Micro Eocnomics Midterm

Elastic supply

when its easy for a firm to switch from the production of one good to another, supply is likely to be elastic

inelastic supply

when its costly to increase output/ or production process is inflexible, supply is inelastic

Scientific method

In economics, draw up a conjecture that aims to explain an economic event. it usually means carrying out empirial evidence (build a case). In eocnomics, you have to be open to bbeing proven wrong. The eocnomist/scientit should not let emotions or beliefs carry their hypotheses.

Why does price changes not affect the demand curve?

The demand curve is the relationship between price and quantity demanded. So when price changes u move along the curve, since the curve was drawn assuming price changes. When there is a shift it means something else is affecting the demand

Difference between elastic and inelastic supply

Elastic supply, producers can easily change how much a product they make when price chnages. Price goes yp, they make more, price goes down then make less

Inelastic supply, its hard and expensive for producers to change how much they produce, even if price chnges. If price goes up, less production, if price goes down they can’t easily make more.

difference is how easilt and cheaply producers can adjust amount produced in repsonse to price change

Primary types of Economic actors (actresses)

Consumers and producers

How does an economy produce a good?

Combining resources into a technology of production

Economic resource (Land)

natural resources

Economic Resources Labour

Human effort

Economic resources (capital)

something that is used to make something

Market Economy 3 coordination tasks

• What goods and services should be produced, what quantities

• How should they be produced

• for who are the goods and service produced

• What goods and services should be produced, what quantities (market)

those that are profitable

• How should they be produced (market)

least costly technique

For whom (market)

• according to the ability to pay

Market Economy

• decentralized way where consumption, production and exchange are made

• allocative mechanism (price system)

• inegalitarianism

• shortages and surpluses are eliminated

• society needs and wants are maximised

Command Economy

• centralized decision making

• egalitarianism

• inefficent, surpluses and shortages are common

• static (doesn’t repsond to tech or any changes)

For whom (command)

central planning buearu rations who gets what

• How should they be produced (command)

Central planning beureau decideds inputs and specific the technique

• What goods and services should be produced, what quantities (command)

central planning bureau sets output quotas for production units

Economic Models

• Primary analystic tool

• not deisgned ti imitate reality with exactness

• models involve gross simplifications

• consist of premises rather unqualified predicitons

Economics:

The study of how people manage resources.
Resources are anything that can be used to make something of value- they are not just objects; they are also intangible items (ex., knowledge, job experience)

Rational behaviour:

People compare the choices available to choose the best one for them

Micro Economics:

study of how individuals and firms manage resources

Macro Economics:

a survey of the economy on a regional, national and international level

Problem-solving by four questions:

What are the wants and constraints of those involved?
What are the trade-offs?
How will other’s respond?
Are resources being allocated in the best way?/ Why isn’t somebody already doing it

Scarcity:

condition of wanting more goods with limited sources

What are the wants and constraints of those involved? It allows us to understand what both parties want and where the issue

Performance and Decision Making

Every decision in life weighs the trade-off between cost and benefit.

Opportunity Cost:

the value of what you have to give up to get something, value you could have gained by choosing the other alternative.

Identifying the opportunity cost helps us to think clearly about the trade-offs

Marginal decision-making/analysis:

the relevant trade-off is between additional benefits and additional costs.

Sunk Costs:

Costs that have already been incurred can’t be recovered

Incentive:

Something that causes people to behave in certain ways by changing their trade-offs

Positive Incentive:

people most likely do something

Negative Incentive:

less likely do it

As trade-offs change, so do people’s reactions. How will others react?

You can’t change something even the slightest and expect no reaction from people.

To understand trade-off changes, we ask the question of:

What happens when the price changes?
What happens when the government implements a new policy?
What happens when a company introduces a new product?

What is Efficiency :

is not just maximization of productivity but also about ensuring that people get what they want and need with available resources.

with _____economy, there is no way to reorganise things to make anyone better off without someone else having worse.

Why is the plan not in Use

Have you mis judged People’s wants and constraints?

Have you miscalculated the trade-offs they face?

Have you needed to understand how people will respond to incentives?

Innovations:

Maybe it’s entirely new for the time

Market failures:

Sometimes, firms/people fail to take advantage of opportunities because something prevents them. Or it could be that there are already dominating companies using that plan

Intervention:

Governments may intervein

Unprofitable idea:

doesn't make a profit

Economic analysis

requires us to combine theories with observation before jumping conclusions.

Correlation:

When there is a consistent relationship between two events, it’s called correlation

Positive Correlation:

occur at the same time or moves in the same direction

Negative Correlation:

when one variable/event increases while the other event/variable decreases

Causation:

means one event brings out the other

Positive Statement:

A statement that makes a factual declaration about how the world works

Ex. In 2020, 20% of homicides were inked to organize crime or street gangs.

Normative Statement:

A statement that claims how the world should be

Production possibilities Frontier

A line or curve that shows all possible combinations of 2 outputs that can be produced using all the available resources

Points on the line or below the line shows the combinations a country can produce goods with available goods
Any point above the line is considered unattainable
gives us a way to represent the constraints on production

The frontier allows us to answer some questions:

What are the wants and constraints of those involved?
It shows the constraints
What are the trade offs

Efficent vs Inefficent

An efficient point is the point lying on the curve, it’s the point that shows the max input put in

An inefficient point is when the point lies inside the curve;

Shiftiing the Curve:

The PPF will go outward (right) if there is improvement in technology and resources increase

Absolute Advantage

The ability of a country or firm to produce a good or service a lot better than another country/firm. Can be for both or one specific good/service

Comparative Advantage:

The ability of a country/ firm to be able to produce a good with a lower opportunity cost.
Impossible for a country to have the comparative advantage in making both goods

Specialization

Almost everything we use comes from a person who specializes in a good or service Spending all your resources producing a specific good.

