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")