Econ Unit 1

Microecon

Study of choices made by individuals

Consumption

Act of individuals with limited incomes choosing to acquire things that generate satisfaction (utility) aka products (goods & services)

Production

Individuals choose to use things to continuously produce products & make avail for people to consume.

4 main grouping of resources necessary to produce products

1. Labor

2. Land

3. Capital

4. Entrepreneurial ability

Exchange

Indiv. choose to trade less valued items for more valued items

Exchanges can be (2)

• Monetary

• In-kind

Scarcity of Resources

A state where the quantity of an item is LESS than the quantity of the item people willing to use if priced at 0.

All resources are considered to be

Scarce

When you choose to produce more of ONE product, you produce

LESS of something else (Opportunity cost)

Types of Economies where decisions are made (3)

1. Centrally planned economy

2. Market economy

3. Mixed economy

Centrally Planned Economy

When the people that control the gov decide how econ resources will be allocated

Market Economy

The decisions of indiv. households & managing firms interact in markets to allocate econ resources

Mixed Economy (2)

• Most econ decisions result from interaction of buyers & sellers in markets

• But gov plays significant role in allocation of resources

Positive Analysis (2)

• Concerned with WHAT IS and WHAT IS EXPECTED TO BE

• Not whether outcome is good or bad (outcomes you should get)

Normative Analysis (2)

• Concerned with WHAT OUGHT TO BE based on certain value system, NOT CONSEQUENCES of choices (believe or don’t)

Mathem. stated as

“Some variable (y) is a function of another variable (x).”

2 possible ways variables are related

• y positiv related to x / x positiv rel to y

• y neg rel to x / y neg rel to x

Variables either rel

pos or neg, or NOT AT ALL

Pos Rel Graph Pt 1

Move away from origin, x & y increase (upward)

Pos Rel Graph Pt 2

Move towards origin, DOWN, both x & y decrease

Pos Rel def

If size of x increases / decreases, y will do the same

Neg Rel Pt 1

As x gets closer to origin, y increases as it moves upward (opposite)

Neg Rel Pt 2

As x gets farther from origin (increases), y decreases, getting closer to origin. (opposite)

Neg Rel def

If size of x increases/decreases, y does opposite

Pos & Neg Rel Curve

Express pos rel in one range and neg rel in other

Prod Poss Curve

Identify diff combinations of the 2 products can be produced (resources are scarce)

What you gain equation

what lose (numerator) /what you get (denominator)

Opportunity Costs INCREASE as

More and more of a produce is produced

Opp cost & law of comp. advantage

Used to compare prod possibility curves

Finding low opp cost

divide top & bottom by denominator

Market System/Price System (2)

• Many buyers compete against other buyers for scarce items

• Many sellers compete against other sellers for those buyers

Price

How much buyer pays for ONE UNIT

Market Demand Curve

Demand side of market (buyers & potential buyers focus)

Market Supply Curve

Focuses on sellers & potential sellers of items

Market Equilibrium

At price, quantity demanded for item = quantity supplied for the item

Quantity demanded (q^d) def & equation (2)

• Max quantity of items buyers = willing to buy

• q^d=f(p)

Law of demand

• Whenever unit price & nothing changes, quantity demanded goes up/down (neg rel)

• Cheaper = more wanted / More expensive = less demand

The buyers and sellers are ___ to compete against e/o & gov does ___ inerfere with their decisions

• Free

• Not

6 Assumed Constants of Market Demand Curve

1. Income

2. Prices of related goods

3. Tastes

4. Population (# of buyers)

5. Expected future prices

6. Taxes imposed on subsidies granted to buyers

Which ways (2)

• Decrease in demand moves closer to origin

• Increase in demand moves farther from origin

Demand symbol

△

Quantity demanded equation

△q^d

Change in price will cause change in

will cause change in quantity demanded

Sellers side of market + equation (2)

• Limited amount sellers willing & able to sell

• q^s=f(p)

qs is a function of

function of price

Law of Supply (2)

• When price ↑, quantity supplied ↑ (paid more, sell more)

• When price ↓, quantity supplied ↓ (paid less, sell less)

Supply curve must be

Must be positive slope

6 Constants of Market Supply Curve

1. Prices of inputs

2. Tech change

3. Prices of substitutes in production

4. #s of firms in the market

5. Expected future prices

6. Taxes or subsidies

If any of these supply constants change, then the

ENTIRE supply curve will shift, either to right or left

For supply curve, orientation is always ______, never ______

• Right & left

• Never up and down

Change in constant =

Change in price =

• = change in supply

• change in QUANTITY SUPPLIED

Supply curve graph, how to tell when dec supply vs incr supply

If quantity demanded (demand curve) = quantity supplied (supply curve), they

MUST intersect

Effect of Excess Supply and Excess Demand

Surplus (only over equilibrium point)

If gov does nothing about excess supply, then the supply will

go down on its own.

Only way excess supply persists is if gov

if gov buys up excess supply (price below equilibrium price)

Consumer Surplus (2)

• Net gains to buyers when buyer pays price than Marginal Benefit to buyer gets by buying item

• Aka if a buyer buys an item for less than they were willing to pay, the money they get to keep is CS.

Consumer Surplus Equation

Most willing to pay/what one actually pays

Producer Surplus

What seller gains the higher they sell for (the difference)

Price goes up, CS goes DOWN, price goes down, CS goes

CS goes UP

How to find the area

Triangle=1/2bh

Quotation Price Elasticity of Demand

=% change in quantity demand / % change in price

For Quotation Price Elasticity of Demand, ALWAYS _______, discard ___

• negative #

• discard -

For Quot. Price Elast. of Demand:

If #1 =

If less than 1 =

Elastic =

• Unitarialistic

• Inelastic

• Numerator bigger than denominator

Use average in quot. price elast. demand to

minimize wrong if unsure

For Quot. Price Elast. of Demand: num & denom

Start/end up

Price Elasticity of Demand Full Equation

Total Revenue eq

Price firm gets for item TIMES amount sold

Steep line

Inelastic line

More flat line

Elastic line

Sales Tax

Gov taxes seller

Both employee & company _____ for employee’s SS

both pay (employer matches % paid)

Legal Obligation does _____ determine who must pay tax, depends on ______ of supply and demand curves

• NOT

• Elasticity

Per unit tax

Tax on each unit of item

Deadweight loss

Loss of consumer surplus and producer surplus WITHOUT a gain

If d=elastic and s=inelastic, seller pays _____, buyers pay _____

• Seller pays MORE

• Buyer pays LESS

If d=inelastic, s=elastic, seller pays _____ and buyers pay _____

• Seller pays LESS

• Buyer pays MORE

Dead Weight Loss Equation

DWL = 1/2bh

Consumer Theory

Explaining act of individuals choosing to allocate limited income on purchasing limited quantity products

Util

More satisfaction of using something = MORE Utils

Marginal Utility

Extra utility you get by consuming a util of product

Marginal

Extra

Law of diminishing marginal utility (2)

Util get from next unit of product will always be LESS (decreasing)

Will eventually reach 0

Budget Constraint

Limited amount of income available to consumers to spend on goods & services

Utility maximizing conditions equation

Marginal utility / price of item