Microeconomics

How do scarcity and poverty differ?

Scarcity is limited resources, Poverty is limited income

Why can't opportunity cost exist without scarcity?

If some things aren't limited (scarce), then you wouldn't need an alternative (trade-off method)

Does an economy that is inside its production possibilities curve face any trade-offs?

Yes, if there are opportunity costs

How can a good be costly yet not scarce?

If it is high in demand, yet abundant

Scarcity

When a society does not have enough resources to produce all the things people would like to have

Factors of Production

Resources that help a society produce and distribute its goods and services

FoP: Land

Natural resources

FoP: Capital

Tools, equipment, factories used in the production of goods and services

FoP: Financial capital

Money used to buy the tools and equipment used in production

FoP: Labor

People with their skills

FoP: Entrepreneurs

People who start new businesses or bring new products to market

Economics

Study of human efforts to satisfy wants through use of scarce resources

Opportunity Cost

The cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Production Possibilities Curve/Frontier

A diagram representing combinations of goods or services an economy can produce when all productive resources are employed

Need

Basic requirement for survival

Want

Means of expressing a need

Free Products

Sunshine, Air, etc. (v plentiful that no one can own)

Good

A tangible commodity (car, book, etc.)

Consumer Good

Intended for final use by individuals

Capital Good

A good used to produce other goods

Durable Good

An item that lasts more than 3 years when used on a regular basis (oven, stove, etc.)

Nondurable Good

An item that lasts for less than 3 years when used on a regular basis (food, clothing, etc.)

Service

Work that is performed for someone

Consumers

People who use goods and services to satisfy wants and needs

Consumption

The process of using up goods and services to satisfy wants and needs

Value

Something that has a worth that can be expressed in dollars and cents

Paradox of Value

Water, essential, has little value Diamond, nonessential, has high value

Utility

Capacity to be useful

Wealth

Sum of those economic products that are tangible, useful, transferable from one person to another

Production

The process of creating goods and services

Productivity

The efficient use of productive resources

Specialization

Productive inputs do whatever task they are able to do best

Division of Labor

Workers perform fewer tasks more frequently

Human Capital

The sum of skills, abilities, motivation of people

Economic Interdependence

When the actions in one part of the country or world have an economic impact on what happens elsewhere

Market

A location that allows buyers and sellers to deal in a certain economic product

Factor Markets

The markets where productive resources are bought and sold (where individuals earn their incomes)

Product Markets

Markets where producers offer goods and services (where individuals spend their incomes)

Standard of Living

The quality of life based on the possession of necessities and luxuries that make life easier

Free Enterprise Economy

Consumers and privately owned businesses, instead of government, make the majority of WHAT, HOW, and FOR WHOM decisions

Traits of Free Enterprise

Economic freedom, voluntary exchange, private property rights, and the profit motive

Role of Government in a Free Enterprise

A protector, provider of goods, consumer, regulator, promoter of national goals

Mixed Economy

People carry on their economic affairs freely, but are subject to government regulation

Demand

The desire, ability, and willingness to buy a product

Law of Demand

when prices increase, the quantity demanded decreases

Demand Elasticity

The extent to which changes in price cause changes in the quantity demanded

Economic Variables of Demand

1. # of consumers (population) 2. Prices of complementary goods 3. Prices of substitute good 4. Consumer income 5. Taste and preferences 6. expectations

Diminishing Marginal Utility

The more one buys of a product, the less eager they are to want it

Supply

A schedule of quantities that would be offered for sale at all possible prices that could prevail in the market

Law of Supply

Supplies offer more at high prices than at low prices

Supply Elasticity

How changes in quantity supplies are affected by changes in price

Economic Variables of Supply

Cost of Inputs, Productivity, Technology, # of sellers, taxes and subsides, expectations, govt regulations, cost of joint products

Stages of Production

1. Increasing Returns 2. Diminishing Returns 3. Negative Returns

Fixed Costs

Cost of production that does not change when output changes

Variable Costs

Cost that varies as output changes

Marginal Cost

Extra cost of producing one additional unit of production

Price

Helps sellers decide where to sell, and producers where to buy (signals that allocate resources between markets

Price System

Flexible, provides maximum freedom of choice for everyone, no cost of administration, efficient, understood by everyone

Rationing

Government agencies decide everyone's fair shares

Market Equilibrium

Quantity Supplied = Quantity Demanded

Surplus

Quantity supplied > Quantity Demanded

Shortage

Quantity supplied < Quantity Demanded

TINSTAAFL

"There is no such thing as a free lunch" -> there are o free products, you pay for it in other ways (ex: higher taxes)

How is the price of a good decided?

Wealth, value, and utility

Pillars of a free market

voluntary exchange, private property, profit, economic freedom

capitalism

an economic system based on private ownership of capital

5 characteristics of capitalism

economic freedom, voluntary exchange, private property rights, profit motive, and competition

consumer sovereignty

consumer decides WHAT good and services to produce

What kind of economy does the US have?

mixed economy/modified private enterprise economy: some govt intervention/regulation

elastic

a small change in price causes a big change in # demanded

inelastic

a change in price causes a small change in the # demanded.

determinants of elasticity

time, substitutes, income

causes for change in supply

cost of inputs, productivity, new technology, taxes, subsidies, expectations, government regulations and number of sellers

price floor

if prices are considered too low, steps are taken to keep them higher ex: minimum wage

price ceiling

a maximum legal price that can be charged for a product