MicroEconomics: Unit 1

Economics

Social science concerned with the efficient use of scare resources to achieve maximum satisfaction

Opportunity Cost

Opportunity cost is the hidden price you pay when you choose one option over another

• Because resources are scare, you have to make choices. When choices are made it means you give up the next best alternative option

Amount Given Up / Amount Gained

4 Factors of Production

1. Land (Natural Resources) = water, oil, land

2. Labor (Human work) = Construction workers, doctors, teachers

3. Capital (Man-made assets to produce other resources)

4. Entrepreneurship (Leaders)

MICROeconomics

study of small economic units such as individuals, firms, and markets.

MACROeconomcis

Study of the large economy as a whole

• Economic growth, government spending, infaltion

Theoretical Economics

The study of abstract ideas and mathematical models that explain how people, businesses, and governments make choices about using scarce resources

Policy Economics

Uses theoretical economics to fix economic problems

• The study and design of government actions, laws, and regulations intended to influence economic behavior and achieve societal goals

Positive Statement

A statement about WHAT IS or WHAT WILL happen

• It can be tested true/false using evidence

Normative Statement

About what SHOULD be

• Uses words like: should, ought, must, more

Three Economic Questions

1. What goods and services should be produced

2. How should these goods and services should be produced

3. Who consumes these goods and servces

Command Economy (Centrally-Planned) Economy

The central government makes all decisions about the production, pricing, and distribution of goods and services. (The three economic questions)

• Advantages: Low unemployment

• Disadvantages: No incentive, no competition, corrupt leaders

Free Market System (Capitalism)

Prices, production, and the distribution of goods are determined by supply and demand with little to no government control.

→ Individuals and companies own property and resources

• Advantages: Incentive, competition

• Disadvantages: Inequality, prices fall or raise based of demand

Mixed Economy

System with free markets but also some government intervention

The Invisible Hand

A metaphor for how free markets use self-interest and competition to benefit society without central planning

• EX: A baker makes bread to earn a living, not out of kindness. To sell that bread, the baker must make it tasty and price it fairly.

Circular Flow Model

Private Sector

Part of the economy run by individuals and businesses

Public Sector

Part of economy that is controlled by the government

Factor Payments

Payment for the factors of production

→ Rent, wages, interest, and profit

Transfer Payments

Governemnt redistributes money

Subsides

Government payments to businesses

Absolute Advantage

Who can produce MORE

Comparative Advantage

Being better at making something because it costs less

• Lower opportunity cost

Specialization

Focusing on producing/trading the goods you have the comparative advantage in

Per Opportunity Cost

Opportunity Cost / Units Gained

• How much of one good you gave up to produce one more unit of another good

EX: 100 cars or 500 computers → opportunity cost = 500/100

Production Possibility Curve (PPC)

Shows the max amount of two goods an economy can produce using its available resources

• Only two goods

• Assumes full employment

• Fixed resources and technology

The PPC curve can shift inward or outward

Constant Opportunity Cost

When opportunity cost stays the same

• You can produce one more unit and what you give up stays the same

EX: Everytime you produce 2 pizzas, you lose 2 robots

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost of producing each additional unit also increases

• WHY: Resources are not easily adaptable to producing both goods

EX: To produce more wheat, you have to give up more land

Why do people trade?

1. Everyone specializes in different things

2. High standard of living → people want more options

Terms of Trade

The agree upon conditions that would benefit both countries

• The terms of trade must fall between their opportuntiy cost

Trade-Off

All the alternatives that we give up when we make a choice

EX: When you go to gym, you give up time to study, hangout with friends, and sleep

Explicit Costs

Direct, out of pocket money

Implicit Cost

The opportunity cost of your descious

EX: You go to movie instead of work → give up paid hours

• Implicit cost includes explicit costs

Marginal Benefit

The additional benefit you get from doing one more unit

EX: Studying for one more hour

Marginal Cost

The additional cost of producing one more unit

• What does ONE MORE cost me?

EX: Studying extra hour, you lose sleep

Marginal Analysis

Making decisions based on increments

Marginal benefit > Marginal Cost

Do more of this activity

Marginal Benefit < Marginal Cost

Do less of this activity

Marginal Benefit = Marginal Cost

Optimal

Marginal Utility

The extra satisfaction you get from consuming one more unit of something

Law of Diminishing Marginal Utility

Asn you consume more and more of something, the additional satisfaction usually increases

EX: Drink water → every sip you become less thirty, so the benefit becomes less and less.

Calculating Marginal Utility

New Total Utility - Previous Total Utility

• When marginal Marginal utility (benefit) becomes less than marginal cost, that’s when you should stop consuming.

Marginal Utility per Dollar

Helps you decide how to spend a limit amount of money

• MU / $ = how much extra satisfaction do I get for every 1$ I spend?

  • Marginal Utility / Price

Utility Maximization

Getting the most total satisfaction from your limited money

• Choose the options that will give you the greatest total utility

1. Calculate MU per dollar

2. You have utility maximization when your

3. MU/P_A should equal MU/P_B