ACTUAL ACTUAL micro economics review

Economics

How people use limited resources to satisfy unlimited wants

3 main factors

land = natural resources
labour = human work/effort
capital = machinery, tools, buildings, equipment

Goods, services, production, and consumption

Goods = physical/tangible things
Services = things done for you
Production = making goods/services
Consumption = using them

Scarcity

We don’t have enough resources to have everything we want, because they are scare we must choose. Because we must choose, we must give something up. That thing becomes your opportunity cost.

Opportunity cost

Value of the next best thing you give up when making a choice.

Production Possibility Boundary

Everything the economy is capable of producing with its current resources.
On PPB it is attainable and the resources are fully used. Inside PPB is attainable, but inefficient. Outside means it is unattainable. PPB shifts outward means economic growth. Moving along the PPB shows the opportunity cost: producing more of one thing means sacrificing another.

Microeconomics

Small. Individual products. Firms, prices, and markets.

Macroeconomics

Whole economy. Total output, unemployment, economy growth.

Incentive

Something that encourages or motivates individuals to change their behaviour.

Specialization

People specialized in goods/services

Division of labour

production broken into specialized tasks

Traditional economy

customs/traditions decide what happens

Command economy

Government/planners decide what happens

Free-market economy

Buyers/sellers decided. Capitalism. Demand and supply balance each other out.

Mixed economy

Some market activity with some government involvement

Positive Statements

Something that can be tested with facts

Normative Statements

Opinion/value judgement about what should happen

Variable

Somethings whose value can change

Correlation

Two variables move together. A correlation does not imply causation.

Causation

Something that actually caused the two variables to move together.

Cross-sectional data

Data collected at a single point in time across multiple subjects or entities.

Time series data

One variable measured overtime

Demand

How much consumers want to buy during a period of time

Demand shift vs. movement

If products OWN PRICE changes = movement along the demand curve.

If anything else changes = shift in demand

Normal vs. Inferior Goods

Normal = Income goes up, demand goes up.

Inferior Good = Income goes up, demand goes down.

Substitutes vs. complements

Substitutes = Goods that can replace the other. i.e. Coke vs. Pepsi

Complements = Things used together. Cars and gasoline

Supply

How much producers WANT to sell

Elasticity

Measures the responsiveness of demand or supply to price changes.

Elastic vs. Inelastic

Elastic = Consumers react a lot to price changes.

Inelastic = Consumers don’t react at all.

Price floor

Minimum legal price. Above the equilibrium point

Price ceiling

Maximum legal price. Below equilibrium point.

Utility

Satisfaction

Total utility

Total satisfaction from everything

Marginal utility

Extra satisfaction from one extra consumed

Diminishing utility

The more you have, the less exciting/useful the next one is

Substitution effect

Cheaper or more expensive than alternatives. Price of X goes down, sub towards X. Price of X goes up, sub away from X.

Income effect

Real purchasing power. If something is cheaper, buy more stuff.

Indifference curve

Every point on the curve means they all have the same utility/satisfaction to the consumer.

Marginal rate of substitution

How much you are willing to give up while staying happy

Budget line

Everything you can afford with your income.

On line = spend all income.

Inside = Affordable

Outside = Cannot afford

Equity

Ownership. Shares resources evenly among others → Owners/shareholders → Receive dividends

Explicit cost

Actual monetary costs. I.e. wages, rent, materials, interest, etc.

Implicit costs

Opportunity cost. Where no payment occurs. Relates to your own time/money.

Short run vs. long run

Short run = least one input is fixed.

Long run = all inputs can change, but technology is fixed

Very long run = input and technology can change

Law of diminishing returns

If you keep adding more workers to the same fixed amount, each worker contributes less extra output

Principal of substitution

If one input gets more expensive, firms replace it with something cheaper.

Market power, perfect competition, and price taker

Market power = Ability to influence price.
Perfect competition = Zero market power. Everyone equal.

Price taker = Accepts the market price

Monopoly

A market structure where a single firm dominates the market with no close substitutes for its product, giving it significant control over prices.

Cartel

Firms cooperate and behave like a monopoly. Every member has incentive to cheat, but if everyone cheats, the cartel falls apart.

Price discrimination

Charging different consumers different prices for reason not explained by different costs.

Equilibrium point

Where supply and demand meet.

Equilibrium curve

The meeting point of the supply and demand curves in economics