microeconomics learning

what is productivity

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.

ceteris paribus

A Latin phrase essentially meaning "all else equal", which is used in economics to emphasize the idea that the only changes you should be thinking about are the ones that are explicitly described; for example, if we are talking about how someone reacts to a change in the price of a good, you should assume the only thing changing is price and not preferences, income, or anything else.

what is specialization

A factory focuses on producing one or two goods and leaves the rest for another factory to improve efficiency

what is an economic model and its purpose.

A model is a simplification of a concept or process that is used to better understand that process by cutting away as much as possible to focus on key aspects. For example, a map is a model of how roads are laid out and where they intersect. Maybe there is other useful or interesting information, like the location of an interesting mural or the world's best taco stand, but if we are just interested in getting to the store, we don't need that, we just need to know how to get there. Economists rely on models because it's impossible to capture the full complexity of human interaction, let alone try to do it in a straightforward and easy to read way!

what is a market

A place where buyers and sellers meet to engage in mutually beneficial, voluntary exchanges of goods, services, or productive resources

what is production technology. In the long run what type of cost does a firms production technology become

A production technology is the specific combination of labor, physical capital, and technology(entrepreneurship) that makes up a particular method of production. In the long run, firms can choose their production technology, so all costs become variable costs.

what is a rational consumer. What is utility. What is a util a unit for.

A rational consumer is a utility maximizer. A consumer will seek to have as much benefit or satisfaction as possible. In economics, the term utilityrefers to the happiness, benefit or value a consumer gets from a good or service. In other words, consumers are not satisficers who will settle for "good enough". This happiness or satisfaction is measured in a unit called a util.

what is an economic system

A system of allocating the means of production and the goods and services produced in an economy

what is absolute advantage

Absolute advantage is when a producer can produce a good or service in greater quantity for the same cost, or the same quantity at lower cost, than other producers.

what is allocative efficiency

Allocative efficiency means that the particular mix of goods a society produces represents the combination that society most desires. At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. For government, this process often involves trying to identify where additional spending could do the most good and where reductions in spending would do the least harm. At the individual and firm level, the market economy coordinates a process in which firms seek to produce goods and services in the quantity, quality, and price that people want. But for both the government and the market economy in the short term, increases in production of one good typically mean offsetting decreases somewhere else in the economy.

how do economic systems differ in market and command economies? What are the three basic questions that economic systems have to answer

An economic system is any system of allocating scarce resources. Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed? There are two extremes of how these questions get answered. In command economies, decisions about both allocation of resources and allocation of production and consumption are decided by the government. In market economies, there is private ownership of resources—established though property rights—and the factors of production and consumption are all coordinated through markets. In a market system, resources are allocated to their most productive use through prices that are determined in markets. These prices act as a signal for buyers and sellers.

why does taxation result in deadweight loss

Because the tax alters the quantity that is sold in the market, it will result in a deadweight loss.

what do demand and supply curves show

Both demand and supply curves show the relationship between price and the number of units demanded or supplied.

how do you calculate the consumer and producer surplus in an economic model. (same equation goes for calculating deadweight loss)

Consumer and producer surplus can be calculated as areas on a demand and supply graph. quantity times price that consumers inexplicitly gained and that producers explicitly gained

what is consumer surplus

Consumer surplus is the difference between willingness to pay for a good and the price that consumers actually pay for it. Each price along a demand curve also represents a consumer's marginal benefit of each unit of consumption. The difference between a consumer's marginal benefit for a unit of consumption, and what they actually pay, represents how much benefit a consumer get's from the price they are paying.

what is cross price elasticity of demand. What about for substitutes and compliment goods.

Cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B. If the two goods are complements, like bread and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. However, if the two goods are substitutes, like plane tickets and train tickets, then a drop in the price of one good will cause people to substitute toward that good, reducing consumption of the other good.The term cross-price refers to the idea that the price of one good affects the quantity demanded of a different good. Substitute goods have positive cross-price elasticities of demand. If good A is a substitute for good B—like coffee and tea—then a higher price for B will mean a greater quantity consumed of A. Complement goods have negative cross-price elasticities. If good A is a complement for good B—like coffee and sugar—then a higher price for B will mean a lower quantity consumed of A.

what is deadweight loss

DWL is the loss of total welfare resulting from a market producing at an allocatively inefficient price and quantity combination

which one is used more in economics positive or normative statements and why?

