Micro
Market for Goods and Services
-Goods and services are bought and sold -Sellers: Firms -Buyers: Households
What do firms do in the circular flow diagram?
-Hire and use factors of production -Produce and sell goods and services
Economists examine:
-How people decide how much they work, what they buy, how much they save, how they invest their savings -How firms decide how much to produce and how many workers to hire -Forces and trends that affect the overall economy: growth in average income, unemployment, rate at which prices are rising
Markets for Factors of Production
-Inputs are bought and sold -Sellers: Households -Buyers: Firms
What do households do in the circular flow diagram?
-Own and sell the factors of production -Buy and consume goods and services
Refer to Figure 2-3. If this economy devotes all of its resources to the production of windows, then it will produce
0 doors and 100 windows.
Table 3-11 Assume that Jamaica and Sweden can switch between producing coolers and producing radios at a constant rate. (J-12 coolers, 6 Radios. S-24 coolers, 3 radios.)
0.5 radios, and Sweden's opportunity cost of one cooler is 0.125 radios.
The five foundations of economics:
1. Incentives matter 2. Life is about trade-offs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value
What is the circular-flow diagram?
A visual model of the economy, shows how dollars flow through markets among households and firms
Refer to Figure 2-3. It is not possible for this economy to produce at point
C.
sunk cost
Cost that has already been paid, not relevant
Who are the two decision makers?
Firms and households
Barter
Individuals trading a good or service in exchange for something they want
In what two markets do households and firms interact?
Market for goods and services Market for factors of production (input)
Where can an economy not produce?
Outside its production possibilities frontier
The coffee market is in equilibrium. What would happen to the equilibrium price and quantity of coffee if (event A) the wages of coffee-bean pickers fell and (event B) the price of tea fell?
Price would fall, and the effect on quantity would be ambiguous.
If Shawn can produce more capcakes in one day than Traci can produce in one day, then
Shawn has an absolute advantage in the production of capcakes.
Which of the following is an example of a positive, as opposed to a normative, statement?
The United States Department of Justice sued AT&T to block its merger with T-Mobile.
The market is in equilibrium. What would happen to the equilibrium price and quantity of lattés if the cost of producing steamed milk, which is used to make lattés, rises?
The equilibrium price would increase, and the equilibrium quantity would decrease.
Which of the following would shift the supply of umbrellas to the left?
The number of firms making umbrellas decreases.
When constructing a production possibilities frontier, which of the following assumptions is not made?
The quantities of the factors of production that are available are increasing over the relevant time period.
Which of the following is an example of a normative, as opposed to a positive, statement?
Universal healthcare would be good for U.S. citizens.
You lose your job and, as a result, you buy fewer iTunes music downloads. This shows that you consider iTunes music downloads to be
a normal good.
The market is in equilibrium. If the demand for a product increases, then we would expect equilibrium price
and equilibrium quantity both to increase.
Refer to Figure 2-3. Efficient production is represented by which point(s)?
b and c (both on ppf line)
When is there a shortage?
below equilibrium
Both Ryzard and Zima produce hair clips and necklaces. However, Zima is better at producing both goods.
benefit both Zima and Ryzard.
Markets -
bring buyers and sellers together to exchange goods and services
People respond to incentives by
comparing cost and benefit
Rational people make
decisions by evaluating costs and benefits of marginal changes
An increase in the price of a good will
decrease quantity demanded.
If the number of buyers in a market decreases, then
demand will decrease.
The law of demand states that, other things equal, when the price of a good
falls, the quantity demanded of the good rises.
5 factors of demand
income, price, tastes and preferences, prices of related goods and services, and expectations
An increase in the price of a good will
increase quantity supplied.
Refer to Figure 2-3. This economy cannot currently produce 60 windows and 80 doors because
it does not have the resources and technology to produce that level of output.
Four factors of supply
natural conditions, input prices, technology, and government
The production possibilities frontier provides an illustration of the principle that
people face trade-offs.
A demand schedule is a table that shows the relationship between
price and quantity demanded.
When is there a surplus?
price is above equilbrium
The market demand curve
shows how the total quantity demanded of a good varies as price varies.
Incentive is...
something that induces a person to act
Suppose roses are currently selling for $30 per dozen, but the equilibrium price of roses is $20 per dozen. We would expect a
surplus to exist and the market price of roses to decrease.
An economy's production of two goods is efficient if
the economy is producing at a point on the production possibilities frontier.
Scarcity
the limited nature of society's resources
The bowed-outward shape of the production possibilities frontier can be explained by the fact that
the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.
What is economics?
the study of how society manages its scarce resources
What is microeconomics?
the study of individual units that make up the economy
The opportunity cost of buying a good is
the value of the next-best alternative you could have purchased
Trade -
the voluntary exchange of goods and services between two or more parties, both parties are at least as better off as before trade
The market starts in equilibrium. If the supply of a product increases, then we would expect equilibrium price
to decrease and equilibrium quantity to increase.
Trade-off means
to get one thing you want, you usually must give up another thing you want
Scarcity means
we have to choose
A double coincidence of wants refers to
when each party in an exchange transaction has what the other person desires
The quantity demanded of a good is the amount that buyers are
willing and able to purchase.
Without trade,
you would have to produce everything you consume
