Microeconomics Notes Ch. 1

Elasticity of demand coefficient

% change in quantity ------------------------ % change in Price

Inelastic Demand

** Quantity is insensitive to a change in price** Products with this type of demand have very few substitutes, for example gas. When the price goes up, quantity demanded only goes down by a little bit because there isn't any alternate fuel you can use. Absolute 10% decrease Value of --------------- < 1 30% increase When theres a small change in quantity and big change in price, the number is less than 1

Price taker

- Firms in perfect competition are price takers - All businesses have to accept the price that is set by the market - Firms are not able to set their own price

Five different demand curves, their names, angle, and elasticity of demand coefficient

1. Perfectly Inelastic - demand curve straight line up and down, 0 2. Relatively Inelastic - demand curve slightly tilted left, < 1 3. Unit Elastic - demand curve at 45º angle, 1 4. Relatively elastic - demand curve almost straight line left and right, > 1 5. Perfectly Elastic - demand curve straight line left and right, ∞

Commodity

A basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities are gold, beef, oil, lumber, and natural gas. All brought up from their natural state (the ground) and brought up for sale in a market place. There is no actual value added to them by the producer, although the quality might change between producers. All commodities of the same grade are priced equally and are interchangeable

Method of Economic Analysis

Build economic models based on scientific approach Identify the economic problem and the variable of interest

Unit Elastic

If the percent change in quantity demanded is exactly the same as the percent change in price. In other words, if you increase the price of milk by 1$ that means the quantity will always increase by the same amount for each dollar, making my elasticity of demand coefficient = 1 20% ---- = 1 20%

Shifting the Production possibilities Curve

Improve efficiency Change in the quantity or quality of resources Enhance technology/ Change in technology

Price maker

In pure monopolies the firm is a price maker as they are able to take the markets demand curve as their own. The monopoly firm is able to set the price anywhere on this demand curve.

The Law of Diminishing Marginal Returns

Is a law of economics that states an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point. For example, a factory employs workers to manufacture its product. As long as all other factors of production stay the same, at one point, each supplementary worker generates less output than the worker before him. Thus, each worker who follows provides smaller and smaller returns. If the factory continues to add new workers, it eventually becomes so cramped that additional workers hinder the efficiency of other employees, thereby decreasing the factory's production.

Price Elasticity

Is a measure of the responsiveness of demand or supply of a good or service to changes in price.

Elastic Demand

Means quantiy is sensitive to a change in price. When price goes up, quantity decreases a whole lot, and when the price goes down the quantity demanded goes up a whole lot This is due to: Means these products have many substitutes, they're luxuries, or they have elasticity coefficient greater than 1 (>1) % change in quantity demanded is large ----------------------- > 1 small percentage

The Four Market Structures

Perfect competition Monopoly Monopolistic competition Oligopoly

Terms of trade The US makes 10 planes and 30 toys a day China makes 4 planes and 20 toys a day Does trading 1 plane for 10 toys make each country better off

Planes Toys USA 10 30 1 toy costs 1/3 plane (With Trade) China 4 20 1 plane costs 5 toys (With Trade) How many toys does the US and China give up for one plane or 1 toy? For the US, 1 plane costs 3 toys and each toy costs 1/3 of a plane. The US is going to specialize in planes, so they're going to need toys from China. China is going to specialize in toys, so they're going to need planes from the US. They can both benefit, but they need to agree on a ***terms of trade*** that works for both of them. Question: Does trading 1 plane for 10 toys make each country better off? With trade: 1 toy costs 1/10th a plane. These terms of trade would make the US way better off. They would be getting toys at a lower opportunity cost than if they were making them themselves. The US loves this, but what about China? China would never accept these terms of trade since they would be worse off. ---> With trade: 1 plane costs 10 toys. China wouldn't want to trade 10 toys to get one plane if they could produce planes by themselves by only sacrificing 5 toys So what terms of trade would satisfy both countries? 1 plane for 4 toys would benefit both countries ---> US With Trade: 1 toy costs 1/4 plane vs 1/3 plane China With Trade: 1 plane costs 4 toys rather than 5 toys Planes Toys USA 10 30 1 toy costs 1/3 plane ** 1 toy costs 1/4 plane ** with trade China 4 20 1 plane costs 5 toys ** 1 plane costs 4 toys ** with trade Conclusion: the US would be getting toys at a lower opportunity cost than if they produced it themselves and China would be getting planes at a lower opportunity cost than they would without trade. In fact, trading one plane for any number btw three and 5 toys would benefit both countries. Anything greater than 3 would benefit the US, anything less than 5 would benefit China

