Economics - Micro

Cost Benefit Principle

Persue choices if benefits are larger than costs

Opportunity Cost Principle

Next best alternative you give up when you make a choice

Marginal Principle

Quantity decisions best made incrementally; breaking inter smaller pieces

Independence Principle

Best choice depends on your other choices

Microeconomics

Decision making in individuals, families and businesses

Scarcity

Limited resource quantities to meet unlimited wants

Explicit Cost

What you directly pay for something

Implicit Cost

Opportunity cost of using your own resources

Four Factors of Production

Land, labor, capital, entrepreneurship

Utility

Benefit someone gets from consuming goods/services

Total Utility

Total satisfaction received from consuming goods/services

Marginal Utility

Additional satisfaction gained from consuming one more unit of goods/services

Law of Diminishing Marginal Utility

As person consumes more goods/services, additional satisfaction from each unit decreases

Marginal Analysis

Comparing additional benefits/costs

For Demand to Exist

Desire, ability to pay, willingness to pay

Demand

Entire relationship between price and quality consumed are willing/able to buy

Quantity Demand

Specific amount consumers are willing/able to buy at one particular price

Law of Demand

All other things remaining equal

Determinants of Demand

Consumer income, price of substitutes, price of complements

Elasticity

Measures how responsive one variable is to a change in another variable

Price Elasticity of Demand

% change in QD/% change in price

Elastic Demand

Quantity demanded changes by larger % than price

Inelastic Demand

QD demanded changes by less % than price

Unit Elasric Demand

% change in QD = percent change in price

Determinants of Elasticity

Availability of substitutes, necessary vs. luxury, proportion of income, time

Supply

Relationship between price of good/service and the quantity producers are willing/able to sell

Law of Supply

Higher price generally leads producers to offer a larger quantity for sale

Determinants of Supply

Input prices, technology, taxes, subsidies, price of related goods, expectations, number of sellers

Short Run Supply

One factor of production is fixed

Long Run Supply

All factors of production are variable

Price Elasticity of Supply

% change in quantity supplied/% change in price

Equilibrium

Quantity demanded = quantity supplied

Absolute Advantage

Ability to produce more output with the same resources/same output fewer resources

Comparative Advantage

Ability to produce good at less opportunity cost than another producer

Specialization

Concentrating productive resources on activities where producer had comparative advantage