Economic analysis tends to focus mostly on positive analysis, that is, the description of phenomena, facts, and concepts. It can be tempting to analyze things using normative analysis, that is, describing things as they ought to be. However, you shouldn't interpret that to mean that normative thinking is completely absent in economics and especially in policy-making: both are important for well-formed policy.

what is economic efficiency

Economic efficiency is the idea that it is impossible to improve the situation of one party without imposing a cost on another.The meaning of efficiency can become even more specific than that, though! In the demand and supply model, efficiency means that the economy is getting as much benefit as possible from its scarce resources and all possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.

what are the five words that can describe a models price elasticity

Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. An inelastic demand or inelastic supply is one in which elasticity is less than one, indicating low responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of either demand or supply. Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic means the response to price is complete and infinite: a change in price results in the quantity falling to zero. Perfectly inelastic means that there is no change in quantity at all when price changes.

are variable or fixed costs sunk costs

Fixed costs are sunk costs—because they are in the past and cannot be altered, they should play no role in economic decisions about future production or pricing. Fixed costs are expenditures that do not change based on the level of production, at least not in the short term. Whether you produce a lot or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out.

what is economic inefficiency

If a situation is economically inefficient, it becomes possible to benefit at least one party without imposing costs on others.

what is a command economy

In its purest form, a command economy answers the three economic questions by making allocation decisions centrally by the government.

Market Economy

In its purest form, a market economy answers the three economic questions by allocating resources and goods through markets, where prices are generated.

how does elasticity of supply and demand differ in the short run from the long run? Why?

In the market for goods and services, quantity supplied and quantity demanded are often relatively slow to react to changes in price in the short run, but they react more substantially in the long run. As a result, demand and supply often—but not always—tend to be relatively inelastic in the short run and relatively elastic in the long run. Changes that just aren't possible to make in a short amount of time are realistic over a longer time frame. On the demand side, that can mean consumers eventually make lifestyle choices—like buying a more fuel efficient car to reduce their gas usage. And on the supply side, it means that producers have time to do things like build new factories and hire new workers.

in a short run perspective how can a firms total costs be divided

Looked at from a short-run perspective, a firm's total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing.

what is the equation for allocative efficiency

MC=MB

what is marginal analysis

Marginal analysis is the process of comparing the benefits and costs of choosing a little more or a little less of a certain good.

what type of economy are most places command, mixed, or market

Most economies are mixed economies that lie between these two extremes.

What is the law of diminishing marginal utility?

Most goods provide diminishing marginal utility. According to the law of diminishing marginal utility, as the consumption of good increases the additional amount of happiness the good provides the consumer decreases. So while having three scoops of ice cream makes you happier than two scoops, the second scoop doesn't make you as happy as the first one did, and the third one doesn't make you as happy as the second one did.

what is land in the four factors of production (also an economic resource)

Natural resources that are used in the production of goods and services. Some examples of land are lumber, raw materials, fish, soil, minerals, and energy resources.

do price floors and ceilings change the supply and demand curves

Neither price ceilings nor price floors cause demand or supply to change. They simply set a price that limits what can be legally charged in the market. Remember, changes in price do not cause demand or supply to change. Price ceilings and price floors can cause a different choice of quantity demanded along a demand curve, but they do not move the demand curve. Price controls can cause a different choice of quantity supplied along a supply curve, but they do not shift the supply curve.

why are not all costs monetary costs.

Not all costs are monetary costs. Opportunity costs are usually expressed in terms of how much of another good, service, or activity must be given up in order to pursue or produce another activity or good.

what is opportunity cost

Opportunity cost measures cost in terms of what must be given up in exchange.

in a growing economy what typically happens to the PPF as there are more resources available resulting in more efficient production.

Over time, a growing economy will tend to shift the PPF outwards. You can produce more of each in the relationship.

what is capital def

Physical goods that are produced and used to produce other goods. Examples of capital would be machinery, technology, and tools such as computers; hammers; factories; robots; trucks, and trains used to transport goods; and other equipment employed in the production of a good or service.

what do points that lie directly on the PPF tell us? What do they not tell us.

