Microeconomic Theory

An indifference curve shows all combinations of two goods that give a consumer the same total satisfaction (utility).

The marginal rate of substitution is the rate at which a consumer will give up one good to get more of another while staying equally satisfied.

A Giffen good is a rare good whose quantity demanded rises when its price rises, violating the law of demand.

A Veblen good is a luxury good whose demand increases as its price rises, because the high price signals status.

Economies of scope exist when it is cheaper to produce several products together than to produce each separately.

A network effect occurs when a product becomes more valuable to each user as more people use it.

Price leadership is when one dominant firm sets a price that other firms in the industry follow, common in oligopolies.

Rent-seeking is spending resources to gain wealth through favorable policy or market position rather than by producing value.

A two-part tariff is a pricing scheme with a fixed entry/access fee plus a separate per-unit price, used to capture consumer surplus beyond a single uniform price.

A budget line shows every combination of two goods a consumer can buy by spending all income, with slope equal to minus the price ratio, -Px/Py.

An isoquant is a curve showing every combination of two inputs, usually labor and capital, that produces the same quantity of output.

An isocost line shows every combination of two inputs a firm can buy for the same total cost, with slope equal to minus the input price ratio.

Returns to scale describes how output responds when a firm scales all inputs up by the same proportion in the long run.

The Cobb-Douglas production function is Q = A × K^α × L^β, a multiplicative form whose exponents give each input's output elasticity.

General equilibrium is a state in which every market in the economy clears at once, with all prices adjusted so supply equals demand everywhere.

Partial equilibrium is the analysis of a single market on its own, holding prices and conditions in all other markets constant.

Pareto efficiency is an allocation in which no one can be made better off without making at least one other person worse off.

An Edgeworth box is a diagram showing every way two people can divide two goods, used to find the trades that make both better off.

A social welfare function is a rule that combines individual well-being into a single ranking of social outcomes, letting a society compare allocations.

Compensating variation is the amount of money that, after a price change, would return a consumer to exactly the utility they had before it.

Revealed preference is the idea that a consumer's choices show what they prefer, so preferences are inferred from what people buy rather than assumed.

Risk aversion is a preference for a certain outcome over a gamble with the same expected value, shown by diminishing marginal utility of wealth.

Expected utility is the probability-weighted average of the utility of each possible outcome, used to rank risky choices.

The certainty equivalent is the guaranteed amount of money that gives a person the same utility as a risky gamble.

Comparative statics is the method of solving a model for equilibrium, changing one exogenous parameter, solving again, and comparing the two equilibria.

Hedonic pricing estimates the implicit value of a good's individual characteristics by regressing observed market prices on those characteristics.