Specialization = increase total production

Gains from Trade

advantagerous for countries, firms, induviduals other units to specialize in the production of one or few G&S and trade majority of product for the other G&S

Autarky

The opposite of free trade, an economy is self sufficent on its own

National Heritage: (National self sufficency)

helps store the historical importance of a country

Security: (national self sufficency)

some people think trade weaknes a country

Quality Control and ethics: (national self sufficency)

if a good is made somewhere else than its harder to control than if it is made in the home country

What is a market?

buyers and sellers who trade particular goods or services

The boundaries of a market are dependent on the scope of trades that are being made

Standardized Good:

good or service for any 2 units of it have the same features and are interchangeable

Transaction costs:

costs incurred by buyer and seller in agreeing ti execute the sale of goos or service

Price Takers

Buyers or sellers who cannot affect the market price

Demand:

describes how much something people are willing and able to buy under specific circumstances

Ceterais Perabis:

All things are equal.

Quanitity Demanded:

Amount of a particular good that all consumers are able and willing to buy given a price per unit of time.

Non Price determinants:

Income, expectations and taste

Law of demand:

higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded

the underlying reality of individual’s decisions

What happens when price drops?

The benefits you get from purchaisn remains the same
Opportunity cost has fallen, because as price drops your not giving up more

Demand Schedule:

shows the quantities of a particular good that consumers are willing to purchase at various prices

Demand curve:

Visually demonstrates the demand schedule, also represents consumer’s willingness to but product, showing the highest price buyers will go.

If demand curve shifts to the right

Increase in demand

if demand curve shifts to the left

decrease in demand

Determinants of Demand

The downward sloping of demand curve, shows the trade offs between
Benfit buyers expect to receive
Opportunity cost they face for buying it
Anything that change sthis balance will change people’s willingness to buy and purchasing decisions

Consumer preferences (demand)

Personal likes and dislikes that make buyers more or less inclined to purchase a good. Some consumer preferences are constant all the time, those that don’t arise from personal traits or cultural attitudes and beliefs

Prices of Related Goods (demand)

There are two kinds of related goods—substitutes and complements

Substitute (demand):

goods that have similar-enough purpose that a consumer might purchase one in place of another

Ex. Its Valentine's Day, and Chocolate is cheaper than roses; your BF is more inclined to buy chocolates since its more affordable, but it also expresses love.

Complements(demand):

goods that are consumed together so that purchasing one will make consumers likely to purchase the other

Ex. Peanut butter and jelly, cereal and milk, cars and gasoline

Example of increase in demand: decrease in price of cereal, increases demand for milk

Example of decrease in demand: decrease in taxi fares, lowers demand in bus rides

Income (demand)

The amount of income people earn affects their demand for goods and service

Normal Goods (demand):

goods for which demand increase as income increases

Infereior Goods:(demand)

goods for which demand decreases as income increases. People replace inferior goods, with more expensive and appealing subsituties when income rises

Example of increase in demand: economic downturn lowers income, increasing demand for an inferior good

Example of decrease in demand: minimum wage increase raises income, decreasing demand for inferior good

Number of buyers (demand)

An increase in number of potential buyer increases demand Decrease in number of potential buyer decrease demand

Example of increase in demand: Increase in life expectancy increase demand fr nursing homes and medical care

Example of decrease in demand: falling birthrate decrease the demand for diapers

If change in price, change in variable on Y

move along demand

If there is any other factor (non-price)-demand

shift the demand curve

Non-price Determinants: When demand decreases ,

shift to the left ,

Non-price Determinants: When demand increase

shift to the right

Supply:

How much of a good or service producers will offer for sale under given circumstances

Quantity Supplied:

total amount of particular goods or service that producer willing to offer for sale at a certain price during a particular time

Law of Supply:

direct relationship between price and Quanitites

a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied

Supply Curve:

Graph that shows information in supply schedule, it shows the producer’s willingness to sell

Prices of related good (supply)

The price of related goods, affects supply because it affects the opportunity cost of production

Ex. A farmer who can grow wheat or corn on his land. If price of corn can increase, quantity of wheat he is willing to grow falls, bevacue each wheat bundle he devotes to, is one fewer he can use to grow corn

Example of an Increase in supply: price of gas rises so an automaker increase production of small fuel efficient cars

Example of a decrease in supply: price of clean energy production falls, so power company reduces amount of power it supplies using coal powered plants

Technology (supply)

Technology helps improve the productivity of supply production. This helps be more efficient in resource allocation, allowing suppliers to provide more quantity supplied

Price of inputs: (supply)

The price of input can shift the supply curve. if there is an increase in the price of inputs then there is a decrease in the quantity supplied. If there is a decrease in the price of supply then there is a increase in quantity dupplied

Number of sellers (supply)

The number of sellers in the market is considered to be one of the fixed parts of the supply curve.

Example of an Increase in supply: subsidies make the production of corn more profitable, farmers plant more corn supply of corn increases

An example of a decrease in supply is that COVID-19 restrictions make operating restaurants more expensive, and some small restaurants close, decreasing the supply of restaurants.

Non-price Determinants: When supply decreases

the curve will shift to the left ,

Non-price Determinants: When supply increase

the curve will shift to the right

Price Determinants: ( increase or decrease in quantity supply)

Price changes are movement along the supply curve, but the curve itself will be in the same place

Market Equilibrium

The point where quantity supplied = quantity demand
Where the demand Curve intersects the Supply Curve

Equlibrium Price:

The price point at the equilibrium, also known as market clearing price