DE: Microeconomics (ch 1-4)

assumption of human behavior

People are rational, self-interested, and respond to incentives

Ceteris Paribus

“All other things are held constant”

efficiency

How well resources are allocated (distributed for a purpose) to produce goods and services with lowest the cost

equity

Fairness in outcome and didtribution of resourced (for the people)

positive analysis

Questions and statements used to analyze facts

(Ex. What is the cost of funding public colleges?)

normative analysis

Questions and statements involving opinions or norms to decide matter

(Ex. Should education be publicly funded?)

(8 Key Principles) Scarcity

Unlimited wants conflict with limited resources. Decisions must be made to accomodate.

(8 Key Principles) Tradeoffs and Opportunity Costs

Every choice incolves guving up something else. Opportunity cost is the value/ price if the next best alternative.

(8 Key Principles) Gains from specialization

Everyone benefits from specialization of labor best suited to them, then trading with eachother

(8 Key Principles) Incentives

People respond predictably to good or bad incentives

(8 Key Principles) Thinking on the margin

National decision-making requires comparing the marginal benefit (the satisfaction and goodness) to the marginal cost (the extra cost) of an extra unit.

(8 Key Principles) Market efficiency and failures

Competitive markets generally lead to efficient resource allocation, as they are guided by the invisible hand, but market failures require government intervention

(8 Key Principles) Macroeconomic policy goals

Exonomic growth, low unemployment, and low inflation. These tend to be in conflict

(8 Key Principles) Institutions and wealth

Institutions (a legal and legidtlativr system to protect businesses and individuals) and human creativity are the basis of national wealth

the three basic economic questions

What goods and services will be produced?

How will these goods and services be produced?

Who will recieve the goods and services produced?

economic systems

Capitalist/ market economies: private individuals/ firms own the resources, the gov protects rights

Planned/ command economies: the government owns most of the resources

factors of production

Land, labor, capital, entreupreneurial ability (human talent for taking risks and being innovative)

production efficiency

When goods are produced at the lowest cost (aka. When the max output possible with the guven resources is produced)

allocative efficiency

When goods produced represent the output combination most desired by society

Comparative advantage

You already know

PPC

You already know

change in quantity demanded

A movement ALONG the curve because of a change in price

(Change in demand is caused by other determinants and moves the curve)

Determinants of demand

Income, price of related goods, taste and preferance, number of buyers, expectations

(Determinants) income

Normal goods: demand increases when income increases

Inferior goods: demand decreases when income increases

(Determinants) Prices of related goods

Substitutes: when the price of goods A increases, demand for good B increases

Complements: when the price of good A increases, the demand for good B decreases

(Determinants) Expectations

If prices are expected to increase or shortages are expected to occur, demand will increase.

If surpluses or decreased prices are expected, demand will decrease

Determinants of Supply

Production technology, cost of resources, prices of related commodoties, expectations, number of sellers, and tax and subsidies

(Determinants of supply) expectations

If sellers expect future prices to rise, they sre likely to restrict supply to recieve higher prices in the future

If prices are expected to lower, the will sell as much as they can while they can esrn the most revenue

consumer surplus

The difference between what consumers are willing to pay and the actual market price

(Calculate the triangle above the equilibrium price line and below demand line)

producer surplus

The difference between the actual price recieved by suppliers and the minimum price the supliers are willing to produce/sell at.

(Calculate the triangle above the supply line and below the equilibrium price line)

total surplus

Consumer surplus + producer surplus

This is maximized at equilibrium, aka peak efficiency

deadweight loss

Reduction in economies when not in equilibrium (due to market inefficiencies)

(Calculate the triangle between the initial price/ quantity and the current)

asymmetric information (causes market failure)

When one party during a transaction has better/more information than the other party

(leads to prices too high or too low)

extrrnalities (causes market failure)

External benefits (ex. Someone else getting a flu shot automatically benefits you)

External costs (ex. Pollution from car or other transports)

public goods (causes market failure)

When goods are nonrival (meaning someone using the product doesn’t decrease it for another person, like tv shows) and nonexcludable

(when people can’t be excluded from it once it’s provided)