Microeconomics Exam I

Core principles

- scarcity principle - cost-benefit principle - incentive principle - principle of comparative advantage - principle of increasing opportunity costs - equilibrium principle - efficiency principle

Excess Supply and Demand

- when the market price exceeds the equilibrium price, the market is said to be characterized by excess supply (surplus) - when the market prices lies below the equilibrium price, the market is said to be characterized by excess demand (a shortage)

supply

A stock of a resource from which a person or place can be provided with the necessary amount of that resource.

sunk cost

a cost that is beyond recovery at the moment a decision must be made

the shift from the "Old" to the "New" line in the accompanying graph represents:

a decrease in the vertical intercept - a decrease in the vertical intercept of a line is represented by a downward parallel shift

Economists believe that scarcity is

a fundamental fact of life for everyone

variable

a quantity that if free to take on different values

Efficiency

an outcome is said to be efficient if no one could be made better off without making someone else worse off

when assessing the costs and benefits associated with taking an action, it is generally best to consider costs and benefits:

as absolute dollar amounts rather than proportions

the total cost of carrying N unites of an activity divided by N is the activity's

average cost

a quantity that is fixed in value is know as a:

constant

trade

decisions about how much of each good to produce and trade ultimately come down to the relationship between opportunity costs and relative prices

in the graph of a straight line, the vertical intercept is the value taken by the:

dependent variable when the independent variable is equal to zero

independent variable

determines the value of another variable in an equation

when making decisions, people sometimes make mistakes because they:

fail to consider implicit costs

if someone is rational, then they

have well-defined goals that they try to fulfill as best they can

Equilibrium

in the market occurs at the price-quantity pair for which both buyers and sellers are satisfied

in standard economic models, a rational person

makes choices by weighing the extra benefits of an action against its extra costs

economists believe that people

never have enough time, money or energy to do everything or have everything they want

Common decision pitfalls

pitfall 1: ignoring opportunity costs pitfall 2: measuring costs and benefits as proportions rather than absolute dollar amounts pitfall 3: failing to ignore sunk costs pitfall 4: failing to understand average vs. marginal costs and benefits

economic surplus

refers to the benefit of taking any action minus its cost

when deciding whether to take an action, sunk costs should...

should be ignored

Cost-Benefit Principle

states that a rational individual/firm/society should pursue an action if the extra benefits from taking that action outweigh the extra costs.

production possibilities curve

tells us about how much of one good must be traded off to produce more of the other good

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

the cost-benefit principle states that an individual or society should take an action if, and only if

the extra benefits from taking the action are at least as great as the extra costs

marginal cost

the increase in total benefit that results from carrying out one additional unit of the activity

demand

the quantity of a good or service that consumers are willing and able to buy

Opportunity Cost (OC)

the value of the next-best alternative activity or opportunity that must be foregone