Microeconomics MIDTERM 1
Revenue formula
Price x Quantity
Equilibrium
Quantity demanded is exactly equal to quantity supplied (If market is not in equilibrium, price changes to bring supply and demand into balance)
Marginal Product of Labor
What is the increase of output from hiring one extra worker? Change in Q/Change in L
Willingness to pay
What is the most I am willing to pay to get this benefit (or avoid that cost)?
Substitutes in production
alternative products that a firm could produce
2 factors analysts keep in mind to create most accurate demand estimates
existing competition in market, consumer demographic information
Perfectly Competitive Market
firm cannot influence market price 1) identical good 2) many buyers and sellers (each of whom is small, relative to the market size)
Complements in production
goods that are produced together
Quantity demanded vs. demand
shift among curve vs. shift in curve (PRICE CHANGE triggers a change in quantity demanded, not demand)
4 step process to estimate market demand
1. Survey 2. For each price, add up total quantity demanded by all customers 3. Scale up the quantities to represent the whole market 4. Plot the total quantity demanded at each price, yielding the market demand curve
6 things shift demand curve
1. income 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects (individual demand curve) 6. the type and number of buyers (market demand curve)
Factors that shift supply curve
1. input prices 2. productivity/technology 3. prices of related outputs 4. expectations 5. type and number of sellers
Variable costs
A cost that varies with the level of output
Inferior good
A good for which higher income causes a decrease in demand
Individual Supply Curve
A graph plotting the quantity of an item that a business plans to sell at each price.
Market Demand Curve
A graph plotting the total quantity of an item demanded by the entire market, at each price.
Market Supply Curve
A graph plotting the total quantity of an item supplied by the entire market, at each price.
Individual Demand Curve
A graph that plots the quantity of an item that an individual plans to buy at each price
Either/or question
Answer is yes/no
Income increases
Buy less inferior goods
Rational Rule for Buyers
Buy more of an item if its marginal benefit is greater than (or equal to) the price ; keep buying until MB = Price
Marginal Product of Capital (K)
Change in Q/Change in K
Opportunity cost principle
Consider the trade offs of your decisions The true cost of something is the net best alternative you must give up to get it
Cost-benefit principle
Costs and benefits are the incentives that shape decisions
Fixed cost
Costs that are constant whatever the quantity of goods or services produced (Should not be included in opportunity costs)
Diminishing Marginal Benefit
Each addition item yields a smaller marginal benefit than the previous item (not negative, just less); explains why demand curve is downward sloping
Marginal principle
Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.
Opportunity cost principle note
Enforces that you need to ignore sunk costs. Money you can't get back- irrelevant. You need to think, what is the best choice to make now?
Substitutes
Goods that can replace each other (pepsi and coke)
Complements
Goods that go well together (coffee and milk)
Ceteris paribus
Holding everything constant
PPF note
If economy is using resources efficiently, more of one good can only be produced if the other is given up
Second set of interdependencies
Is between businesses or people in the same market (between my coffee shop and my competition)
First Interdependencies
Is between each of my individual choices (If I stay open late or if I give barista lessons)
Third set of interdependencies
Is between markets (when museums stay open late, affects my business)
Supply curve = MC curve
MB curve= demand curve
Marginal principle note
MB= MC
Benefit of one more unit
Marginal benefit (exceeds the cost)
Marginal benefit and demand curve
Marginal benefit and demand curves are one and the same
Fourth set of interdependencies
Occurs over time (Choices I make today affect what I'll be able to do in the future, and my expectations about the future shape the choices I make today)
Price decreases
People buy more of it because some new people may be willing to enter the market
Sunk costs
Refers to the money you have spent that you can't get back
Scarcity
Resources are limited: therefore, any resources you spend pursuing one activity leaves fewer resources to pursue others
Rational Rule for Sellers
Sell one more item if the marginal revenue is greater than (or equal to) marginal cost.
Production Possibilities Frontier (PPF)
Shows the different sets of output that are attainable with your scarce resources
Marginal Product
The increase in output that arises from an additional unit of an input
Economic surplus
The total benefits minus the total costs flowing from a decision. It measures how much a decision has improved your wellbeing
Law of Demand
We want more of something when the price is lower (When price goes up, we buy less)
Framing effect
When a decision is affected by how a choice is described or framed
Congestion Effect
When you want to buy something less because a lot of other people are also using it
Network effect
When you want to buy something more because other people are also using it
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.
Framing effect note
Your choice should depend only in cost and benefit of an item, not irrelevant things like how much it cost in the past
Price Taker
a buyer or seller that is unable to affect the market price
Normal good
a good for which higher income causes an increase in demand
ECONOMICS
is the study of choices (a way of thinking)
Diminishing Marginal Product
the MP of an input declines as you use more of that input
Marginal cost
the additional cost of producing one more unit
Law of Supply
the tendency for the quantity supplied to be higher when the price is higher
PPF slope
y2- y1/ x2- x1