Understanding Financial Markets and Capital Study Guide

Principles of Microeconomics 3e Overview

This textbook explores economic theories and applications through the study of scarce resources, supply and demand, microeconomic theory, and microeconomic policy issues.

• scarce resources
• supply and demand
• equilibrium
• consumer behavior
• production and costs
• market structure
• game theory
• public goods
• positive and negative externalities
• competition and antitrust policies
• international trade
• protectionism

• Principles of Microeconomics: Scarcity, Supply, Demand, and Market Structures

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Introduction to Economics and Scarcity

Economics is the study of how humans make decisions in the face of scarcity where human wants for goods, services and resources exceed what is available.

• Microeconomics
• Macroeconomics
• Scarcity
• Economic systems
• Imperfect information
• Production
• Division of labor
• Resources
• Economic data

Introduction to Economic Principles and Systems

This text explores the concept of scarcity, the division and specialization of labor, the distinction between microeconomics and macroeconomics, and various economic systems.

• scarcity of resources
• division of labor
• specialization of labor
• economies of scale
• microeconomics
• macroeconomics
• monetary policy
• fiscal policy
• economic theories and models
• circular flow diagram
• traditional economy
• command economy
• market economy
• mixed economy
• economic freedom
• globalization
• gross domestic product (GDP)
• exports
• imports

Foundations of Economics and Individual Choice

Economics is the study of how humans make choices under conditions of scarcity, involving tradeoffs, opportunity costs, and budget constraints.

• scarcity
• division of labor
• specialization
• economies of scale
• globalization
• microeconomics
• macroeconomics
• monetary policy
• fiscal policy
• command economy
• market economy
• traditional economy
• opportunity cost
• budget constraint
• tradeoffs

Choice in a World of Scarcity

This topic examines how individuals and societies make choices using the budget constraint and production possibilities frontier frameworks to navigate opportunity costs and scarcity.

• opportunity cost
• budget constraint
• marginal analysis
• law of diminishing marginal utility
• sunk costs
• production possibilities frontier
• law of increasing opportunity cost
• productive efficiency
• allocative efficiency
• comparative advantage
• absolute advantage

Confronting Objections to the Economic Approach

This text analyzes arguments against economic approaches to decision-making and contrasts positive statements with normative statements.

• positive statements
• normative statements
• budget constraint
• production possibilities frontier
• scarcity
• tradeoffs
• economic efficiency
• productive efficiency
• allocative efficiency
• opportunity cost
• marginal analysis
• law of diminishing marginal utility
• law of diminishing returns
• invisible hand
• sunk costs

Demand, Supply, and Market Equilibrium

An analysis of how demand and supply interact to determine equilibrium price and quantity, including the effects of price controls and market efficiency.

• ceteris paribus assumption
• demand curve
• supply curve
• equilibrium price
• equilibrium quantity
• shifts in demand
• shifts in supply
• price ceiling
• price floor
• shortage
• surplus
• consumer surplus
• producer surplus
• social surplus
• deadweight loss
• economic efficiency

Shifts in Demand and Supply

This content explains how changes in input prices, technology, natural conditions, and government policies cause shifts in supply curves and affect equilibrium price and quantity.

• supply curve shifts
• cost of production
• input prices
• technological improvement
• government policies
• taxes
• regulations
• subsidies
• demand shifts
• equilibrium price
• equilibrium quantity
• law of supply
• law of demand

Demand and Supply in Labor Markets

Analysis of how demand and supply determine equilibrium salary and quantity in labor, financial, and goods markets.

• demand curve
• supply curve
• equilibrium
• quantity demanded
• quantity supplied
• shortage
• surplus
• price ceiling
• price floor
• consumer surplus
• producer surplus
• total surplus
• deadweight loss
• derived demand
• labor market
• financial markets
• minimum wage
• living wage
• wage inequality

Economic Elasticity and Market Systems

The sources examine the market system as a mechanism for information and analyze how elasticity measures the responsiveness of quantity demanded or supplied to changes in price, income, or related goods.

• demand and supply in labor markets
• demand and supply in financial markets
• price elasticity of demand
• price elasticity of supply
• elastic, inelastic, and unitary elasticity
• midpoint method for elasticity
• infinite elasticity
• zero elasticity
• constant unitary elasticity
• total revenue and pricing
• tax incidence
• income elasticity of demand
• cross-price elasticity of demand
• wage elasticity of labor supply
• elasticity of savings

Understanding Economic Elasticity and Responsiveness

Elasticity measures the responsiveness of one variable to changes in another variable, including price elasticity of demand, price elasticity of supply, and cross-price elasticity of demand.

• price elasticity of demand
• price elasticity of supply
• cross-price elasticity of demand
• elastic demand
• inelastic demand
• elastic supply
• inelastic supply
• unitary elasticity
• infinite elasticity
• zero elasticity
• income elasticity of demand
• wage elasticity of labor supply
• elasticity of savings
• tax incidence

Elasticity and Consumer Choice Theory

Analysis of how consumers make choices to maximize total utility within budget constraints and the impact of price, income, and supply elasticity.

• price elasticity of demand
• price elasticity of supply
• income elasticity of demand
• cross-price elasticity of demand
• wage elasticity of labor supply
• total utility
• marginal utility
• diminishing marginal utility
• budget constraint
• utility maximization
• normal goods
• consumer choices

Consumer Choice and Utility Maximization

This content explores how individuals maximize utility through marginal utility per dollar, the effects of income and price changes on consumption, and behavioral economics perspectives on irrational decision-making.

• marginal utility
• total utility
• marginal utility per dollar
• consumer equilibrium
• budget constraint
• normal goods
• inferior goods
• substitution effect
• income effect
• demand curves
• behavioral economics
• loss aversion
• mental accounting
• fungibility

Consumer Choice and Behavioral Economics

Economic analysis of consumer choices explores how individuals seek utility maximization through budget constraints, marginal utility, and the impact of income and price changes.

• behavioral economics
• budget constraint
• consumer equilibrium
• marginal utility
• diminishing marginal utility
• income effect
• substitution effect
• total utility
• normal goods
• inferior goods
• fungible

Production, Costs, and Industry Structure

This topic examines how firms determine costs and desired profit levels through the study of production functions, explicit and implicit costs, and short run cost structures.

• explicit costs
• implicit costs
• accounting profit
• economic profit
• production function
• factors of production
• natural resources
• labor
• capital
• technology
• entrepreneurship
• fixed inputs
• variable inputs
• short run
• long run
• total product
• marginal product
• law of diminishing marginal product
• factor payments
• total cost

Production and Costs in the Long Run

An analysis of how firms manage production technology, variable and fixed costs, and scale to achieve efficiency in the long run.

• fixed costs
• variable costs
• marginal costs
• average total cost
• average variable cost
• short run production function
• long run production function
• diminishing marginal productivity
• production technology
• economies of scale
• diseconomies of scale
• constant returns to scale
• long-run average cost curve
• short-run average cost curve

Introduction to Perfect Competition

Firms in perfectly competitive markets act as price takers and make output decisions based on total revenue and total cost.

• Perfect competition
• Price taker
• Market structure
• Free entry and exit
• Identical products
• Total revenue
• Total cost
• Long-run equilibrium
• Short run
• Perfectly elastic demand curve

Profit Maximization in Perfect Competition

Perfectly competitive firms determine profit-maximizing output by comparing marginal revenue and marginal cost, while long-run entry and exit processes drive prices toward zero profit.

• perfect competition
• price taker
• total revenue
• total cost
• marginal revenue
• marginal cost
• profit maximization
• average total cost
• average variable cost
• break even point
• shutdown point
• entry and exit
• long-run equilibrium
• constant-cost industry
• increasing-cost industry
• decreasing-cost industry
• productive efficiency
• allocative efficiency

Monopoly Formation and Profit Maximization

This topic explores how monopolies form through barriers to entry and how a profit-maximizing monopoly chooses output and price.

• Barriers to entry
• Natural monopoly
• Economies of scale
• Control of a physical resource
• Legal monopoly
• Intellectual property
• Patents
• Trademarks
• Copyrights
• Trade secrets
• Predatory pricing
• Marginal revenue
• Marginal cost
• Profit maximization
• Allocative efficiency
• Market power

Monopoly and Intellectual Property Concepts

This document explores monopoly power, natural monopolies, intellectual property, and profit-maximizing behavior of firms.

• predatory pricing
• intellectual property
• natural monopoly
• economies of scale
• monopolist demand curve
• marginal revenue
• marginal cost
• total revenue
• total cost
• profit-maximizing level of output
• allocative efficiency
• barriers to entry

Monopoly and Antitrust Policy

This chapter discusses public policy issues about competition, including corporate mergers, regulating anticompetitive behavior, and regulating natural monopolies.

• Corporate Mergers
• Acquisitions
• Lateral Mergers
• Vertical Mergers
• Conglomerate Mergers
• Antitrust Laws
• Sherman Antitrust Act
• Celler-Kefauver Act
• Four-Firm Concentration Ratio
• Market Concentration
• Restrictive Practices
• Tying Sales
• Bundling
• Predatory Pricing
• Cartels
• Exclusive Dealing Agreements

Monopoly, Antitrust Policy, and Regulation

This topic examines monopoly and antitrust policy, including predatory pricing, restrictive practices, natural monopolies, and the effects of deregulation.

• Monopoly
• Antitrust policy
• Predatory pricing
• Restrictive practices
• Tying sales
• Bundling
• Natural monopoly
• Cost-plus regulation
• Price cap regulation
• Deregulation
• Regulatory capture

Environmental Protection and Negative Externalities

This chapter explores the economics of pollution, market failure, and the tradeoff between economic output and environmental protection.

• negative externality
• positive externality
• market failure
• social costs
• private costs
• command-and-control regulation
• market-oriented environmental tools
• pollution charges
• marketable permits
• property rights
• biodiversity
• international externalities
• production possibility frontier
• marginal benefits
• marginal costs

Positive Externalities and Public Goods

This topic explores how new technology creates positive externalities and social benefits, the role of government in encouraging innovation, and the economic implications of public goods.

• positive externalities
• public goods
• private benefits
• social benefits
• investments in innovation
• rate of return
• human capital
• intellectual property rights
• patents
• copyright laws
• government research and development spending
• research and experimentation tax credit

Public Goods and Common Resources

An analysis of public goods characterized by nonexcludable and non-rival properties, the free rider problem, and the tragedy of the commons regarding common resources.

• public goods
• nonexcludable
• non-rival
• free rider problem
• positive externalities
• common resources
• tragedy of the commons
• private goods
• social benefits
• private benefits
• intellectual property

Labor Markets and Income

This topic explores the theory of labor markets, how wages are determined in imperfectly competitive markets, the impact of unions, employment discrimination, and how immigration affects labor market outcomes.

• Theory of labor markets
• Perfectly competitive labor market
• Imperfectly competitive labor market
• Monopsony
• Marginal product of labor
• Value of the marginal product of labor
• Marginal revenue product
• Derived demand
• Labor unions
• Collective bargaining
• Bilateral monopoly
• Employment discrimination
• Earnings gaps
• Motherhood penalty
• Fatherhood bonus
• Affirmative action
• Immigration economic impacts
• Unskilled labor supply

Labor Market Dynamics and Employment

This content examines labor market mechanics including marginal product of labor, monopsony, labor unions, and discrimination.

• marginal product of labor
• value of the marginal product
• marginal revenue product
• perfectly competitive labor market
• monopoly
• labor union
• equilibrium wage
• excess demand
• excess supply
• monopsony
• marginal cost of labor
• bilateral monopoly
• labor market discrimination
• earnings gap
• affirmative action
• immigration impact on wages

Poverty and Economic Inequality

This chapter explores how economists measure income inequality and poverty, the poverty trap, and the safety net of government programs.

• Poverty line
• Economic inequality
• Poverty trap
• Safety net
• Income inequality
• Labor-leisure budget constraint
• Temporary Assistance for Needy Families (TANF)
• Earned Income Tax Credit (EITC)
• Supplemental Nutrition Assistance Program (SNAP)
• Medicaid
• Welfare reform

Measuring and Addressing Income Inequality

This text explains how to measure income distribution using quintiles and Lorenz curves, analyzes the causes of growing inequality, and discusses government policies to reduce economic inequality.

