module 1-3 microeocnomics - eubanks

microeconomics

the study of the economy at a small-scale level (individuals)

macroeconomics

the study of the economy at a large scale level (total output)

aggregate

total (mostly in macroeconomics

resources

the inputs used to produce goods and services

1. land

2. labor

3. capital

4. entrepreneurial ability

land

all natural resources used in production

labor

all physical & mental activity in producing goods & services

capital

the tools, machinery, money, and knowledge used to produce goods and services

1. physical - machinery & tangible items

2. human - knowledge, and skills people acquire to increase productivity

entrepreneurial ability

the ability to coming the factors of production to produce goods & services

scarcity

the inability of limited resources to produce unlimited wants

relative scarcity

the comparison of the scarcity of one good to that of another (ex. drinkable water)

allocation

the process of assigning a good, service or resource to 1 purpose instead of another

opportunity costs

the value of the next best alternative (exists because of scarcity)

rational decision making 3 concepts

1. self-interest

2. marginal-decision making

3. optimization

marginal benefit (MB)

the additional BENEFIT associated with one more unit of activity

(MB = change in total benefit / change in quantity)

marginal cost (MC)

the additional COST associated with one more unit of activity

(MC = change in total cost / change in quantity produced)

marginal decision making

the process of making choice in increments by evaluating MC versus MB

rules of optimization

1. MB > MC, do it

2. MB < MC, don’t do it

decreasing marginal benefit

the NEGATIVE relationship between the MB association with the use of a good and the quantity consumed

increasing marginal cost

a condition where the additional cost associated with each unit of activity increases the marginal value

optimal level of output

the level of output where the marginal benefit = marginal cost

level of activity increase… (results)

1. Marginal benefit decreases

2. Marginal cost increases

production possibilities schedule

the TABLE that shows the possible combinations of 2 different goods or services that can be produced

production possibilities frontier (PPF)

a GRAPH that shows the possible combinations of 2 different goods & services that can be produced

constant opportunity costs

a characteristic of production where the opportunity cost does not change at every level of production

efficient allocation of resources

resources used in a way that is possible to increase the production of one good by ONLY decreasing the production of another

inefficient allocation of resources

resources being used in a way where it is possible to increase the production of one good while NOT decreasing the production of another (do more)

terms of trade

sellers opportunity costs < price < buyers opportunity cost

• must benefit both parties

• does not have to be monetary

• creates the willingness to trade

gains from trade

the benefits that a buyer or seller gets as a result of trade

comparative advantage

the ability to produce a good or service at a lower relative opportunity cost than another producers

• it’s easier to produce oranges in Florida than in Alaska

specialization

the practice of using available resources to reduce a single good or service rather than multiple goods and services

• increases the overall production

• whoever has the lowest opportunity cost & the comparative advantage

law of increasing opportunity costs

economic principle that says some resources are better suited to producing one good or service than other

• as the production of a good rises, the opportunity cost of each additional unit rises

circular flow model

describes how goods, services, resources, and money flow back and forth in an economy

• households: give labor through the resource market (input of production ) get income payments

• firms: use inputs of production to make goods and services to create products & provide a market where households can spend their income

market

any place where buyers and sellers interact to trade goods, services and resources (formal or informal)

good

a tangible produce that consumers, firm or governments wish to pruchase

service

an often intangible product or action that consumers wish to purchase

prices for buyers

_____ show the willingness and ability to BUY the produce

prices for sellers

______ show the willingness and ability to sell

competition from SELLERS

causes prices to go lower

competition from BUYERS

causes prices to go HIGHER

law of demand

as the price of a good rises, the quantity demanded will decrease (inverse relationship)

demand schedule

a TABLE representation of the relationship between the price or a good and the amount that buyers are willing and able to buy

demand curve

a GRAPH representation of the relationship between the price of a good and the amount buyers are willing and able to buy

• price is always y axis, quantity demanded is x axis

  • “demand goes down”

quantity demanded

the amount of a good that consumers are willing and able to buy at a given price

income effect

the change in the price of a good, changes the amount that people are able to buy

• as price decreases, purchasing power increases and consumers can buy more goods

• as prices increase, purchasing power decreases and consumers can not afford as many goods

substitution effect

the price change of one god impacts the demand of another

• as the price of one god increases, the demand for its substitute will increase

market demand

the OVERALL demand for a good

• represented by the horizontal sum of all of the quantities demanded by individuals at different prices

change in demand

consumers are more/less willing to buy a product as EVERY price

• increase → right

• decrease → left

• something other than price changes (ex. company gets exposed and no one wants to shop there)

normal good

a good where there is a DIRECT relationship between demand and income

• increase in income → increase in the demand

• ex: clothing

• cause demand curves to shift RIGHT

inferior good

a good where there is an INVERSE relationship between demand for the good and income

• increase in income → decrease in demand

• ex: microwave dinners

• cause demand curve to shift left

tastes & preferences

the perception of desirability associate with consuming a good

substitutes

goods and services that can be viewed as replacements for one another

• A decrease in the price will cause a decrease in demand of replacement, causing a shift to the right

• increase in the price will cause increase in demand of the other good, causing shift to the left

complements

goods/ services that are used WITH each other (chips and salsa)

• decrease in the price of one good will cause an increase in the demand for both → a shift to the right

• increase in price of one good will cause decreases in demand for both → shift to the left

law of supply

as the price of one god rises, the quantity supplied will increase, all else held constant

• direct relationship

  • producers are more willing and able to increase the quantity of items they supply to the market if they have more money

diminishing marginal productivity

principle that as long as at least 1 input of production is fixed, the marginal productivity of additional resources will eventually fall

• ex: too many cooks in one kitchen → you can either get a bigger kitchen or fire some cooks

supply schedule

a TABLE representation of the relationship between the price of a good and the quantities producers are willing and able to give

supply curve

a GRAPHICAL representation of the relationship between the price of a good and the quantity producers are able to give

• slopes up

• direct relationship

• price is the y axis, quantity is the x axis

market supply

the OVERALL supply of a good

• the horizontal summation of all of the quantity supplied at different prices

movement along the supply curve

change in the quantity supplied of a good due to a change in price

• along the existing line

change/shift in supply

something other than price causes the entire supply curve to shift left or right

subsidy

a payment made BY the government TO businesses → supply curve shifts to the right

tax

a payment TO governments BY businesses → supply curve shifts left

• collected from individuals and firms

tax to consumers

cause a shift in the demand curve & impact the willingness to purchase a product

taxes to businesses

shift the entire supply curve left

• producers do not want to pay as much, so they produce less

technology

the knowledge, inventions and innovations that can potentially increase productivity

• better tech → decrease production cost →supply increase → shift right

seller expectations

anticipated future outcomes associated with the supply of a good

• expecting lower future prices → curve shift right

• expecting higher future prices → curve shifts left