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