Micro 1

How does an increase in the price of a good affect the demand for its complement? How about its substitute? Give examples of goods that are complements. Give examples of goods that are substitutes.

A complement refers to a complementary good or service used in conjunction with another good or service.

What is the opportunity cost of working on this study guide?

It's not too high, considering it will take me about 3 hours and I could be working in that time so maybe $30

Why does the demand curve slope downward?

Its downward slope reflects the law of demand—people buy more of a product, service, or resource as its price falls. The relationship between price and quantity demanded is inverse (or negative)

Why does the supply curve slope upward?

Suppliers are generally willing to offer more goods and services at a higher price and fewer at a lower price

Illustrate on a graph what a simultaneous increase in supply and decrease in demand looks like. Can you say for certain what will happen to the equilibrium price and/or quantity? If not, what additional information do you need to answer that question?

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Illustrate on a graph what an increase in demand looks like. Describe what happens to the equilibrium price and quantity in the market after the increase in demand. How is this different from a decrease in demand?

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Does having an absolute advantage in everything mean that you should undertake to produce everything on your own? Why or why not?

Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than another entity that produces the same good or service. An entity with an absolute advantage can produce a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another entity producing the same good or service.

Describe the difference between inferior goods and normal goods. Give an example of each type of good.

An inferior good is a type of good that declines in demand when income rises. These could be items such as generic foods, off-brand electronics, and discount store clothing. In contrast to inferior goods are normal goods. A normal good acts just the opposite of an inferior good; demand increases when income increases.

Does a price change cause a movement along a demand curve or a shift of the entire curve? What factors cause the entire demand curve to shift?

Changes in factors like average income and preferences can cause an entire demand curve to shift right or left. This causes a higher or lower quantity to be demanded at a given price.

Does a price change cause a movement along a supply curve or a shift of the entire curve? What factors cause the entire supply curve to shift?

Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price. The ceteris paribus assumption: Supply curves relate prices and quantities supplied assuming no other factors change.

Why does comparative advantage matter more than absolute advantage for trade?

If one country has a comparative advantage over another, both parties can benefit from trading because each party will receive a good at a price that is lower than its own opportunity cost of producing that good.

A basic principle of economics is that people respond to incentives. Explain how this relates to rational decision making.

Incentive is something that induces a person to act [by offering rewards to people who change their behavior]. Because rational people make decisions by comparing costs and benefits, they respond to incentives.

Explain how marginal thinking works. How do people decide on the margin to do more or less of something?

Marginal thinking is thinking about how much extra resources are worth. If you have no bananas, and you get a banana, it's worth a lot more to you than if you already had a million of them.

Why do economists say that there is no such thing as a free lunch?

The economic theory, and also the lay opinion, that whatever goods and services are provided, they must be paid for by someone - that is, you don't get something for nothing.

Evaluate the following statement: "Trade is like football: one team wins and the other loses."

This is not true. Trade creates value; both sides are better off as a result. Trade, unlike football, is not a zero-sum game. Consider the following example. You and your friend go trick-or-treating. Your friend loves Reese's cups but doesn't care for M&Ms. In contrast, you really love M&Ms and don't really care for Reese's cups. If you trade one of your Reese's cups for one of your friend's M&Ms packets, you are both better off. In fact, you wouldn't bother to make the trade if you weren't made better off. Trade is not like football; in trade, both sides win.

What happens to the market price when there is a market surplus? What happens to the market price when there is a shortage in the market? Illustrate both scenarios on a graph.

When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.

Describe the process that leads a market toward equilibrium.

When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

What criteria would you use to determine which of two workers has a comparative advantage in performing a task?

Whoever gives up less of one thing in order to produce the other

What is economics? What is the difference between microeconomics and macroeconomics? How are they related to one another?

the branch of knowledge concerned with the production, consumption, and transfer of wealth. Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole.