First-year courses · Social sciences
Microeconomics: markets, elasticity and costs
Microeconomics flashcards for first year: scarcity, opportunity cost, supply and demand, elasticity, surplus, externalities, costs and market structures.
43 cards6 topicsAbout 15 minutes a roundTypical first-year Principles of Microeconomics
About this deck
Microeconomics studies how individual households and firms make choices when resources are limited, and how those choices interact in markets. This deck follows the order of most Canadian first-year micro courses: core ideas such as scarcity and opportunity cost, the supply and demand model, elasticity, consumer and producer surplus, government price controls, market failure, the costs of production, and the four main market structures.
You need comfortable high school algebra: reading a graph, finding a slope, and solving two linear equations at once. Almost every topic here is shown on a graph, so draw one for each card. For supply and demand cards, practise the habit of asking 'does this change the price of the good itself (a movement along the curve) or something else (a shift of the curve)?'
Study in short rounds and test yourself by predicting: if a frost destroys part of the Okanagan cherry crop, what happens to equilibrium price and quantity? If you can sketch the answer and explain it in one sentence, you understand the card.
Three mistakes cost students the most marks. First, mixing up a change in demand with a change in quantity demanded. Second, treating slope and elasticity as the same thing; a straight demand line has a constant slope but changing elasticity along its length. Third, forgetting that opportunity cost is only the value of the next best alternative, not the sum of every option given up.
Before you start: High school algebra and graph reading (Grade 11 or 12 math).
All 43 cards
Cover the definitions with a sheet of paper and test yourself, or use the study modes above.
Core ideas
- Scarcity
- The basic condition that human wants exceed the limited resources available to satisfy them, which forces choices.Example: A city has one budget and must choose between more snow plows and more transit buses.
- Opportunity cost
- The value of the next best alternative given up when making a choice.Example: Working a weekend shift for $200 means giving up a weekend ski trip, if skiing was your next best option.
- Production possibilities frontier
- Curve showing the maximum combinations of two goods an economy can produce with its resources and technology fully used.Example: Points inside the curve mean unemployed resources; points outside are unreachable for now.
- Comparative advantage
- Ability to produce a good at a lower opportunity cost than another producer, which is the basis for gains from trade.Example: Even if one country is better at everything, both gain by specializing where their opportunity cost is lowest.
- Marginal analysis
- Comparing the extra benefit and extra cost of one more unit of an activity to decide whether to do it.Example: Studying one more hour is worth it only if the expected gain exceeds what that hour costs you.
Supply and demand
- Law of demand
- Other things equal, as the price of a good rises, buyers want to purchase less of it.Example: When gasoline prices climb, some drivers take transit more often.
- Change in quantity demanded
- Movement along a fixed demand curve caused only by a change in the good's own price.Example: A sale on maple syrup leads shoppers to buy more syrup.
- Shift in demand
- Movement of the whole demand curve caused by a change in income, tastes, related prices, expectations or number of buyers.Example: A viral recipe raises the amount of maple syrup people want at every price.
- Law of supply
- Other things equal, a higher price leads sellers to offer more of a good for sale.Example: Higher canola prices encourage Prairie farmers to plant more canola.
- Market equilibrium
- The price and quantity at which the amount buyers want equals the amount sellers want to sell, so there is no pressure to change.Example: If 1,000 concert tickets are wanted and offered at $80, $80 is the clearing price.
- Shortage
- Situation where quantity demanded exceeds quantity supplied at the current price, often because the price is below equilibrium.Example: Long waiting lists for rent-controlled apartments.
- Excess supply
- Situation where sellers offer more than buyers want at the current price, usually because the price is set above equilibrium.Example: Unsold winter coats in March lead stores to cut prices.
- Normal good
- A good for which demand rises when consumer income rises.Example: Restaurant meals and new cars for most people.
- Inferior good
- A good for which demand falls as consumer income rises, because buyers switch to preferred options.Example: Instant noodles after a student starts a full-time job.
- Substitutes
- Goods that can replace each other, so a price rise for one increases demand for the other.Example: Tim Hortons coffee and Starbucks coffee.
- Complements
- Goods used together, so a price rise for one decreases demand for the other.Example: Hockey skates and ice time.
