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