Microeconomics MIDTERM 1

Revenue formula

Price x Quantity

Equilibrium

Quantity demanded is exactly equal to quantity supplied (If market is not in equilibrium, price changes to bring supply and demand into balance)

Marginal Product of Labor

What is the increase of output from hiring one extra worker? Change in Q/Change in L

Willingness to pay

What is the most I am willing to pay to get this benefit (or avoid that cost)?

Substitutes in production

alternative products that a firm could produce

2 factors analysts keep in mind to create most accurate demand estimates

existing competition in market, consumer demographic information

Perfectly Competitive Market

firm cannot influence market price 1) identical good 2) many buyers and sellers (each of whom is small, relative to the market size)

Complements in production

goods that are produced together

Quantity demanded vs. demand

shift among curve vs. shift in curve (PRICE CHANGE triggers a change in quantity demanded, not demand)

4 step process to estimate market demand

1. Survey 2. For each price, add up total quantity demanded by all customers 3. Scale up the quantities to represent the whole market 4. Plot the total quantity demanded at each price, yielding the market demand curve

6 things shift demand curve

1. income 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects (individual demand curve) 6. the type and number of buyers (market demand curve)

Factors that shift supply curve

1. input prices 2. productivity/technology 3. prices of related outputs 4. expectations 5. type and number of sellers

Variable costs

A cost that varies with the level of output

Inferior good

A good for which higher income causes a decrease in demand

Individual Supply Curve

A graph plotting the quantity of an item that a business plans to sell at each price.

Market Demand Curve

A graph plotting the total quantity of an item demanded by the entire market, at each price.

Market Supply Curve

A graph plotting the total quantity of an item supplied by the entire market, at each price.

Individual Demand Curve

A graph that plots the quantity of an item that an individual plans to buy at each price

Either/or question

Answer is yes/no

Income increases

Buy less inferior goods

Rational Rule for Buyers

Buy more of an item if its marginal benefit is greater than (or equal to) the price ; keep buying until MB = Price

Marginal Product of Capital (K)

Change in Q/Change in K

Opportunity cost principle

Consider the trade offs of your decisions The true cost of something is the net best alternative you must give up to get it

Cost-benefit principle

Costs and benefits are the incentives that shape decisions

Fixed cost

Costs that are constant whatever the quantity of goods or services produced (Should not be included in opportunity costs)

Diminishing Marginal Benefit

Each addition item yields a smaller marginal benefit than the previous item (not negative, just less); explains why demand curve is downward sloping

Marginal principle

Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

Opportunity cost principle note

Enforces that you need to ignore sunk costs. Money you can't get back- irrelevant. You need to think, what is the best choice to make now?

Substitutes

Goods that can replace each other (pepsi and coke)

Complements

Goods that go well together (coffee and milk)

Ceteris paribus

Holding everything constant

PPF note

If economy is using resources efficiently, more of one good can only be produced if the other is given up

Second set of interdependencies

Is between businesses or people in the same market (between my coffee shop and my competition)

First Interdependencies

Is between each of my individual choices (If I stay open late or if I give barista lessons)

Third set of interdependencies

Is between markets (when museums stay open late, affects my business)

Supply curve = MC curve

MB curve= demand curve

Marginal principle note

MB= MC

Benefit of one more unit

Marginal benefit (exceeds the cost)

Marginal benefit and demand curve

Marginal benefit and demand curves are one and the same

Fourth set of interdependencies

Occurs over time (Choices I make today affect what I'll be able to do in the future, and my expectations about the future shape the choices I make today)

Price decreases

People buy more of it because some new people may be willing to enter the market

Sunk costs

Refers to the money you have spent that you can't get back

Scarcity

Resources are limited: therefore, any resources you spend pursuing one activity leaves fewer resources to pursue others

Rational Rule for Sellers

Sell one more item if the marginal revenue is greater than (or equal to) marginal cost.

Production Possibilities Frontier (PPF)

Shows the different sets of output that are attainable with your scarce resources

Marginal Product

The increase in output that arises from an additional unit of an input

Economic surplus

The total benefits minus the total costs flowing from a decision. It measures how much a decision has improved your wellbeing

Law of Demand

We want more of something when the price is lower (When price goes up, we buy less)

Framing effect

When a decision is affected by how a choice is described or framed

Congestion Effect

When you want to buy something less because a lot of other people are also using it

Network effect

When you want to buy something more because other people are also using it

Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Framing effect note

Your choice should depend only in cost and benefit of an item, not irrelevant things like how much it cost in the past

Price Taker

a buyer or seller that is unable to affect the market price

Normal good

a good for which higher income causes an increase in demand

ECONOMICS

is the study of choices (a way of thinking)

Diminishing Marginal Product

the MP of an input declines as you use more of that input

Marginal cost

the additional cost of producing one more unit

Law of Supply

the tendency for the quantity supplied to be higher when the price is higher

PPF slope

y2- y1/ x2- x1