Microeconomics Final

Microeconomics Final

Economics

The study of how scarce resources are allocated to satisfy unlimited wants.

Factors of Production

Land, labor, capital, and entrepreneurship.

Scarcity

The condition where demand for goods/services exceeds their availability.

Opportunity Cost

The value of the next best alternative forgone.

Production Possibilities Curve (PPC)

A graph showing maximum possible output combinations of two goods using available resources.

Straight-Line PPC

Indicates constant opportunity costs.

Law of Demand

As price decreases, quantity demanded increases; as price increases, quantity demanded decreases.

Reasons for Law of Demand

Diminishing marginal utility, income effect, and substitution effect.

Law of Supply

As price increases, quantity supplied increases; as price decreases, quantity supplied decreases.

Determinants of Demand

Tastes, income, number of buyers, prices of related goods, consumer expectations.

Determinants of Supply

Resource prices, technology, number of sellers, taxes/subsidies, producer expectations.

Movement vs. Shift in Curves

Movement is caused by price changes; shifts are caused by changes in determinants.

Price Elasticity of Demand

The responsiveness of quantity demanded to a price change.

Elastic Demand

Demand is sensitive to price changes; small price change causes large change in quantity demanded.

Inelastic Demand

Demand is not sensitive to price changes; price change causes little change in quantity demanded.

Cross-Price Elasticity of Demand

Measures how the demand for one good responds to the price change of another good.

Income Elasticity of Demand

Measures how demand changes with income changes.

Marginal Cost

The additional cost of producing one more unit of a good.

Fixed Costs

Costs that do not change with the level of output (e.g., rent).

Variable Costs

Costs that change with the level of output (e.g., raw materials).

Total Cost

The sum of fixed and variable costs.

Marginal Benefit

The additional benefit of consuming one more unit of a good.

Profit-Maximizing Rule for Firms

Produce where marginal revenue equals marginal cost (MR = MC).

Perfectly Competitive Market Characteristics

Many buyers/sellers, identical products, easy entry/exit, price-taking behavior.

Monopoly Characteristics

Single seller, unique product, price maker, high entry barriers, non-price competition.

Shut-Down Rule

Shut down if price is less than average variable cost (P < AVC).

Long Run in Perfect Competition

Firms earn zero economic profit as price equals minimum average total cost (P = min ATC).

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between the price a producer receives and the minimum price they would accept.

Calculation of Consumer Surplus

½ × (Base × Height).

Public Goods Characteristics

Nonrivalry and nonexcludability.

Free-Rider Problem

When individuals benefit from a public good without contributing to its cost.

Positive Externality

A benefit to third parties from an economic activity (e.g., education).

Negative Externality

A cost imposed on third parties by an economic activity (e.g., pollution).

Perfectly Competitive Firm’s Graph

Shows price, quantity, marginal cost (MC), average total cost (ATC), and profit/loss areas.

Allocative Efficiency

Producing goods most desired by society, where P = MC.

Marginal Revenue Product (MRP)

The additional revenue from employing one more unit of a resource.

Marginal Resource Cost (MRC)

The additional cost of employing one more unit of a resource.

Profit-Maximizing Rule for Hiring Resources

Employ resources where MRP = MRC.

Substitute Goods

Goods that can replace each other; when the price of one rises, demand for the other increases.

Complementary Goods

Goods consumed together; when the price of one rises, demand for the other falls.

Quasi-Public Goods

Goods with characteristics of both public and private goods (e.g., toll roads).

Adam Smith’s Invisible Hand

The idea that individuals pursuing self-interest can unintentionally promote society’s overall good.