Microeconomics Exam 1 Study Guide
Market Equilibrium
Intersection of Supply and Demand
Consumer Surplus
The value the consumer gets from buying a product less than what they are willing to pay
Shift Factors of Demand
1. Change in society's income 2. Prices of substitutes/ complements 3. taste/preferences 4. Expectations 5. Taxes and Subsides
Shift Factors of Supply
1. Costs of inputs 2. Technology 3. Expectations 4. Taxes/Subsides
Demand
1. Willingness and ability to consume 2. Schedule of quantities demanded at various prices at a specific period of time
Supply
1. Willingness and ability to produce something and bring it to the market for sale 2. Schedule of all quantities supplied at various prices at a specific time
Efficiency
Achieving a goal as cheaply as possible
Marginal Analysis
Additional cost or benefit of consuming one more
Socialism
An economic system based on individuals' goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce
Market Economy
An economic system based on private property and the market in which, in principle, individuals decide how, what, and for whom to produce
Economics Policies
Are actions (or inaction) taken by the government to influence economic actions
Increasing Opportunity Cost
As you produce more and more of something, you have to give up more of something else
Comparative Advantage
Better suited to the production of one good than to the production of another good
Sunk Cost
Costs that have already been incurred and cannot be resolved or recovered
Perfectly Elastic
Enormously responsive to change in price (E= ∞)
Income Elasticity of Demand
How responsive quantity demand is to a change in income. Percent change in Quantity Demanded divided by percent change in price
Elastic
If the percentage change in quantity is greater than the percentage change in price (E>1).
Inelastic
If the percentage change in quantity is less than the percentage change in price (E<1)
Price Elasticity of Supply
Is the percentage change in quantity supplied divided by the percentage change in price
Technology
Methods used to produce something- techniques of production
Unit Elastic
Percent change in demand is equal to the change in price (E=1)
Key Decision Making Mechanisms
Price and Trade
Mercantilism
Prior to market economy, economic system focused to bring wealth to the nation state
Perfectly Inelastic
Quantity does not respond at all to price change (E=0)
Marginal Benefit
The additional benefit above what you have already derived
Art of Economics
The application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics
Opportunity Cost
The benefit that you might have gained from choosing the next best alternative
Scarcity
The goods available are too few to satisfy individuals' desires
Price Elasticity of Demand
The percentage change in quantity demanded divided by the percentage change in price.
Invisible Hand
The price mechanism, the rise and fall of prices that guides our actions in a market. Idea from Adam Smith "Father of Capitalism"
Producer Surplus
The price the producer sells a product for less than the cost of producing it
Microeconomics
The study of individual choice, and how that choice is influenced by economic forces
Macroeconomics
The study of the economy as a whole (aggregate)
Positive Economics
The study of what is and how the economy works
Normative Economics
The study of what the goals of the economy should be
Rule of Law
To govern private property
Consumer Sovereignty
Ultimately through spending decisions- households determine what will be produced
Inferior Goods
a. E <0
Normal Goods
a. Luxury (E >1) b. Necessity (0<E <1)
Capitalism
an economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists
Production Possibility Model
conveys the tradeoffs involved in a choice of a what to produce
Economics
the study of how human beings coordinate their wants and desires given the decision making mechanisms, social customs, and political realities of the society
Law of Supply
↑ Price, ↑ Quantity Supplied ↓ Price, ↓ Quantity Supplied
Law of Demand
↓ Price, ↑ Quantity Demanded ↑ Price, ↓ Quantity Demanded
Ways Business can be Organized
● Sole Proprietorship- one owner ● Partnerships- 2 or more owners ● Corporation- legally owned by stockholders, limited liability ● B Corporation- Social Mission
Central Problems
● What, and how much, to produce ● How to produce it ● For whom to produce it