What is Price Elasticity of Supply (PES), and what is its primary determinant in the short vs. long run?

The percentage change in quantity supplied divided by percentage change in price; its primary determinant is time, becoming significantly more elastic over longer horizons as firms adjust production capacity.

What is a binding price ceiling, and what are its market consequences?

A government-imposed maximum price set strictly below the equilibrium price, resulting in persistent shortages, non-price rationing (queues, black markets), and deadweight loss.

How does a change in price differ from a change in a non-price determinant on a demand curve?

A price change causes a movement along the existing demand curve (change in quantity demanded), whereas a non-price determinant (income, preferences, prices of related goods) shifts the entire curve.

How does an increase in the price of Good X affect demand for Good Y if they are substitute goods versus complementary goods?

If substitutes, demand for Y increases (shifts right); if complements, demand for Y decreases (shifts left).

What does a bowed-out (concave to the origin) Production Possibilities Frontier (PPF) illustrate?

The Law of Increasing Opportunity Costs, which occurs because economic resources are not perfectly adaptable to the production of all goods.

What is consumer surplus, and where is it located graphically on a supply and demand graph?

The difference between the maximum amount consumers are willing to pay and the market price actually paid; graphically, the area beneath the demand curve and above the equilibrium price line.

How does a price increase affect Total Revenue when demand is price elastic?

Total Revenue decreases, because the percentage drop in quantity demanded is larger than the percentage increase in price.

What is a binding price floor, and what are its market consequences?

A government-imposed minimum price set strictly above the equilibrium price, leading to persistent surpluses, misallocated resources, and deadweight loss.

What is opportunity cost in economics?

The value of the next best alternative foregone when a choice is made.

What causes a market shortage (excess demand), and how does a free market resolve it?

A shortage occurs when price is below equilibrium (quantity demanded > quantity supplied). Upward pressure on price reduces quantity demanded and increases quantity supplied until equilibrium is restored.

What is the formula for the Price Elasticity of Demand (PED) using the midpoint formula?

PED = [ (Q2 - Q1) / ((Q1 + Q2) / 2) ] / [ (P2 - P1) / ((P1 + P2) / 2) ].

What is the economic definition of scarcity?

The fundamental tension between virtually unlimited human wants and finite, limited resources available to satisfy those wants.

What is an Engel curve in microeconomic theory?

A curve that plots the relationship between the quantity demanded of a good and consumer income, sloping upward for normal goods and bending backward for inferior goods.

What is producer surplus, and where is it located graphically on a supply and demand graph?

The difference between the market price received by producers and their minimum acceptable supply price (marginal cost); graphically, the area above the supply curve and below the equilibrium price line.

How are price elastic, inelastic, and unit elastic demand defined by PED magnitude (|PED|)?

|PED| > 1 is price elastic (highly responsive); |PED| < 1 is price inelastic (unresponsive); |PED| = 1 is unit elastic.

How does the relative elasticity of supply and demand determine the economic incidence (burden) of an excise tax?

The more inelastic side of the market bears the larger burden of the tax because it has fewer alternatives to avoid transactions.

How does Income Elasticity of Demand (YED) categorize goods into normal necessities, normal luxuries, and inferior goods?

YED > 1 indicates a normal luxury; 0 < YED <= 1 indicates a normal necessity; YED < 0 indicates an inferior good.

State the equimarginal principle (utility-maximizing rule) for a consumer choosing between Goods X and Y.

MU_x / P_x = MU_y / P_y, subject to the consumer's budget constraint, meaning marginal utility per dollar spent must be equal across all consumed goods.

What is the Law of Diminishing Marginal Utility?

As a consumer consumes additional units of a specific good during a given time period, the extra utility (satisfaction) derived from each successive unit declines.

How do normal goods and inferior goods respond to an increase in consumer income?

Demand for a normal good increases (curve shifts right), whereas demand for an inferior good decreases (curve shifts left) when income rises.

What does an indifference curve represent in consumer choice theory?

A graphical curve showing all combinations of two goods that yield the exact same level of total utility to the consumer.

What does a Cross-Price Elasticity of Demand (XED) value tell us about the relationship between two goods?

If XED > 0, the goods are substitutes; if XED < 0, the goods are complements; if XED = 0, the goods are unrelated.

How does a price increase affect Total Revenue (TR = P * Q) when demand is price inelastic?

Total Revenue increases, because the percentage drop in quantity demanded is smaller than the percentage increase in price.

