micro exam

scarcity

limited resources and unlimited wants

economics

study of how people allocate scarce resources to satisfy unlimited wants

three key economic ideas

1. People are rational

2. people respond to incentives

3. optimal decision made at the margin

opportunity cost

the value of the next best alternative

fundamental questions

1. What goods and services should be produced?

2. How should they be produced?

3. Who should receive them?

economic systems

centrally planned economy

market economy

mixed economy

Positive

factual and objective

Negative

subjective and opinion based

micro

small and individual markets

macro

large and collective, economies as a whole

PPF

point inside = inefficient

point on curve = efficient

point outside = unattainable

shifters of PPF

more resources (labor and capital), technology improvements

absolute advantage

produce more with the same resources

comparative advantage

produces at a low opportunity cost

Thinkers

Adam Smith - invisible hand

Friedrich Hayek - knowledge problem

property rights

gives people incentives to produce, trade, and maintain resources

demand vs quantity demanded

movement along the curve = change in quantity demanded

shift of curve = change in demand

shifters of demand

income

tastes/preferences

price of related goods

supply concepts

change in supply - caused by technology/input costs

change in quantity supplied - caused by price change

surplus

price above equilibrium

shortage

price below equilibrium

demand increase

price will rise, quantity will rise

consumer surplus

The difference between willingness to pay and price paid

producer surplus

the difference between the price received and the minimum acceptable cost

efficiency

MB = MC = equilibrium

deadweight loss

occurs when total surplus is reduced

price ceiling

max price, causes shortage

price floor

min price, cause surplus

tax incidence

if demand is inelastic, consumers bear most of the burden

negative externalities

markets produce too much

positive externalities

The market produces too little

coase theorem

works only if transaction costs are low

pigovian taxes

used to correct negative externalities

private goods

rival and excludable

public goods

not rival, not excludable

free-rider problem

occurs because public goods are non-rival and non-excludable

tragedy of the commons

happened due to a lack of clearly defined property rights

price elasticity

measures how much the quantity of a good consumers will buy changed in response to a price change

total revenue test

If demand is inelastic, raising the price will increase TR (TR = P x Q)

positive cross-price elasticity

substitutes

negative cross price elasticity

complements

income elasticity

Inferior goods have an income elasticity of less than zero

price elasticity of supply

firms respond quickly to price changes (% change Q/% change P)

marginal utility

extra satisfaction from one more unit consumed

diminishing marginal utility

decreases as consumption increases

behavioral bias

loss aversion (overconfidence, farming, anchoring)

sunk costs

a cost that has already been paid and cannot be recovered

cost formula

TC = FC + VC

ATC = TC/Q

MC = change TC/change Q

marginal product of labor and marginal cost

MPL rising - MC falling

MPL falling - MC rising

shapes

MC curve is J-shaped

ATCE is U-shaped

economies of scale

ATC falls as output increases

perfect competition characteristics

P > ATC = profit

P = ATC = break even

P < ATC = loss

shutdown rule

P < AVC

monopolistic competition

products are differentiated but not identical, profit max - MR = MC, long run profit = zero

oligopoly

firms are independent control of key resources, patents, and high start-up costs

monopoly

barriers to entry, control of resources, and patents, produce where MR = MC, charge high prices, and produce less output than PC

price elasticity of demand formula

% change Q/% change P

midpoint formula

(Q2-Q1)/(Q1 +Q2/2)/(P2-P1)/(P1 +P2/2)

cross-price elasticity of demand

% change Q of good X/% change P of good Y

income elasticity of demand formula

% change Q/% change in income

AFC formula

FC/Q

AVC formula

VC/Q

profit formula

TR - TC

AR formula

TR/Q

MR formula

change TR/change Q