MECH 3360 - Microeconomics

Economics Lecture 2.

Microeconomics is the examination of what part of an economy?

Microeconomics examines the smaller units of an overall economy. This includes both consumers and businesses, and how they interact with the economy.

Define what maximizing utility is.

The process of making a decision with intent to maximize their personal satisfaction.

A sense of diminishing marginal utility is most commonly characterized with what?

The general consumer experience that, the more you use something, the less satisfaction you get in return.

The price of products and services is more commonly determined by what?

The interplay of supply and demand.

Opportunity cost is defined as?

The loss of potential gain from you choosing one option over other alternative ones.

What is specialization? What advantages does it carry to specialize in something?

Specialization is the concentration of labor into only one type of production. This can make people more productive as they have a comparative advantage.

How does trade intertwine with comparative advantages?

Individuals and countries that specialize in producing things with a comparative advantage can offer their services to others. This is the cornerstone of trade.

What is trade?

Trade is the exchange of currency for goods and services.

What is the marginal cost?

The cost of one extra unit. Its merely the difference between two total costs of two different units produced.

What is a risk?

A risk is the chance of an outcome of an investment’s gain to differ from the expected return. It includes the possibility of losing some or all of an investment.

How can risk be reduced?

By diversifying and using hedging strategies. (offload the risk of a investment by investing in a safer option.)

What is business risk?

It refers to the basic viability of a business; it is whether it can make sufficient sales and revenue to cover for its operational expenses.

What is a credit/default risk?

It is the risk that a borrower will be unable to pay the contractual interest or principle on a debt obligation.

What is interest rate risk?

It is the risk that an investments value will change due to a change in the absolute level of interest rates.

What is a price ceiling?

The absolute maximum price firms can post for their services or goods. This is to introduce incentive for people to buy products from that industry.

What is a price floor? What is it used for?

The absolute minimum price firms can post for their services or goods. This is to introduce incentive into an industry.

Explain the potential drawbacks of introducing price ceilings.

Price ceilings can introduce potential shortages and negative incentives into an industry.

Explain the potential drawbacks of introducing price floors.

Price floors can lead customers to buy cheaper options, potentially leaving providers with no one to sell too.

What are subsidies?

Subsidies are government payments that are given to individuals, organizations, or businesses, designed to offset costs to advance a goal.

Provide an advantage and disadvantage of government subsidies.

Subsidies can provide a stable living, limit inflation, and guarantee sufficient supply. However, it discourages innovation in its industry as its workers are guaranteed an income.