What are the key determinants of Price Elasticity of Demand for a good?

Availability of close substitutes, proportion of income spent on the good, whether the good is a necessity or luxury, and the time horizon under consideration.

What causes a market surplus (excess supply), and how does a free market resolve it?

A surplus occurs when price is above equilibrium (quantity supplied > quantity demanded). Downward pressure on price increases quantity demanded and reduces quantity supplied until equilibrium is restored.

What is the Marginal Rate of Substitution (MRS) and how is it related to the slope of an indifference curve?

MRS is the rate at which a consumer is willing to give up good Y for an additional unit of good X while maintaining the same utility; it equals the negative slope of the indifference curve (-dY/dX = MU_x / MU_y).

What is allocative efficiency in a competitive market equilibrium?

The condition where marginal benefit (demand) equals marginal cost (supply), maximizing total economic surplus (consumer surplus + producer surplus) with zero deadweight loss.

What is deadweight loss (DWL)?

The loss of total economic surplus that results when an economy produces at an output level where marginal social benefit does not equal marginal social cost.

State the Law of Supply and explain why the supply curve slopes upward.

Ceteris paribus, as price rises, quantity supplied increases, because higher prices incentivize producers to allocate more resources to production to increase profits.

What is a Giffen good and why does it violate the standard Law of Demand?

A highly inferior good lacking close substitutes where a negative income effect overpowers the substitution effect, causing quantity demanded to rise as price rises.

How does the substitution effect differ from the income effect when the price of a good falls?

The substitution effect always induces consumers to buy more of the cheaper good; the income effect reflects the increased purchasing power of real income, increasing consumption of normal goods and decreasing consumption of inferior goods.

State the Law of Demand and explain the slope of the demand curve.

Ceteris paribus, as the price of a good increases, the quantity demanded decreases, resulting in a downward-sloping demand curve due to substitution and income effects.

Macroeconomía — Básico (A1/A2) 1: Microeconomics: Supply, Demand, Elasticity & Market Equilibrium

[Español] Macroeconomía: Foundational microeconomic principles: opportunity cost, supply and demand dynamics, price elasticity, surplus, market equilibrium, and price controls