• income inequality
• poverty levels
• quintiles
• income distribution
• winner-take-all labor markets
• household composition
• wage distribution
• high-skilled labor demand
• redistribution
• ladder of opportunity
• wealth versus income

Imperfect and Asymmetric Information Problems

This chapter discusses how imperfect and asymmetric information affect markets for goods, labor, and financial capital, as well as insurance markets.

• imperfect information
• asymmetric information
• insurance markets
• information, risk, and insurance
• market equilibrium
• price as a signal of quality
• thin markets
• thick markets
• loss aversion
• behavioral economics

Information, Risk, and Insurance

Mechanisms used by buyers and sellers to reduce risks associated with imperfect information and asymmetric information in various markets.

• Imperfect information
• Asymmetric information
• Reputation
• Guarantees
• Warranties
• Service contracts
• Occupational licenses
• Collateral
• Cosigners
• Insurance premiums
• Adverse selection
• Moral hazard
• Actuarially fair
• Risk groups
• Deductibles
• Copayment
• Coinsurance
• Social insurance
• Individual mandate
• Employer mandate

Imperfect Information and Insurance Markets

Imperfect information and asymmetric information create challenges in goods, labor, and capital markets, often leading to adverse selection and moral hazard in insurance.

• asymmetric information
• imperfect information
• adverse selection
• moral hazard
• insurance
• actuarially fair insurance
• deductibles
• copayments
• coinsurance
• fee-for-service
• health maintenance organization
• collateral
• cosigner
• occupational license
• money-back guarantee
• service contract
• warranty

Introduction to Financial Markets and Capital

This chapter explores how businesses raise financial capital, how households supply financial capital, and how financial markets bridge the gap between capital suppliers and demanders.

• financial capital
• financial markets
• housing equity
• 2008 financial crisis
• business investment
• corporate profits
• angel investors
• venture capital
• reinvesting profits
• bank loans
• bonds
• municipal bonds
• treasury bonds
• corporations
• shareholders
• initial public offering
• dividends
• capital gains
• private companies
• public companies

• Introduction to Financial Markets and Capital

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How Households Supply Financial Capital

An analysis of mechanisms for savings available to households including bank accounts, bonds, stocks, mutual funds, and tangible assets.

• expected rate of return
• risk
• liquidity
• financial intermediary
• bank accounts
• certificates of deposit
• default risk
• interest rate risk
• bonds
• bond yield
• stocks
• dividends
• capital gains
• mutual funds
• diversification
• index funds
• home equity

Financial Markets and Personal Wealth

This topic explores how households supply financial capital, the characteristics of financial investments, and methods to accumulate personal wealth through interest and education.

• financial capital markets
• rate of return
• risk
• liquidity
• tangible assets
• subprime loans
• mortgage-backed securities
• securitizing
• financial intermediaries
• bonds
• stocks
• mutual funds
• index funds
• diversification
• random walk theory
• simple interest
• compound interest
• capital gains
• dividends

Economics of Public Economy and Democracy

An analysis of how political institutions and democratic systems influence the allocation of scarce resources through voter participation, special interest politics, and government policy.

• Public economy
• Public choice
• Voter participation
• Election expenses
• Special interest groups
• Lobbying
• Regulatory capture
• Pork-barrel spending
• Logrolling
• Median voter theory
• Voting cycle

Flaws in the Democratic System

This topic examines how special interest groups, voting cycles, and rational ignorance can cause government action to deviate from majority preferences and economic efficiency.

• median voter theory
• voting cycle
• special interest groups
• pork-barrel spending
• logrolling

Principles of International Trade

This topic explores the economic logic of international trade through absolute and comparative advantage, specialization, and intra-industry trade between similar economies.

