Microeconomics - Fundamentals

What is the law of increasing opportunity cost?

A principle in economics which holes that as the production of a good or service increases, the opportunity cost of each additional unit rises

Why does opportunity cost exist?

Because of scarcity

Why do economists focus on marginal decision making?

Because we evaluate the costs and benefits associated with each decision that needs to be made

What type of resources are the tools, machinery, infrastructure, and knowledge used to produce goods and services?

Capital

How do you calculate marginal benefit and which way does its line slope?

Change in total benefit/change in quantity (as quantity increases, benefit decreases), downward slope

How do you calculate marginal cost and which way does its line slope?

Change in total cost/change in quantity (as quantity increases, cost increases), upward slope

What type of resources are the talent or ability to combine land, labor, and capital to produce goods and services?

Entrepreneurial ability

What should you do if MB>MC?

Expand your activity (you have too little)

What is the decision rule for optimization?

If MB>MC then do it, if MC<MB then don't do it

What type of resources are physical and mental activity devoted to producing goods and services?

Labor

What type of resources are natural resources?

Land

With increased activity, what happens to MB and MC?

MB tends to fall, MC tends to rise

What is the circular flow model?

Model that concisely describes how goods, services, resources and money flow back and forth in an economy

Increasing marginal cost

More of a good/service produced the higher the marginal cost -most productive resources are used first

What should you do if MB<MC?

Reduce your activity (you have too much)

What is the condition in which wants are greater than the limited resources available and will always exist?

Scarcity -limited resources to satisfy unlimited wants

What three concepts affect rational decision making?

Self-interest, marginal decision making, and optimization

How does comparative advantage view gains from trade?

Specialization in production increases output

What is an example of macroeconomics?

Study of economics at a large scale -examining total output, price level, and other aggregate measures in the economy ex. focus on how govt, individuals, and businesses make decisions when faced with scarcity

What is microeconomics?

Study of economics at the small scale -examining individuals and *specific* markets

What is comparative advantage?

The ability to produce a good or service at a lower relative opportunity cost than another producer

What is self-interest?

The idea that people choose to do things that provide them some benefit

What is optimization?

The idea that people make choices in order to maximize the overall benefit of an action subject to its cost

What is marginal decision making?

The process of making choices in increments by evaluating the marginal benefit against the marginal cost

What is rational decision making?

The process of maximizing well being or happiness through choices

What is economics?

The study of how society and individuals allocate scarce resources

What is opportunity cost?

The value of the next best activity or opportunity you give up when you choose another activity

When does the optimal level of output occur?

When MB=MC -a rational decision has been made

Specialization results in..

a more efficient use of resouces

Production possibilities frontier, efficiency?

above the line = impossible below the line = possible, but inefficient along the line = possible & efficient

What are resources?

foundation of all productive activity -any item, whether gift of nature, result of production, or result of human effort that is used to *produce goods and services* -relatively scarce in all countries

What is the flow in the model between firms and individuals?

goods/services (products) flow FROM businesses TO the goods/services market money flows FROM firms to resource market, to individuals then FROM product market back to firms resources flow FROM individuals to resource market

PPF illustrates...

opportunity cost

A rational decision...

results from the comparison of marginal benefit and marginal cost

Terms of trade for the producer

the price must be *greater than the opportunity cost of the seller or producer* of the item to make them better off

What are terms of trade?

the price of one good/service/resource in terms of another -mutually beneficial

Terms of trade for the consumer

the prices must be *less than the opportunity cost of the buyer or consumer* of the item to make them better off