Level: basic
Languages: es → es
Cards: 32
Markdown: Macroeconomía — Básico (A1/A2) 1: Microeconomics: Supply, Demand, Elasticity & Market Equilibrium (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	What is Price Elasticity of Supply (PES), and what is its primary determinant in the short vs. long run?	The percentage change in quantity supplied divided by percentage change in price; its primary determinant is time, becoming significantly more elastic over longer horizons as firms adjust production capacity.
2	What is a binding price ceiling, and what are its market consequences?	A government-imposed maximum price set strictly below the equilibrium price, resulting in persistent shortages, non-price rationing (queues, black markets), and deadweight loss.
3	How does a change in price differ from a change in a non-price determinant on a demand curve?	A price change causes a movement along the existing demand curve (change in quantity demanded), whereas a non-price determinant (income, preferences, prices of related goods) shifts the entire curve.
4	How does an increase in the price of Good X affect demand for Good Y if they are substitute goods versus complementary goods?	If substitutes, demand for Y increases (shifts right); if complements, demand for Y decreases (shifts left).
5	What does a bowed-out (concave to the origin) Production Possibilities Frontier (PPF) illustrate?	The Law of Increasing Opportunity Costs, which occurs because economic resources are not perfectly adaptable to the production of all goods.
6	What is consumer surplus, and where is it located graphically on a supply and demand graph?	The difference between the maximum amount consumers are willing to pay and the market price actually paid; graphically, the area beneath the demand curve and above the equilibrium price line.
7	How does a price increase affect Total Revenue when demand is price elastic?	Total Revenue decreases, because the percentage drop in quantity demanded is larger than the percentage increase in price.
8	What is a binding price floor, and what are its market consequences?	A government-imposed minimum price set strictly above the equilibrium price, leading to persistent surpluses, misallocated resources, and deadweight loss.
9	What is opportunity cost in economics?	The value of the next best alternative foregone when a choice is made.
10	What causes a market shortage (excess demand), and how does a free market resolve it?	A shortage occurs when price is below equilibrium (quantity demanded > quantity supplied). Upward pressure on price reduces quantity demanded and increases quantity supplied until equilibrium is restored.
11	What is the formula for the Price Elasticity of Demand (PED) using the midpoint formula?	PED = [ (Q2 - Q1) / ((Q1 + Q2) / 2) ] / [ (P2 - P1) / ((P1 + P2) / 2) ].
12	What is the economic definition of scarcity?	The fundamental tension between virtually unlimited human wants and finite, limited resources available to satisfy those wants.
13	What is an Engel curve in microeconomic theory?	A curve that plots the relationship between the quantity demanded of a good and consumer income, sloping upward for normal goods and bending backward for inferior goods.
14	What is producer surplus, and where is it located graphically on a supply and demand graph?	The difference between the market price received by producers and their minimum acceptable supply price (marginal cost); graphically, the area above the supply curve and below the equilibrium price line.
15	How are price elastic, inelastic, and unit elastic demand defined by PED magnitude (\|PED\|)?	\|PED\| > 1 is price elastic (highly responsive); \|PED\| < 1 is price inelastic (unresponsive); \|PED\| = 1 is unit elastic.
16	How does the relative elasticity of supply and demand determine the economic incidence (burden) of an excise tax?	The more inelastic side of the market bears the larger burden of the tax because it has fewer alternatives to avoid transactions.
17	How does Income Elasticity of Demand (YED) categorize goods into normal necessities, normal luxuries, and inferior goods?	YED > 1 indicates a normal luxury; 0 < YED <= 1 indicates a normal necessity; YED < 0 indicates an inferior good.
18	State the equimarginal principle (utility-maximizing rule) for a consumer choosing between Goods X and Y.	MU_x / P_x = MU_y / P_y, subject to the consumer's budget constraint, meaning marginal utility per dollar spent must be equal across all consumed goods.
19	What is the Law of Diminishing Marginal Utility?	As a consumer consumes additional units of a specific good during a given time period, the extra utility (satisfaction) derived from each successive unit declines.
20	How do normal goods and inferior goods respond to an increase in consumer income?	Demand for a normal good increases (curve shifts right), whereas demand for an inferior good decreases (curve shifts left) when income rises.
21	What does an indifference curve represent in consumer choice theory?	A graphical curve showing all combinations of two goods that yield the exact same level of total utility to the consumer.
22	What does a Cross-Price Elasticity of Demand (XED) value tell us about the relationship between two goods?	If XED > 0, the goods are substitutes; if XED < 0, the goods are complements; if XED = 0, the goods are unrelated.
23	How does a price increase affect Total Revenue (TR = P * Q) when demand is price inelastic?	Total Revenue increases, because the percentage drop in quantity demanded is smaller than the percentage increase in price.
24	What are the key determinants of Price Elasticity of Demand for a good?	Availability of close substitutes, proportion of income spent on the good, whether the good is a necessity or luxury, and the time horizon under consideration.
25	What causes a market surplus (excess supply), and how does a free market resolve it?	A surplus occurs when price is above equilibrium (quantity supplied > quantity demanded). Downward pressure on price increases quantity demanded and reduces quantity supplied until equilibrium is restored.
26	What is the Marginal Rate of Substitution (MRS) and how is it related to the slope of an indifference curve?	MRS is the rate at which a consumer is willing to give up good Y for an additional unit of good X while maintaining the same utility; it equals the negative slope of the indifference curve (-dY/dX = MU_x / MU_y).
27	What is allocative efficiency in a competitive market equilibrium?	The condition where marginal benefit (demand) equals marginal cost (supply), maximizing total economic surplus (consumer surplus + producer surplus) with zero deadweight loss.
28	What is deadweight loss (DWL)?	The loss of total economic surplus that results when an economy produces at an output level where marginal social benefit does not equal marginal social cost.
29	State the Law of Supply and explain why the supply curve slopes upward.	Ceteris paribus, as price rises, quantity supplied increases, because higher prices incentivize producers to allocate more resources to production to increase profits.
30	What is a Giffen good and why does it violate the standard Law of Demand?	A highly inferior good lacking close substitutes where a negative income effect overpowers the substitution effect, causing quantity demanded to rise as price rises.
31	How does the substitution effect differ from the income effect when the price of a good falls?	The substitution effect always induces consumers to buy more of the cheaper good; the income effect reflects the increased purchasing power of real income, increasing consumption of normal goods and decreasing consumption of inferior goods.
32	State the Law of Demand and explain the slope of the demand curve.	Ceteris paribus, as the price of a good increases, the quantity demanded decreases, resulting in a downward-sloping demand curve due to substitution and income effects.