• Absolute advantage
• Comparative advantage
• Opportunity cost
• Gains from trade
• Specialization
• Production possibility frontier
• Intra-industry trade
• Economies of scale
• Value chain

Absolute, Comparative Advantage, and International Trade

This topic explores how absolute advantage, comparative advantage, and intra-industry trade facilitate economic gains through specialization, economies of scale, and splitting up the value chain.

• absolute advantage
• comparative advantage
• intra-industry trade
• gains from trade
• splitting up the value chain
• economies of scale
• tariffs
• specialization
• opportunity cost
• value chain

Globalization and Protectionism

This chapter explores trade policy, protectionism, and the effects of international trade on jobs, wages, and working conditions.

• Protectionism
• Tariffs
• Import quotas
• Nontariff barriers
• Anti-dumping
• Consumer surplus
• Producer surplus
• Social surplus
• Infant industry argument
• Predatory pricing
• Comparative advantage
• Intra-industry trade
• Labor standards

Globalization and Protectionism Trade Policy

This topic analyzes how governments enact trade policy through the World Trade Organization, regional trading agreements, and national level protectionism.

• protectionism
• tariffs
• import quotas
• nontariff barriers
• World Trade Organization (WTO)
• General Agreement on Tariffs and Trade (GATT)
• regional trading agreements
• free trade agreements
• common markets
• economic unions
• national interest argument
• infant industry argument
• dumping
• anti-dumping laws
• comparative advantage
• disruptive market change

Mathematics and Graphs in Economics

Math is a tool used to illustrate economic concepts through algebraic models and various types of graphs.

• algebraic models
• functions
• linear equations
• variables
• slope
• y-intercept
• positive slope
• negative slope
• zero slope
• growth rates
• percentage change
• line graphs
• pie graphs
• bar graphs
• time series
• graphical manipulation

Indifference Curves and Utility Maximization

An analysis of indifference curves, marginal rate of substitution, and the substitution and income effects on consumer choices.

• indifference curves
• utility
• marginal utility
• diminishing marginal utility
• marginal rate of substitution
• budget constraint
• utility-maximizing choice
• substitution effect
• income effect
• labor-leisure choice
• intertemporal choice

Understanding Present Discounted Value

Present discounted value is the amount you should be willing to pay in the present for a stream of expected future payments.

• Present discounted value
• Interest rate
• Stock pricing
• Bond pricing
• Dividends
• Risk premium
• Opportunity cost
• Capital investment

Microeconomics Principles and Market Analysis

An analysis of scarcity, supply and demand, opportunity cost, and market structures including perfect competition, monopoly, and oligopoly.

• scarcity
• supply and demand
• opportunity cost
• specialization of labor
• public enterprise
• budget constraint
• production possibilities frontier
• allocative efficiency
• productive efficiency
• normative and positive economics
• equilibrium price and quantity
• surplus
• ceteris paribus
• price ceiling
• price floor
• marginal utility
• substitution effect
• income effect
• accounting profit
• economic profit

Externalities and Environmental Policy Management

Analysis of positive and negative externalities, command-and-control policies, and market-based solutions like pollution charges and marketable permits.

• positive externality
• negative externality
• command-and-control
• market-based
• marketable permits
• pollution charges
• property rights
• marginal cost
• marginal benefit
• optimal level of pollution
• environmental treaties

Microeconomic Principles of Efficiency and Labor

This content examines productive and allocative efficiency, market externalities, labor market dynamics, and the relationship between economic equality and output.

• productive efficiency
• allocative efficiency
• production possibility frontier
• positive externalities
• private benefits
• social benefits
• excludable goods
• nonexcludable goods
• rivalrous consumption
• nonrivalrous goods
• marginal revenue product
• marginal product of labor
• monopsony
• marginal cost of labor
• income inequality
• quintiles
• poverty trap
• asymmetric information

Principles of Microeconomics and International Trade

This content explores financial instruments, voting cycles, comparative advantage, and the impacts of trade barriers and economies of scale.

• bonds
• equity
• venture capitalists
• risk and return
• voting cycle
• absolute advantage
• comparative advantage
• opportunity cost
• economies of scale
• intra-industry trade
• trade barriers
• tariffs
• subsidies
• free trade association
• common market
• economic union