Microeconomics Chapter 3&4

Everything we consume comes down to a

make or buy decision

1st benefit of trade

everyone becomes better off because of different wants

2nd benefit of trade

increased productivity through specialization

3rd benefit of trade

increased productivity through comparative advantage

case 1 when trade makes sense- 2 parties, 2 goods

each party can only produce one good

case 2 when trade makes sense- 2 parties, 2 goods

each party can produce both goods, but each are better at producing one over the other

case 3 when trade makes sense- 2 parties, 2 goods

each party can produce both goods, but one party is better at producing both goods

absolute advantage

ability to produce a good using fewer inputs than others

comparative advantage

ability to produce a good at a lower oppurtunity cost than others

seller is willing to sell as long as

trade price is above oppurtunity cost

markets

a group of buyers and sellers of a particular good

competitive market

market in which there are so many buyers and sellers, than no one has substantial power over price

1st characteristic of competitive market

homogenous good

2nd characteristic of competitive market

many buyers and many sellers

buyers and sellers are

price takers

demand

characterize the behavior of buyers

quantity demanded

amount of a good that buyers are willing and able to buy at a particular price

law of demand

qd of a good decreases, as p of that good increases, holding everything else constant and vice versa

price and quantity have what kind of a relationship?

negative relationship

demand schedule and demand curve show the

relationship between p and qd

changes in quantity demanded is caused by

changes in the price level

changes in demand is caused by

changes in a factor other than price that also affects buyers

1st factor that moves demand curve

changes in income

normal good

good in which an increase in income leads to an increases in demand and vice versa

inferior goods

good for which an increase in income leads to a decrease in demand and vice versa

2nd factor that moves demand curve

changes in prices of related goods

substitutes

2 goods for which an increase in the price of one leads to an increase for the other