Microeconomics

3 Big Ideas of economics

Rationality, Marginality, and Incentives

Rationality

weighing benefits and cost to make the best decision

Marginality

weighing EXTRA benefits and cost, ignoring sunk cost

Incentives

market signals influences consumer behaviors

2 Economic Assertions

Positive Statements (what is) and Normative Questions (what ought to be)

Efficiency Methods

productive and allocative

Productive Efficiency

least cost methods

Allocative Efficiency

production mirrors preferences, MB=MC of last unit produced

Home security example

Marginal Benefit falls as more methods are introduced, whereas the cost increases, find the equilibrium

Equity

fair distribution of income/economic benefit (subjective)

Technological Process

new production or processes

3 types of economic goals

Efficiency, Equity, and Technological Progress

Marginal Opportunity Cost

value of next-best alternative sacrificed when a choice is made

Production Possibilities Model

Natural Resources, Labor, Capital, and entrepreneurs

What skills does Labor include?

intrinsic skills (instinct) + aquired skills

Capital

man made goods used to make other goods

What is a sacrifice CAPITAL requires

“final consumption” goods

Entrepreneurs

risk-takers

Production Possibilities Frontier

max combination of 2 goods that can be produced given all inputs used efficiently

Regions

Points inside (inefficient), outside points (unattainable), points on PPF (efficient, determine if allocative or productive)

How to find Opportunity cost on graph

slope of end points, if there’s 2 goods to find other opportunity cost (inverse)

Comparative Advantage

a resource has it if the production of a good if it has lowest opportunity cost of producing that good

Law of increasing Opportunity cost

as more units of a good is produced, opportunity cost of additional units increase

What does trade increase?

consumption possibilities (purchasing power of income)

Comparative Advantage

smallest OPPORTUNITY COST of producing a good

Some reasons for Comparative Advantage/Trade

climate/natural resources, product vs process technology, external economies

Trade Barriers

job protection, foreign subsidies, national security, "dumping”, labor/enviormental

Foreign Subsidies

reduces cost for foreign firms, lower import prices increase US trade gains

Job Protection

high cost to protect targeted industries, more jobs lost in related industries

Dumping

exporting a good at a price below their own costs (good for US gains)