ECON Test 1 Material

microeconomics

microeconomics

the study of how people and firms make choices to use scarce resources

cost-benefit principle

you should evaluate the full set of costs and benefits of any choice and only pursue alternative with benefits at least as large as cost

opportunity cost

the true cost of something is the next best alternative you must give up to get it

marginal principle

decisions about quantities are best made incrementally, you weigh marginal benefits and marginal costs to make good decisions

interdependence principal

your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the future

sunk cost

a cost that cannot be reversed (you should ignore these costs)

marginal benefits

the extra benefit from one unit

marginal cost

the extra cost from one unit

gains from trade

the benefits that come from reallocating resources, goods, and services to higher valued uses

absolute advantage

the ability to do more given inputs (we do not use this type of advantage)

comparative advantage

the ability to do a task at a lower opportunity cost

total utility

the stock of enjoyment/satisfaction people receive from consuming and good/service

marginal utility

the added enjoyment or satisfaction people receive from consuming ONE MORE UNIT of a good or service

law of diminishing marginal utility

we expect the marginal utility to decrease with each additional utility (we are willing to give up less and less of a good to get added units of another good)

indifference curve

represents a constant level of utility at each point

budget constraint

(a PPF with money as the constraint) represents how the market values goods and what you can afford

demand

the willingness and ability to buy certain quantities of a good or service at different prices

law of demand

for all normal goods, if price (P) goes up, quantity demanded (Qd) goes down

ceteris paribus

all else constant

complements

two goods that are bought together (ex: chips and salsa)

substitutes

good(s) you buy instead of a more expensive alternative

demand determinants

things that shift the demand curve

supply

willingness and ability of firms to produce certain quantities of goods and services at different prices

law of supply

as price goes up quantity supplied also goes up

determinants of supply

anything that changes the cost of production for a firm (or changes the number of firms)

price taker

a supplier who charges the prevailing price and whose actions do not affect the prevailing price

variable costs

vary with the quantity you produce (included in marginal cost)

fixed costs

doesn’t vary with the quantity you produce (not included in marginal cost)

marginal cost

cost of producing one more

law of diminishing returns

adding more of a variable input to the same amount of fixed input will cause the marginal product to increase, then decline

marginal product

added output per extra unit of input

market

where buyers and sellers come together to trade

equilibrium price

where quantity supplied equals quantity demanded

shortage

the current market price is below the new market equilibrium

surplus

the current market price is above the new market equilibrium