What is Microeconomics
Ceteris Paribus
"all other things held constant"
Natural resources
(Renewable & exhaustible) -payment = "rent"
Households (name the two roles)
-consumers Demand goods and services -resource owners Supply resources (mostly labor)
Firms (name the two roles)
-demand resources -produce goods and services
Entrepreneurial ability
-talent, idea -risk of operation -payment = "profit"
Order of Core Principles
1. Marginal Principle 2. Cost-Benefit Principle 3. Opportunity Cost Principle 4. Interdependence Principle
Three big questions facing all economic systems
1. What gets produced 2. How it gets produced 3. Who gets it
Model
A forma statement of a theory, usual a Mathematical statement of a presumed relationship between two or more varibales
perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Demand
A relationship between the price of a good and the quantity of that good that consumers are willing and able to buy per period, other things constant
Price-takers are individuals in a market who:
A type of firm that charges the market price Can not choose the price but can choose quantity
market economy (laissez fair/ capitalism)
An economic system in which production and prices are determined by unrestricted competition privately owned businesses
command economy
An economic system in which the government makes all economic decisions. (North Korea)
Traditional Economy
An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.
Law of Diminishing Marginal Returns
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
quantity demanded
Changes in price of a product affects what? Moving along the demand curve
Fixed costs
Costs that do not vary with the quantity of output produced
Marginal Principle
Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller decisions, weighing marginal benefits and marginal costs
1. income 2. price of related goods 3. expectations of future prices 4. number of buyers 5. tastes and preferences
Factors that shift the demand curve
Capital
Human creations (physical capital and human capital) -payment = "Interest"
Labor
Human effort (physical & mental effort) -measured in time -payment = "wage"
Positive economics
Looks at "what Is" -tries to determine economic reality -supported or rejected by evidence -true or false
Normative economics
Looks at "what should be" -opinion -look for words like "should" or "ought to" etc.
Input Markets (Resource Markets)
Markets in which households are sellers and businesses are buyers; factors of production are bought and sold
Resource markets
Markets in which households that own resources sell them to firms -firms buy -households sell
Agents
People or organizations or coiountries -pretty much any decision, making entity
price theory
Prices are the basic coordinating and signaling mechanism.
Substitute good
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; conversely, when the price of one product rises, the demand for the other product rises.
Law of supply
Tendency of suppliers to offer more of a good at a higher price
opportunity cost
The best alternative that we forgo, or give up, when we make a choice or decision
Cost-Benefit Principle
The incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.
Economics
The study of how people seek to satisfy their needs and wants by making choices
Opportunity cost principle
The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of pocket financial costs
MR=P
Under perfect competition MR=?
congestion effects
When increasing numbers of users lower the value of a product or service.
Left and right
Which way does the demand curve shift
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.
Sunk cost
a cost that has already been committed and cannot be recovered
inferior good
a good that consumers demand less of when their incomes increase
normal goods (superior goods)
a good that consumers demand more of when their incomes increase
Perfect competition
a market structure in which a large number of firms all produce the same product (lack of market power)
Variable
a measure that can change from time to time or from observation to observation
Incentives
a positive or negative environmental stimulus that motivates behavior
Rational Rule for Buyers
buy more of an item if its marginal benefit is greater than (or equal to) the price
Law of demand
consumers buy more of a good when its price decreases and less when its price increases
Complimentary goods
goods that go together, if price ↑ the demand for both that good and complimentary good ↓.
Product markets
market in which goods and services are bought and sold -household buy -firms sell
Output Markets (Product Markets)
markets in which businesses are sellers and households are buyers; consumer goods and services are exchanged
Consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Quantity demanded
the amount of a good that buyers are willing and able to purchase
Quantity supplied
the amount of a good that sellers are willing and able to sell
Income effect
the change in consumption resulting from a change in real income
marginal cost
the cost of producing one more unit of a good or service
market demand curve
the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product
marginal benefit
the extra benefit of adding one unit
fallacy of composition
the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole
Scarcity
the limited nature of society's resources -ie. Money, time, natural resources, etc.
willingness to pay
the maximum amount that a buyer will pay for a good
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
Economic surplus
the sum of consumer surplus and producer surplus
Substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods ("substitutes")