Points that lie on the PPF illustrate combinations of output that are productively efficient. We cannot determine which points are allocatively efficient without knowing preferences.

what is a price ceiling

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

what is price elasticity

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.

what is a price floor

Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.

what is productive efficiency

Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. All choices on the PPF in this graph, including A, B, C, D, and F, display productive efficiency. As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods.

what are property rights

Property rights are the ability to own and use resources (and anything made from those resources). Property rights are like the rules of a game such as soccer or hide-and-seek. When everyone knows the rules, and those rules are consistently enforced, people can focus on playing their best and having fun.

what happens to producer and consumer tax when taxes are imposed

Regardless of whether a tax is imposed on a buyer or a seller, both will experience a reduction in surplus.

why does economics exist. (hint there is one thing that economics is concerned with analyzing)

Scarcity is why economics exist: we wouldn't have to worry about how scarce resources are allocated if those resources were unlimited. It should be emphasized that economics is primarily concerned with the scarcity of resources.

what are sunk costs

Sunk costs are costs that occurred in the past and cannot be recovered; they should be disregarded in making current decisions. In the budget constraint framework, all decisions involve what will happen next—what quantities of goods will you consume, how many hours will you work, or how much will you save. These decisions do not look back to past choices. Thus, the budget constraint framework assumes that sunk costs—costs that were incurred in the past and cannot be recovered—should not affect the current decision. Consider the case of Selena, who pays $8 to see a movie; after watching the film for 30 minutes, she knows that it is truly terrible. Should she stay and watch the rest of the movie because she paid for the ticket, or should she leave? The money she spent is a sunk cost, and unless the theater manager is feeling kindly, Selena will not get a refund. But, staying in the movie still means paying an opportunity cost in time. Her choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something—anything—else. The lesson of sunk costs is to forget about the money and time that is irretrievably gone and instead to focus on the marginal costs and benefits of current and future options. For people and firms alike, dealing with sunk costs can be frustrating. It often means admitting an earlier error in judgment. Many firms, for example, find it hard to give up on a new product that is doing poorly because they spent so much money in creating and launching the product. But the lesson of sunk costs is to ignore them and make decisions based on what will happen in the future.

what is tax incidence

Tax incidence refers to how a tax is distributed between the buyer and the seller. For instance, if the amount of consumer surplus that is reallocated to tax revenue is greater than the amount of producer surplus that is reallocated to tax revenue, we would say that the incidence of the tax falls more heavily on consumers.

what is tax revenue? is it or is it not part of total surplus?

Tax revenue is the dollar amount of tax collected. For an excise (or, per unit) tax, this is quantity sold multiplied by the value of the per unit tax. Tax revenue is counted as part of total surplus.

what is technology/entrepreneurship in the four factors of production

Technology (sometimes called entrepreneurship) The ability to combine the other productive resources into goods and services.

what is the production possibilities frontier

The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. The PPF captures the concepts of scarcity, choice, and tradeoffs. Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. Society can choose any combination of the two goods on or inside the PPF. But it does not have enough resources to produce outside the PPF. At the start of the frontier you need to give up less of the y-axis since u already have so much of it so the slope is less however when you have a lot of the x-axis quantity you need to give up more of the y-axis quantity because you have so much more of the x-axis quantity so the y-axis good is so much more important to conserve.

explain how elasticity does not only apply to price

The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Quantity demanded, QdQdstart text, Q, d, end text, depends on more than just price, it also depends on income, tastes, preferences, the prices of related goods, and so on. Similarly, quantity supplied, QsQsstart text, Q, s, end text, depends on the cost of production and other factors, as well as on price. Elasticity can be measured for any determinant of supply and demand, not just the price.

what is a budget constraint

The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual's income. Any point on or inside of the constraint the person could afford while any point on the outside of the constraint a person cant afford.

what is marginal utility

The change in a consumer's total utility when he consumes one additional unit is the marginal utility. for example total utility goes from 13 to 19 after consuming one more of a specific good then marginal utility is 6.

what is the circular flow model

The circular flow model illustrates how a market economy works. In the model, households and firms engage in mutually beneficial exchanges of resources and products in the market. Households are the owners of the factors of production and sell labor in exchange for a wage, land in exchange for rent, and capital in exchange for interest. Firms sell goods and services in exchange for money.

what is scarcity definition

The fact that there is a limited amount of resources to satisfy unlimited wants

household economic def

The owners of resources—supplied to firms in the resource market—and the buyers of goods and services—demanded from firms in the product market

What is the interest

The payment firms make to households in exchange for capital

what is rent (in the context of land in the four factors of production)

The payment firms make to households in exchange for land

what are wages

The payment firms make to households in exchange for their labor

what does the slope of the PPF tell you.

The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and the opportunity cost can be compared to the opportunity costs of another producer to determine comparative advantage.

what is total surplus

The total surplus in a market is a measure of the total wellbeing of all participants in a market. It is the sum of consumer surplus and producer surplus.

what is the difference between financial capital and capital in the economic sense (hint four factors of production

The word capital is used in everyday language to mean what economists would call financial capital. If you see the word capital on its own in an economics context, it refers to physical capital—equipment, machinery, or tools used to produce goods and services. Physical capital is tangible, but financial capital isn't always so.

what are economic resources

Things that are inputs to production of goods and services. There are four economic resources: land, labor, capital, and technology. Technology is sometimes referred to as entrepreneurship.

what is the midpoint method for elasticity of arc elasticity

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists sometimes use the average percent change in both quantity and price. A drawback of the midpoint method is that as the two points get farther apart, the elasticity value loses its meaning.

what is the equation for total cost for production

Total cost is the sum of fixed and variable costs of production. t=f+v

when is total welfare maximized

Total welfare is maximized when a market produces at its equilibrium price and quantity. This level of output is considered allocatively efficientbecause no other price and quantity combination can achieve a greater level of total surplus.

what is the burden of tax/ the tax incidence

Typically, the incidence, or burden, of a tax falls both on the consumers and producers of the taxed good. who ends up paying a larger percentage of the tax the consumer or the producer. if demand is more inelastic than supply tax burden falls on consumers but if supply is more inelastic than demand than tax incidence falls on the producers. Think about it this way—when the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded remains relatively constant when the tax is introduced. In the case of smoking, the demand is inelastic because consumers are addicted to the product. The seller can then pass the tax burden along to consumers in the form of higher prices without much of a decline in the equilibrium quantity. When a tax is introduced in a market with an inelastic supply—such as, for example, beachfront hotels—sellers have no choice but to accept lower prices for their business. Part of the excise tax is paid by buyers an part paid by sellers

what is unitary elasticity

Unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

what shows diminishing marginal returns fixed or variable costs

Variable costs typically show diminishing marginal returns, so the marginal cost of producing higher levels of output rises. Variable costs, on the other hand, are incurred in the act of producing—the more you produce, the greater the variable cost. Labor is treated as a variable cost since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs also include raw materials.

what is marginal utility per dollar spent

We can determine the "bang per buck" a buyer gets using the marginal utility per dollar spent, or MU/$MU/$M, U, slash, dollar sign. To determine the MU/$MU/$M, U, slash, dollar sign we divide the marginal utility a consumer gets at a particular level of consumption by the price of the good. using the marginal utility per dollar spent is useful since you can use this to compare the marginal utility per dollar spent to purchase another good that gives you more utils or a better "bang for your buck"

do taxes and tariffs make markets efficient or inefficient

When a tax is imposed on a market it will reduce the quantity that will be sold in the market. As we learned in a previous lesson, whenever the quantity sold in the market is not the equilibrium quantity, there will be inefficiencies.

what is price control

When government laws regulate prices instead of letting market forces determine prices, it is known as price control. Controversy sometimes surrounds the prices and quantities established by demand and supply, especially for products that are considered necessities. In some cases, discontent over prices turns into public pressure on politicians, who may then pass legislation to prevent a certain price from climbing "too high" or falling "too low".

product market

Where firms supply goods and services to households in exchange for money

Resource market def

Where households supply land, labor, capital, and entrepreneurship/technology to firms in exchange for money

what is comparative advantage

While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. Often how much of a good a country decides to produce depends on how expensive it is to produce it versus buying it from a different country. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology or skills. When a country can produce a good at a lower opportunity cost than another country, we say that this country has a comparative advantage in that good. The slope of the PPF gives the opportunity cost. Countries' differences in comparative advantage determine which goods they will choose to produce and trade. When countries engage in trade, they specialize in the production of the goods that they have a comparative advantage in, and trade part of that production for goods they do not have a comparative advantage in. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties.

Labor def

Work effort used in the production of goods and services. Some examples are the number of workers and number of hours worked.

why are entrepreneurship and technology iterchangeably used as the fourth factor of production/economic resource

You might hear the fourth economic resource referred to as either entrepreneurship or technology. The terms are used interchangeably but mean the same thing: the ability to make things happen. Take the example of computers—a computer itself would be considered a good, but our ability to make computers would be considered technology.

what is a normal good vs an inferior good

a normal good people by a larger quantity of as income rises while an inferior good people buy less of as income rises

why are there no fixed costs in long run production

because the company can adapt to make their efficiency improve; they are not locked into sunken costs

what can price elasticity be calculated for (two things)

demand and supply

what is consumer theory

how people decide to spend their money, a field of economics known as consumer theory. This study of how people decide to allocate their income to spending on goods has a few key assumptions that lead to some important conclusions about how a consumer will decide to allocate their income to spending on goods and services.

are price ceilings and price floors efficient or inefficient

inefficient. So, if equilibrium is economically efficient, under what circumstances can we find economic inefficiency? A price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and quantity, thus creating an inefficient outcome. But there's an additional twist! In addition to creating inefficiency, price floors and ceilings also transfer some consumer surplus to producers or some producer surplus to consumers. Even though either consumer surplus or producer surplus gains in the situation the social surplus is lessened.

what is the difference between an inexplicit and an explicit cost

inexplicit is an intangible opportunity cost while explicit cost is the price of what you are doing/paying for

what is welfare economics

interested in how the allocation of resources affects wellbeing. The most important concepts used in welfare analysis are total surplus and allocative efficiency

how to create an equation for a budget constraint

make an equation that finds the quantity of a certain good that you are buying if you buy the other good. example q burgers=5-0.25 q hot dogs this means that there are 5 hot dogs in total that you could afford with whole budget so if I buy 20 hot dogs I can afford 0 burgers

what does a util measure

measures the happiness

in economic models what is typically on the x-axis/independent variable

quantity of ____

what are the two other words for total surplus

social surplus and economic surplus. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price.

what are positive statements

statements of fact or description of how something actually is.

what are normative statements

statements that describe opinions or how things ought to be.

division of labor

the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.

what is the consumers tax burden and producers tax burden

the consumers tax burden is the amount that tax revenue took away from consumer surplus and the producers tax burden is the amount that the tax revenue took away from producer surplus

what is producer surplus

the difference between the price a seller receives and their willingness to sell for each quantity. Each price along a supply curve also represents a seller's marginal cost of producing each unit of production. Therefore the difference between what the price that the seller for each unit, and what it cost for the seller to produce that last unit, represents the seller's benefit from the price they are getting.

what is the law of diminishing returns

the law of diminishing returns, which holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline.

Occam's razor

the logical principle that states you should make no more assumptions than the minimum amount needed to perform analysis; in economics, we use the concept of Occam's razor when we invoke the ceteris paribus assumption.

what are three things that concern consumers when purchasing another unit of a good. (consumer theory)

the marginal utility of another unit of a good they are considering buying the prices of a good and alternative goods they are considering buying their budget for consuming goods and services

what is the profitability

what is the profitability index used for?

in what situation of demand are most price ceilings instituted

when demand is rising and consumers don't want to pay a higher price. Those who manage to purchase the product at the lower price given by the price ceiling will benefit, but sellers of the product will suffer, along with those who are not able to purchase the product at all. Quality is also likely to deteriorate.

in what situation of demand are most price floors instituted

when supply is rising and suppliers want to keep prices high enough to maintain profitability.

what is increasing opportunity costs

when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up 2 fidget spinners when she produces the first Pokemon card, and 4 fidget spinners for the second Pokemon card, so she has increasing opportunity costs.

what is constant opportunity cost

when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.