Microeconomics Midterm 1

10/14/25

Benefit

The satisfaction gained by making a particular choice

Cost

the monetary value of resources used to produce a good or service

Marginal benefit

The additional benefit gained from a particular choice

Marginal Cost

The additional cost accrued from a particular choice

Microeconomics

The study of individual units in the economy, such as households and businesses

Macroeconomics

Study of overall aspects and workings of the economy

Econ

Study of choice under scarcity

Incentives

Changes behavior, creates predictable responses

Trade offs

Scarcity creates choices; must give up something

Opportunity cost

Value of your other options

Marginal Thinking

Incremental decision making

Trade creates value

Making trade increases value for all parties

Production Possibilities Frontier (PPF)

A model showing combinations of outputs if resources used efficiently

Economic Model

Simplified abstract representation of reality

Ceteris Paribus

All other things equal

Variables (Endogenous)

Inside the model

Variables (Exogenous)

Outside the model

Law of Increasing Opportunity Cost

As production shifts, opportunity cost increases

Economic Growth

Society produces more output in the future

Specialization

Focusing effort on one area

Absolute Advantage

Ability to produce more output with the same resources

Comparative Advantage

Ability to produce something with lower opportunity cost

Perfectly competitive

Many buyers and sellers, none individually impactful

Demand

Relationship between price and quantity demanded

Law of Demand

Price increases, quantity demanded falls (and vice versa)

Normal Goods

Income increases, demand increases

Inferior Goods

Income increases, demand decreases

Compliments

Goods typically consumed together

Substitutes

Goods that can replace each other

Equilibrium

Quantity demanded equals quantity supplied; intersection point

Surplus

Excess supply

Shortage

Excess demand

Price elasticity of demand

Ratio of change in quantity demanded over change in price (PED)

Price Elasticity of Demand= % Change in Quantity Demanded / % Change in Price

Normative Economics

Focuses on what should be; based on opinions or value judgments

Positive Economics

Focuses on what is; based on facts and data