Microeconomic Exam 1 Mississippi State Prof Chang

Cost-benefit Principle

Consider the cost and benefits of the choice when evaluating a decision

Opportunity-cost Principle

Consider the alternative before making a choice

Marginal Principle

Think at the margin, asking wether a bit more or bit less of something would be an improvement

Interdependence Principle

Think about how other thing could affect my decision

Willingness to pay (WTP)

What is the most you would be willing to pay to obtain a benefit or to avoid a particular cost

Economic surplus (ES)

Total Benefits-Total Cost

Opportunity Cost

the true cost of something is the Next best alternative you must give up in order to get it

Frontier

Describe the most you can produce using ALL available resources

Production possibility frontier (PPF)

Shows the different sets of outputs that are attainable with your scarce resources

b→c

opportunity cost of more students means less meals per day

Marginal principle 2

it is easier to break things into a series of smaller, marginal, decisions

Diminishing Marginal Benefit (DMB)

MB will eventually begin to lose value as you take action.
(ex.) buying a second pizza after buying 1

Rational Rule (RR)

If something is worth doing, keep doing it until MB=MC or stop just before MC>MB

interdependencies

your own choices
other peoples choices
different markets
dependencies over time

Demand schedule

A table that indicates the quantity of a good or service that is demanded at each price

quantity demanded

the amount you are willing to buy at each price

ceteris paribus

Holding all other factors constant

MB>MC

Take action because we have economic surplus

MC=MB

Stop because we’ve used up our economic surplus

DMB 2

demand curve slopes down because buyers experience _____

Shift in demand curve

Income
Preference
Price of related goods
Expectation

Supply Schedule

A table that indicates the quantity of a good that would be supplied at each price

Quantity Supplied

How much of something do you expect to sell/supply at each price ceteris paribus

Individual Supply Curve

A graph of the quantity that a business plans to sell at each price

Perfect Competition

Perfectly competitive market: A market in which all firms sell identical goods

Diminishing marginal product of labor (D.M.P.o.L)

Hiring an extra worker helps sell goods faster. Hiring an extra worker also adds a salary that needs to be paid

Variable cost

Cost that vary with the quantity of a good

Fixed cost

cost that do not vary when you change the quantity produced

Market supply

the total amount of an item that producers in a market are planning to sell at each price

factors that shift the supply curve

Input prices/cost
productivity/technology
prices of related goods
Expectations

substitutes-in-production

when a company finds a new way to make the same product for cheaper

compliments-in-production

goods that are produces together
(ex.) peanut butter and peanut oil

Market

any place where sellers and buyers come together

Market Economy

When prices coordinate the decisions of buyers and sellers

equilibrium

The point on a demand graph where supply meets demand

Q_d >Q_s

Shortage

Q_d <Q_s

surplus

Shortage

When the price is below the equilibrium

Surplus

When the price is above the equilibrium

Demand increase

P* increases and Q* increases

Demand decreases

P* decreases and D* decreases

Supply increases

P* decreases Q* increases

Supply Decreases

P* increases Q* decreases

Supply increases but demand decreases

P* increase Q* ambiguous

Supply and demand increases

P* ambiguous and Q* ambiguous