Microeconomics - Midterm

Flash cards for chapters 1 - 11 for Microeconomics

What is scarcity?

Scarcity means limited resources in comparison to unlimited human wants. Scarcity forces us to make choices about how to allocate resources.

What is opportunity cost?

Opportunity cost is the value of the next best alternative you give up when you make a choice

What is marginal decision-making

Involves comparing the additional benefits and costs of a decision. People make choices based on whether the marginal benefit exceeds the marginal cost.

What does the PPF show

It’s a graph that shows the maximum output combinations of 2 goods that an economy can produce given the current resources and technology. It’s meant to demonstrate the trade-offs and opportunity costs

What causes the PPF to shift outward

Economic growth such as improved technology or an increase in resources shifts the PPF outward. This reflects an increased production capacity

Neoclassical economics

Talks about rational decision making, marginal analysis, and market equilibrium. Assumes individuals maximize utility and firms maximize profit.

Behavioral economics

Behavioral economics just talks about the psychological affect in decision making. (We act irrationally due to biases and cognitive limitations)

How do economic systems vary across countries

countries exist on a spectrum from free markets —→ command economies. Most modern economies are mixed and contain elements of both systems.

Mixed economy

blends private enterprise with government regulation. Wants to balance efficiency with equity and stability.

How does a market economy allocate resources

In a market economy resources are allocated through voluntary exchange based on prices and incentives. (Decisions are driven by supply and demand)

How does a command economy allocate resources?

The government makes all economic decisions.

Why do we use models

Models simplify the complex real world situations to analyze economic behavior. They help us with predicting outcomes and testing theories.

What is utility in economics?

Utility measures satisfaction or happiness from consuming goods and services. Consumers aim to maximize total utility.

What is diminishing marginal utility?

Diminishing marginal utility means each additional unit of a good provides less additional satisfaction. This underlies the downward-sloping demand curve.

How do marginal utility and marginal cost guide individual decision-making?

Individuals compare the marginal utility gained from one more unit of a good to its marginal cost. A rational decision is to get the next unit if the Marginal Utility > or = the Marginal cost

How does the frame work of marginal utility and marginal cost apply to real-world choices like subscription services?

When choosing between subscriptions, each additional service provides extra utility but also adds an extra cost. Consumers should keep adding subscriptions until the marginal utility of the next service is lower than the marginal cost, at which point they stop.