Microeconomics - Supply, Demand & Market Structures Flashcards

Question 1

Price Elasticity of Demand (PED) Formula & Interpretation

Accepted Answer

Measures buyer responsiveness to price changes: $E_d = \frac{\% \Delta Q_d}{\% \Delta P}$. If $|E_d| > 1$, demand is **elastic** (sensitive to price). If $|E_d| < 1$, demand is **inelastic** (insensitive to price).

Question 2

Cross-Price Elasticity of Demand (XED)

Accepted Answer

Measures responsiveness of demand for Good A to price changes in Good B: $E_{AB} = \frac{\% \Delta Q_A}{\% \Delta P_B}$.
- **Substitutes**: $E_{AB} > 0$
- **Complements**: $E_{AB} < 0$

Question 3

Income Elasticity of Demand (YED)

Accepted Answer

Measures responsiveness of demand to consumer income changes: $E_Y = \frac{\% \Delta Q_d}{\% \Delta Y}$.
- **Normal Good**: $E_Y > 0$ (Luxury if $E_Y > 1$)
- **Inferior Good**: $E_Y < 0$

Question 4

Consumer Surplus (CS) vs. Producer Surplus (PS)

Accepted Answer

**Consumer Surplus**: Difference between maximum price consumers are willing to pay and market price (area below Demand, above Price).
**Producer Surplus**: Difference between market price and minimum price producers are willing to accept (area above Supply, below Price).

Question 5

Deadweight Loss (DWL)

Accepted Answer

The net loss of total economic surplus ($CS + PS$) that occurs when a market operates away from competitive equilibrium due to distortions like taxes, price controls, or monopoly power.

Question 6

Profit Maximization Condition

Accepted Answer

A firm maximizes total profit or minimizes loss by producing at the output quantity where **Marginal Revenue equals Marginal Cost** ($MR = MC$).

Question 7

Perfect Competition: Key Characteristics

Accepted Answer

1. Infinite price-taking buyers and sellers
2. Homogeneous (identical) products
3. Free entry and exit (no barriers)
4. Perfectly elastic demand curve for individual firms ($P = MR = AR = D$)

Question 8

Perfect Competition: Long-Run Equilibrium

Accepted Answer

Occurs where $P = MC = 	ext{min } ATC$. Firms earn **zero economic profit** (normal profit), achieving both allocative and productive efficiency.

Question 9

Monopoly: Price and Efficiency

Accepted Answer

A single seller facing downward-sloping market demand ($MR < P$). Produces where $MR = MC$ and sets price from the demand curve, causing $P > MC$ (**allocative inefficiency**) and deadweight loss.

Question 10

First-Degree (Perfect) Price Discrimination

Accepted Answer

Occurs when a seller charges each consumer their exact maximum willingness to pay. **Consumer surplus is eliminated ($CS = 0$)**, producer surplus is maximized, and deadweight loss is zero because output reaches the efficient level ($P = MC$).

Question 11

Third-Degree Price Discrimination

Accepted Answer

Charging different prices to distinct consumer groups based on price elasticities of demand (e.g., student discounts). The seller sets a higher price for the group with **more inelastic demand**.

Question 12

Monopolistic Competition: Short-Run vs. Long-Run

Accepted Answer

- **Short-Run**: Firms can earn economic profits or losses due to product differentiation.
- **Long-Run**: Free entry/exit drives economic profit to zero ($P = ATC$), but firms operate with **excess capacity** ($P > 	ext{min } ATC$).

Question 13

Oligopoly & Strategic Interdependence

Accepted Answer

A market dominated by a few large, mutually interdependent firms with high barriers to entry. Decisions depend directly on anticipated actions and reactions of competitors.

Question 14

Nash Equilibrium

Accepted Answer

A set of strategies in game theory where **no player has an incentive to unilaterally change their strategy**, given the choices of all other players.

Question 15

Dominant Strategy

Accepted Answer

A strategy that yields a higher payoff for a player regardless of the strategy chosen by the opposing player.

Question 16

Negative Externalities in Production

Accepted Answer

Occurs when production imposes uncompensated costs on third parties, leading to **Marginal Social Cost exceeding Marginal Private Cost** ($MSC > MPC$). Results in free-market **overproduction** relative to the socially optimal level.

Question 17

Positive Externalities in Consumption

Accepted Answer

Occurs when consumption creates spillover benefits for third parties, leading to **Marginal Social Benefit exceeding Marginal Private Benefit** ($MSB > MPB$). Results in free-market **underproduction**.

Question 18

Pigouvian Taxes and Subsidies

Accepted Answer

- **Pigouvian Tax**: Equal to marginal external cost to internalize negative externalities ($MSC = MPC + 	ext{Tax}$).
- **Pigouvian Subsidy**: Equal to marginal external benefit to internalize positive externalities.

Question 19

Binding Price Ceiling vs. Price Floor

Accepted Answer

- **Binding Price Ceiling**: Set *below* equilibrium price, resulting in a persistent **shortage** ($Q_d > Q_s$).
- **Binding Price Floor**: Set *above* equilibrium price, resulting in a persistent **surplus** ($Q_s > Q_d$).

Question 20

Natural Monopoly & Regulation

Accepted Answer

A market where continuous economies of scale allow a single firm to supply the entire market at lower $ATC$ than multiple firms. Regulated using **Socially Optimal Pricing** ($P = MC$, requiring subsidies) or **Fair-Return Pricing** ($P = ATC$, zero economic profit).

Microeconomics - Supply, Demand & Market Structures

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