Microeconomics Final Study Guide – Flashcards
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the scarcity principle
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the cost benefit principle
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An individual will be better off taking an action if, and only if, the extra benefits from taking the action are greater than the extra costs
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opportunity cost
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the highest-valued alternative of what you must give up in order to get an item; the real cost of an item
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9 principles of economics
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1. Resources are scarce 2. Opportunity cost matters 3. Decisions are made at the margin • Example: how many hours should a firm advertise? 4. People exploit opportunities to make themselves better off + respond to incentives 5. There are gains from trade 6. Markets move towards equilibrium 7. Resources should be used efficiently 8. Markets are usually efficient 9. When markets fail, government intervention can be beneficial.
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economic model
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a simplified representation of a a real situation that is used to better understand real-life situations, often employing a graph
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principle of comparative advantage
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a model that explains the source of gains from trade between individuals and countries. economic units should specialize in producing that good for which they have the lowest opportunity cost.
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absolute advantage
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an ability to produce a particular good or service better than anyone else; when a country produces a good or service if the country can produce more output per worker than other countries. likewise, an individual has an absolute advantage if producing a good or service if he or she is better at producing it than other people. not the same as having a comparative advantage.
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production possibilites curve
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a model that illustrates the trade-offs facing an economy that produces only two goods. it shows the maximum quantity of gone good that can be produced for any quantity produced of the other; illustrates the concepts of efficiency, opportunity cost, and economic growth; identifies all combinations of any two goods that can be produced with given resources
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gains from specialization
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increasing opportunity cost principle
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comparative advantage is important in explaining why it is in a person or country's best interest to
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specialize in production and engage in exchange; explains why supply curves are upward sloping.
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we use our (highest/lowest) opportunity cost resources first.
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lowest
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as the opportunity cost of production rises, the price the firm is willing to sell for (rises/lowers).
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rises
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Demand Curve
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a graphical representation of the demand schedule; shows the relationship between quantity demanded and price
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supply curve
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an upward-sloping curve that graphically shows the relationship between the price of a product and the quantity of the product supplied
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law of demand
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declares that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service. Demand curve typically slopes downward
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law of supply
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5 Main Factours that can Shift the Supply Curve
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(1) Changes in input prices (2) changes in prices of related goods or services (3) changes in technology (4) changes in expectations (5) changes in number of producers
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shift of the supply curve
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a change in the quantity supplied of a good or service at any give price; represented by the change of the original supply curve to a new position, denoted by a new supply curve
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movement along the supply curve
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a change in the price of the good itself; a change in the quantity supplied of a good arising from a change in the good's price.
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if the quantity sold changes in the same direction as the price (both price and quantity rise)
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the demand curve has shifted
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if the price and quantity move in opposite directions
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the supply curve shifts
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market equilibrium
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price has moved to a level at which the quantity of a good or service demanded equals the quantity of that good or service supplied.
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normal v. inferior goods
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normal: a good that consumers demand more of when their income increases. inferior: a good that consumers demand less of when their incomes increase.
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substitute v. complement goods
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substitute: products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls ex: french toast for cereal complement: two goods that are bought and used together; an increase in the price of one causes a fall in demand for the other. ex: cereal and milk
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the interaction of supply and demand determines
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market price
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changes in supply and demand will affect the
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market price
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producer surplus
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individual and total producer surplus
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consumer surplus
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often used to refer to both individual and to total consumer surplus
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markets are efficient in that the market equilibrium (maximizes/minimizes) the total surplus.
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maximizes
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total surplus is defined as
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the sum of producer and consumer surplus
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demand measures the
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marginal benefit of consumption
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you are willing to pay a price equivalent to the
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perceived marginal benefit received
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supply measures
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the marginal cost of production
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firms are willing to sell for a price that
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covers marginal cost
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for all quantities sold, up to the market equilibrium, marginal benefit--price consumers are WTP--exceeds
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marginal cost (the price firms are willing to sell for.)
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price ceiling
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a maximum price sellers are allowed to charge for a good or service
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price floor
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minimum price buyers are required to pay for a good or service
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quantity restriction
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A restriction on trade, usually imports, limiting the quantity of the good or service that is traded.
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why would the government adopt quantity restriction policies?
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how does the implementation of each of these policies affect consumer surplus, producer surplus, and total surplus?
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deadweight loss
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inefficiently low quantity. the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity; a loss to society; a reduction in total surplus; a loss in surplus that accrues to no one as a gain.
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In all government policies,
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total surplus is reduced thus they are overall inefficient.
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elasticity
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elasticity formula
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elastic v. inelastic
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key factors that help determine if demand is elastic or inelastic
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elasticity along a linear demand curve
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the midpoint formula + its use
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elasticity and revenue
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income elasticity
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supply elasticity
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cross price elasticity
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elasticity helps us measure how a given percentage change in price will affect
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quantity demanded
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knowing elasticity can help a firm with its _________, and can also help a firm _____________.
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pricing strategy ; predict how a given change in price will affect sales.
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per-unit tax on good
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how does tax affect consumer surplus?
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how does tax affect producer surplus?
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if demand is relatively inelastic, who pays more of the tax (buyers or sellers)?
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if demand is relatively inelastic, is the deadweight loss relatively large or small?
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types of tax systems
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marginal tax rate v. average tax rate
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world prices compared to domestic prices
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the world price for a good will settle
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between the two pre-trade prices
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prices are directly related to
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opportunity costs
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countries with (high/low) opportunity costs of production will be able to supply goods for a relatively low price and will hence have a _________________.
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low ; comparative advantage
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free trade will increase
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social welfare / total surplus
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tariffs and quotas will reduce
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social welfare / total surplus
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explicit v. implicit cost
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accounting v. economic profit
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marginal cost and marginal benefit
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marginal analysis
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sunk cost
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utility
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marginal utility
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budget constraint
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marginal utility per dollar
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the optimal consumption rule
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individual and market demand
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factors that shift the demand curve
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all consumers seek to maximize utility from
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consuming a given bundle of goods
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the consumer must allocate their scarce dollars to the (highest/lowest) valued use
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highest
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consumers use their scarce dollars to the highest valued use by
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choosing to consume goods that offer the highest level of additional/marginal utility per dollar spent
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market demand is
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the sum of the individual demand curves
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production function
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short run v. long run
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marginal product
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law of diminishing returns
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how do firms decide how much labor to employ
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fixed cost
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average variable cost
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average total cost
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marginal cost
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the cost curve graph
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assumptions of perfect competition
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how do firms decide how much output to produce
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how does the firm decide when to shutdown
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the firm's supply curve is the
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marginal cost curve
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the industry supply curve
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entry and exit from an industry
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normal rate of return
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zero economic profit
