Microeconomics

Economics

study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions.

Scarcity

human wants for goods, services and resources exceed what is available.

Adan Smith

Adam Smith introduced the idea of dividing labor into discrete tasks, in his famous 1776 book, titled The Wealth of Nations

Division of Labor

Different workers dived required tasks to produce good/service

Specialization

When workers or firms focus on particular tasks for which they are well-suited within the overall production process.

Economies of Scale

For many goods, as the level of production increases, the average cost of producing each individual unit declines

Economist John Maynard Keynes.

economics teaches you how to think, not what to think.

Theory

simplified representation of how two or more variables interact with each other

Model

Used for theory testing

Circular Flow Diagam

a. goods and services, b. wages and salaries, c. labor services, d. payment of goods

Traditional Economy

Agricultural, and homebased

Command Economy

An economy where economic decisions
are passed down from government authority and where the government owns the resources

Free Market Economy

an economy where economic
decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand.

Market

Interaction between potential buyers and sellers; a combination of demand and supply.

Private Enterprise

System where private individuals or
groups of private individuals own and operate the means of production (resources and businesses).

Globalization

buying and selling in markets have increasingly crossed national borders.

Exports

goods and services that a nation produces domestically and sells abroad.

Imports

goods and services that are produced abroad and then sold domestically.

Gross Domestic Product

measures the size of total production in an economy.

Budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set. (Is a straight line on the graph)

Opportunity set

All possible combinations of consumption that someone can afford given the prices of goods and the individual's income (all income does not need to be spent)

Opportunity cost

indicates what one must give up to obtain what he or she desires.

Marginal analysis

benefits and costs of choosing a little more or a little less of a good.

Utility

the capacity to be useful and provide satisfaction

Law of diminishing marginal utility

The more of a good you get, the less utility you get

Production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available. (Is curved on the graph + no specific numbers)

Slope of PPF

Shows opportunity cost on a graph

Law of diminishing returns

as additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline

Productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

Allocative efficiency

when the mix of goods produced represents the mix that society most desires

Comparative advantage

when a country can produce a good at a lower opportunity cost than another country.

Invisible hand

concept that individuals' self-interested behavior can lead to positive social outcomes