Flashcards About Microeconomics Exam 1 Study Guide
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Economics
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the study of how human beings coordinate their wants and desires given the decision making mechanisms, social customs, and political realities of the society
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Central Problems
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● What, and how much, to produce ● How to produce it ● For whom to produce it
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Key Decision Making Mechanisms
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Price and Trade
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Scarcity
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The goods available are too few to satisfy individuals' desires
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Microeconomics
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The study of individual choice, and how that choice is influenced by economic forces
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Macroeconomics
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The study of the economy as a whole (aggregate)
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Marginal Analysis
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Additional cost or benefit of consuming one more
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Sunk Cost
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Costs that have already been incurred and cannot be resolved or recovered
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Marginal Benefit
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The additional benefit above what you have already derived
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Opportunity Cost
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The benefit that you might have gained from choosing the next best alternative
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Invisible Hand
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The price mechanism, the rise and fall of prices that guides our actions in a market. Idea from Adam Smith "Father of Capitalism"
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Efficiency
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Achieving a goal as cheaply as possible
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Economics Policies
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Are actions (or inaction) taken by the government to influence economic actions
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Positive Economics
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The study of what is and how the economy works
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Normative Economics
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The study of what the goals of the economy should be
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Art of Economics
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The application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics
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Production Possibility Model
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conveys the tradeoffs involved in a choice of a what to produce
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Increasing Opportunity Cost
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As you produce more and more of something, you have to give up more of something else
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Comparative Advantage
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Better suited to the production of one good than to the production of another good
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Technology
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Methods used to produce something- techniques of production
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Market Economy
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An economic system based on private property and the market in which, in principle, individuals decide how, what, and for whom to produce
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Rule of Law
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To govern private property
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Mercantilism
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Prior to market economy, economic system focused to bring wealth to the nation state
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Socialism
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An economic system based on individuals' goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce
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Capitalism
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an economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists
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Consumer Sovereignty
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Ultimately through spending decisions- households determine what will be produced
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Ways Business can be Organized
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● Sole Proprietorship- one owner ● Partnerships- 2 or more owners ● Corporation- legally owned by stockholders, limited liability ● B Corporation- Social Mission
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Demand
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1. Willingness and ability to consume 2. Schedule of quantities demanded at various prices at a specific period of time
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Law of Demand
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↓ Price, ↑ Quantity Demanded ↑ Price, ↓ Quantity Demanded
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Shift Factors of Demand
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1. Change in society's income 2. Prices of substitutes/ complements 3. taste/preferences 4. Expectations 5. Taxes and Subsides
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Supply
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1. Willingness and ability to produce something and bring it to the market for sale 2. Schedule of all quantities supplied at various prices at a specific time
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Law of Supply
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↑ Price, ↑ Quantity Supplied ↓ Price, ↓ Quantity Supplied
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Shift Factors of Supply
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1. Costs of inputs 2. Technology 3. Expectations 4. Taxes/Subsides
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Market Equilibrium
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Intersection of Supply and Demand
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Consumer Surplus
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The value the consumer gets from buying a product less than what they are willing to pay
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Producer Surplus
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The price the producer sells a product for less than the cost of producing it
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Price Elasticity of Demand
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The percentage change in quantity demanded divided by the percentage change in price.
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Price Elasticity of Supply
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Is the percentage change in quantity supplied divided by the percentage change in price
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Elastic
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If the percentage change in quantity is greater than the percentage change in price (E>1).
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Inelastic
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If the percentage change in quantity is less than the percentage change in price (E<1)
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Unit Elastic
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Percent change in demand is equal to the change in price (E=1)
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Perfectly Elastic
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Enormously responsive to change in price (E= ∞)
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Perfectly Inelastic
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Quantity does not respond at all to price change (E=0)
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Income Elasticity of Demand
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How responsive quantity demand is to a change in income. Percent change in Quantity Demanded divided by percent change in price
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Normal Goods
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a. Luxury (E >1) b. Necessity (0<E <1)
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Inferior Goods
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a. E <0
