Micro Study Guide

Micro Test #1

Definition of Economics

How individuals, businesses, governments, and societies make choices regarding the allocation of scarce resources to satisfy their needs and wants.

Micro vs Macro

Micro focuses on individual segments of the economy while Macro examines the overall health of the economy.

Opportunity Cost

The next best alternative; the highest value alternative.

Factors of Production

Land, labor, capital, and entrepreneurship.

Human Capital

Training and skills that enhance productivity.

Production Possibilities Curve (PPC)

The maximum combination of two goods that an economy can produce given its resources and technology.

Efficient Point on PPC

Dots on the curve which are efficient and attainable, representing maximum combinations.

Inefficient Point on PPC

Dot inside the curve, indicating inefficient use of resources.

Unattainable Point on PPC

Dot outside the curve, which is unattainable with current resources and technology.

Economic Growth and PPC

Economic growth shifts the curve to the right due to more resources or improved technology.

Law of Demand

Negative (inverse) relationship; as price increases, demand decreases and vice versa.

Shifts in Demand Curve

Changes due to factors such as price of goods, preferences, and income.

Law of Supply

Positive relationship; as price increases, quantity supplied increases.

Shifts in Supply Curve

Changes due to technology, cost of production, taxes, and number of producers.

Equilibrium Characteristics

Where quantity demanded equals quantity supplied (Qd = Qs), with no surplus or shortage.

Shortage

Occurs when the price is below equilibrium, leading to increased demand and reduced availability.

Surplus

Occurs when the price is above equilibrium, leading to excess supply (Qs > Qd).

Adjusting to Shortage

Increase price to reduce demand and eliminate the shortage.

Adjusting to Surplus

Lower price to increase demand and eliminate the surplus.

Comparative Advantage

The ability of a party to produce a good or service at a lower opportunity cost (who gives up less to produce) than another party, allowing for beneficial trade.

Absolute Advantage

The ability of a party to produce more of a good or service with the same resources than another party, leading to greater efficiency.

Middle dot on PPC curve

Represents efficient production levels of two goods, indicating trade-offs between them.

Right dot on PPC curve

Represents inefficient production levels, indicating that resources are not being fully utilized.

Left dot on PPC curve

Represents unattainable production levels given current resources, indicating potential output beyond current capabilities.