consumer goods

Products created for direct consumption

Capital Goods

Products that create consumer goods

Elasticity

The law of demand says theres an inverse relationship btw price and quantity - when the price goes up for a product, people buy less, and when the price goes down people buy more But the question is how much less or how much more do they buy - the idea of _____ ***____ measures how sensitive quantity demanded is to a change in price***

Production Possibilities Frontier 1. Definition 2. What other terms does the curve demonstrate 3. Why scarcity? 4. Practice calculating opportunity cost 5. The two graphs and what they mean 6. How can the PPC shift?

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently. The PPF indicates the production possibilities of two commodities when resources are fixed. This means that the production of one commodity can only increase when the production of the other commodity is reduced, due to the availability of resources. Therefore, the PPF measures the efficiency in which two commodities can be produced together, helping managers and leaders decide what mix of commodities are most beneficial. The PPF assumes that technology is constant, resources are used efficiently, and that there is normally only a choice between two commodities. The Curve shows: - scarcity - trade-offs - opportunity cost - efficiency There is scarcity because you can't go beyond the curve, you have limited resources such as time, to do that. Practice calculating opportunity cost with table in notes There is a difference between - 1. Constant Opportunity Cost - linear 2. Increasing Opportunity cost - curved The PPC can shift for example 1. Change in the quantity or quality of resources 2. Change in technology When will the PPC not shift? - High unemployment because the workers are still alive and not dead. In other words, the resources haven't disappeared, they just aren't being used = inefficient, with point inside the curve

Perfect Competition

To be perfectly competitive, you have to have many competitors and they need to be competing for or selling the same thing - identical products No boundaries to entry. All milk will always be $10 profit and it doesn't matter because milk is the same for every cow - There is no such thing as perfect competition but some markets come close - PRICE TAKERS: price is determined by market supply and demand. once the market establishes the price, each individual firm is free to supply any amount to maximize profits. That way they behave as price takers. Competition: High Resource allocation (or distribution): more efficient - Perfectly elastic demand curve

Capital

Wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing.

Horizontal Demand curve. What does that mean?

Where a firm cannot change the price at all. If they change the price, no one is going to buy, like rice! That means the elasticity of demand coefficient would be infinite

Marginal Analysis

is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits.

scarcity

is the fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs.

Per unit opportunity cost

number of units you lose divided by the number of units you gain. For the US, 1 plane costs 3 toys and each toy costs 1/3 of a plane. How many toys does china give up for one plane? For china 1 plane costs 5 toys and when they produce 1 toy they give up 1/5 of a plane.

Opportunity Cost

refers to a benefit that a person could have received, but gave up, to take another course of action.

Marginal Cost

refers to the value of what is given up in order to produce that additional unit.

Marginal Benefit

refers to what people are willing to give up in order to obtain one more unit of a good

Absolute Advantage

the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

Comparative Advantage

the ability of an individual, company, or country to produce a good or service at a lower opportunity cost than its competitor, or make a specific product more efficiently than another activity. Ex: The US makes 10 planes and 30 toys a day China makes 4 planes and 20 toys a day Planes Toys USA 10 30 1 toy costs 1/3 plane China 4 20 1 plane costs 5 toys The US obviously has an absolute advantage over China, ***********(look back at video) For the US, 1 plane costs 3 toys and each toy costs 1/3 of a plane. How many toys does china give up for one plane? For china 1 plane costs 5 toys and when they produce 1 toy they give up 1/5 of a plane. So which country should specialize in producing planes? The one that gives up 3 toys for each plane or 5 toys for each plan? Well the US which gives up 3 toys for each plane because they have a LOWER OPPORTUNITY COST and therefore a COMPARITAVE ADVANTAGE And China has a comparative advantage in the production of toys. --> --> --> *** So if these two countries specialize in trade, they would actually be better off than if they tried to produce the products themselves.*** NEXT read terms of trade flashcard which continues this concept

Microeconomics

the part of economics concerned with single factors and the effects of individual decisions. The study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices.