Microeconomics 1.1-1.6

Economics

Study of scarcity and choice

Positive economics

economic questions that have right/wrong answers

Normative economics

Economic analysis that is opinion and open to interpretation

Macroeconomics

looking at the whole economy

Microeconomics

study of how individuals, households, and firms make decisions + how those decisions interact

Resource

factor of production - anything that can be used to produce something else

Types of Resources

• Land - came from nature

• Labor - effort of works

• Capital - goods used to make other goods/services

• Entrepreneurship - efforts taken to organize resources for production

Types of Capital

• Human capital - knowledge gained through education/experience

• Physical capital - tools, factories, buildings

Marginal analysis

Study of the costs and benefits of doing a little more of an activity vs. a little less

Marginal benefit

what is gained when something is done once more

Traditional Economy

• production and consumption based on precedent and tradition

Market Economy

• capitalist

• trade

• provide goods/services to others to receive goods/services in return

• needs protection of property rights

Command Economy

• factors of production are publicly owned

• communist/socialist

• government controlled

Mixed Economy

• combines elements of traditional, market, and command economies

Law of Diminishing Marginal Utility

More of something is consumed —> less satisfaction/utility

When to stop consuming

• consume until marginal benefit = marginal cost / marginal cost exceeds marginal benefit

Optimal Consumption Rule/Utility-Maximizing Rule

Mux/Px=Muy/Py

Budget Line

Absolute Advantage

• producer with most outputs OR requires the least amount of inputs (resources)

Comparative Advantage

• producer with lower opportunity cost

Output

• Output question: amount of inputs (time, workers) are the same; only the output is different

• OOO —> other number over

Input

• Input question: amount of outputs (cars, planes, corn) are the same; only the input is different

• IOU —> other number under

Terms of Trade

• The agreed upon conditions that would benefit both countries

• Find terms of trade: in the middle of the opportunity costs

Utility

• how satisfaction is measured

• units: utils

Firms vs. Consumers

• firms: maximize profit

• consumers: maximize utility

Explicit Costs

• traditional out of pocket costs associated with making a decision

  • ex: price of a movie ticket

Implicit Costs

• opportunity costs of making a decision

  • forgone time/wage that could have been earned instead of going to the movies

Sunk Costs

• cost that can not be recovered —> should not impact decision-making

What causes a shift inwards/outwards on the PPC?

• change in resources —> depletion or increase

  • natural disaster, amount of workers (unemployed/employed), new technology, etc

• specialization does NOT cause a shift outwards

Net Benefit

Total benefit - total costs