Micro Econ mid sets 1 and 2 and 3 and 4 and 5

Economics

The study of how society manages its scarce resources to satisfy unlimited wants.

Efficiency

The property of society getting the maximum benefit from its scarce resources.

Opportunity cost

The value of the next-best alternative that must be given up when making a decision.

Calculation for opportunity cost

$$\frac{\text{Quantity of good given up}}{\text{Quantity of good gained}}$$

Production possibilities frontier (PPF)

A graph showing the maximum combinations of two goods an economy can produce given available resources and technology.

Construction of a linear PPF using labor hours

Calculate the maximum output of each good using all available labor, plot these endpoints on the axes, and connect them with a straight line.

Absolute advantage

The ability to produce a good using fewer resources, or to produce a larger output with the same resources, relative to another producer.

Comparative advantage

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

Sequential economic chain from scarcity to trade

Scarcity $\rightarrow$ choice $\rightarrow$ opportunity cost $\rightarrow$ comparative advantage $\rightarrow$ specialization $\rightarrow$ trade.

Absolute advantage

The ability to produce a good using fewer resources, or to produce a larger output with the same resources, relative to another producer.

Comparative advantage

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

Distinction between absolute and comparative advantage

The former evaluates relative productivity, whereas the latter evaluates relative opportunity cost.

Economic rationale for specialization

Total output increases when producers allocate resources to goods in which they hold a lower opportunity cost.

Primary advantage of specialization and trade

Enables individuals or economies to consume combinations of goods beyond their individual production possibilities.

Sequential economic chain from scarcity to trade

Scarcity $\rightarrow$ choice $\rightarrow$ opportunity cost $\rightarrow$ comparative advantage $\rightarrow$ specialization $\rightarrow$ trade.

Market

A group of buyers and sellers of a particular good or service.

Law of demand

The principle that, ceteris paribus, as the price of a good rises, the quantity demanded falls.

Quantity demanded

The amount of a good or service that buyers are willing and able to purchase at a specific price.

Cause of movement along a demand curve

A change in the good's own price.

Cause of a shift in the demand curve

A change in any non-price determinant of demand.

Effect of a decrease in the number of buyers

Demand decreases, causing the demand curve to shift to the left.

Normal good

A good for which demand increases when consumer income increases.

Inferior good

A good for which demand decreases when consumer income increases.

Substitute goods

Goods used in place of each other, where a price drop in one reduces demand for the other.

Complementary goods

Goods used together, where a price drop in one increases demand for the other.

Law of supply

The principle that, ceteris paribus, as the price of a good rises, the quantity supplied rises.

Cause of movement along a supply curve

A change in the good's own price.

Determinants of supply curve shifts

Changes in input prices, technology, expectations, or the number of sellers.

Market supply curve

A graph representing the total quantity supplied by all sellers in a market at each price.

Market equilibrium

The point where quantity demanded equals quantity supplied.

What is a shortage?

Quantity demanded is greater than quantity supplied

What is a surplus?

Quantity supplied is greater than quantity demanded.

What causes a shortage?

A price below equilibrium creates it.

What causes a surplus?

A price above equilibrium creates it.

If demand increases, what happens to equilibrium price?

Equilibrium price increases.

If demand increases, what happens to equilibrium quantity?

Equilibrium quantity increases.

If demand decreases, what happens to to equilibrium price?

Equilibrium price decreases

If supply increases, what happens to equilibrium price?

Equilibrium price decreases?

If supply increases, what happens to equilibrium quantity?

Equilibrium price increases.

If supply decreases, what happens to equilibrium price?

Equilibrium quantity decreases.

If supply decreases, what happens to equilbrium quantity?

Equilibrium quantity decreases.

What is elasticity of demand?

How much quantity demanded responds to a change in price.

What does elastic demand mean?

Quantity demanded changes substantially when price changes.

What does inelastic demand mean?

Quantity demanded changes only slighty when price changes.

What makes demand more elastic?

Having many close substitutes.

What makes demand less elastic?

Having few or no close substitutes.

What happens to quantity demanded when price rises?

Quantity demanded falls, following the law of demand.

What is willingness to pay?

The maximum amount a buyer is willing to pay for a good.

What is consumer surplus?

Willingness to pay minus the price actually paid.

How do you find total consumer surplus?

Add each buyer’s consumer surplus, or find the graph’s surplus area.

What is producer surplus?

The amount a seler is paid minus the cost of production.

What is cost of production?

The value of everything a seller must give up to produce a good.

How do you find total producer surplus?

Add each seller’s surplus, or find the graph’s surplus area.

What does consumer surplus appear above?

The price and below the demand curve.

What does producer surplus appear below?

The price and above the supply curve.

When can a triangle area be used on a surplus graph?

When the surplus region forms a triangle.

What is the formula for a trinagle’s area?

Area = ½ x base x height.

What is a negative externality?

An uncompensated cost imposed on a bystander by someone else’s action.

What is a positive externality?

An uncompensated benefit received by a bystander from someone else’s action.

Rational People

Systematically and purposefully do the best they can to achieve their goals, given the available opportunities.

Incnetive

Something that induces a person to act

Price elasticity of Demand formula calculation

Percent change in Quantity Demanded Divided by Percentage change in Price.