revenue from one more unit of a resource tp-ap-microeconomics Hiring rule Hire until marginal revenue product equals the resource price tp-ap-microeconomics Monopsony A market with a single buyer tp-ap-microeconomics Minimum wage A legal price floor for labor tp-ap-microeconomics Wage determination Set by labor supply and demand tp-ap-microeconomics Externality A cost or benefit borne by a third party tp-ap-microeconomics Negative externality Pollution-type cost imposed on others tp-ap-microeconomics Positive externality Benefit to others, like vaccination tp-ap-microeconomics Pigouvian tax A tax set to equal an external cost tp-ap-microeconomics Subsidy Government payment to encourage a good tp-ap-microeconomics Public good Non-excludable and non-rival tp-ap-microeconomics Free-rider problem Benefiting without paying tp-ap-microeconomics Common resource Rival but non-excludable good, prone to overuse tp-ap-microeconomics Tragedy of the commons Overuse of shared resources tp-ap-microeconomics Coase theorem Parties can solve externalities by bargaining if costs are low and property rights are clear tp-ap-microeconomics Allocative efficiency Producing what society values most, P = MC tp-ap-microeconomics Productive efficiency Producing at minimum average total cost tp-ap-microeconomics Marginal social benefit Total benefit to society of one more unit tp-ap-microeconomics Asymmetric information One party knows more than the other tp-ap-microeconomics Adverse selection Hidden characteristics lead to poor market outcomes tp-ap-microeconomics Moral hazard Risky behavior because someone else bears the cost tp-ap-microeconomics Gini coefficient Measure of income inequality from 0 to 1 tp-ap-microeconomics Lorenz curve Graph of cumulative share of income by population share tp-ap-microeconomics Antitrust law Rules promoting competition and limiting monopoly power tp-ap-microeconomics Circular flow model Shows flows between households and firms through markets tp-ap-microeconomics Capital Goods used to produce other goods tp-ap-microeconomics Short run Period in which at least one input is fixed tp-ap-microeconomics Long run Period in which all inputs are variable tp-ap-microeconomics Total surplus Consumer surplus plus producer surplus tp-ap-microeconomics Elasticity of supply Responsiveness of quantity supplied to price tp-ap-microeconomics Rent seeking Spending resources to gain favorable treatment tp-ap-microeconomics