Elasticity
- Price elasticity of demand
- Percentage change in quantity demanded divided by the percentage change in price; measures how responsive buyers are to price.Example: If price rises 10% and quantity falls 20%, the value is 2 (in absolute terms).
- Elastic demand
- Buyers respond strongly to price: quantity changes by a larger percentage than price, so the absolute elasticity is greater than 1.Example: One brand of soft drink, since many close substitutes exist.
- Inelastic demand
- Buyers respond weakly to price: quantity changes by a smaller percentage than price, so the absolute elasticity is less than 1.Example: Insulin or home heating in a Canadian winter.
- Total revenue test
- Rule that if price and total spending move in opposite directions demand is elastic, and if they move together demand is inelastic.Example: A transit fare increase that raises fare revenue suggests inelastic demand.
- Income elasticity of demand
- Percentage change in quantity demanded divided by percentage change in income; positive for normal goods, negative for inferior goods.Example: A value of 1.5 for travel means it is a luxury good.
- Cross-price elasticity of demand
- Percentage change in quantity demanded of one good divided by percentage change in price of another; positive for substitutes, negative for complements.Example: Butter and margarine show a positive value.
Welfare and market failure
- Consumer surplus
- The difference between the most buyers would be willing to pay and what they actually pay, summed over all units bought.Example: You would pay $60 for a jersey but buy it for $45: a $15 gain.
- Producer surplus
- The difference between the price sellers receive and the lowest price they would have accepted, summed over all units sold.Example: A baker willing to sell a loaf for $3 who sells it for $5 gains $2.
- Deadweight loss
- The reduction in total surplus when a market produces something other than the efficient quantity.Example: A tax that stops some mutually beneficial trades creates this loss.
- Price ceiling
- A legal maximum price; if set below equilibrium it causes shortages.Example: Rent controls on certain apartments in some provinces.
- Price floor
- A legal minimum price; if set above equilibrium it creates excess supply.Example: A minimum wage set above the market wage for some low-skill jobs.
- Negative externality
- A cost of production or consumption imposed on third parties who are not part of the transaction.Example: Smoke from a factory affects nearby residents' health.
- Positive externality
- A benefit from an activity that spills over to people who did not pay for it, so the market tends to provide too little.Example: Vaccination protects people who are not vaccinated themselves.
- Pigouvian tax
- A tax per unit set equal to the external cost of an activity so that the price reflects the full social cost.Example: A per-tonne charge on industrial greenhouse gas emissions.
- Public good
- A good that is non-rival (one person's use does not reduce another's) and non-excludable (people cannot easily be kept from using it).Example: National defence or a lighthouse.
- Free-rider problem
- Tendency for people to enjoy a benefit without paying, which leads markets to underprovide goods that are hard to exclude people from.Example: Listeners who never donate to a community radio station.
Costs of production
- Fixed cost
- A cost that does not change with the amount produced in the short run.Example: Monthly rent on a food truck parking spot.
- Variable cost
- A cost that rises or falls with the level of output.Example: Ingredients used for each poutine sold.
- Marginal cost
- The additional cost of producing one more unit of output.Example: If 100 units cost $500 and 101 units cost $504, this is $4.
- Average total cost
- Total cost divided by the quantity of output; per-unit cost.Example: Total cost $5,000 for 1,000 units gives $5 per unit.
- Diminishing marginal returns
- In the short run, adding more of a variable input to a fixed input eventually yields smaller increases in output.Example: A third cook in a small kitchen adds less output than the second did.
- Economies of scale
- Falling long-run average cost as a firm expands its scale of production.Example: A large auto plant spreads equipment costs over many vehicles.
Market structures
- Perfect competition
- Market with many firms selling identical products, free entry and exit, and no single firm able to affect the price.Example: Wheat farmers selling a standard grade are close to this model.
- Monopoly
- Market with a single seller of a product with no close substitutes and high barriers to entry.Example: A local water utility.
- Oligopoly
- Market dominated by a few large, interdependent firms, each of which must consider rivals' reactions.Example: Canada's national wireless carriers or major banks.
- Monopolistic competition
- Market with many firms selling differentiated products and relatively easy entry.Example: Independent coffee shops and hair salons.
- Profit-maximizing rule
- Produce the quantity where marginal revenue equals marginal cost.Example: If one more unit adds $10 in revenue and $8 in cost, keep expanding output.