Micro Unit `1

Economics

study of scarcity and choice

Microeconomics

the part of economics concerned with single factors and the effects of individual decisions.

Firm

a business organization that produces and sells goods or services to make a profit

Household

a group of people who live together and share resources, such as income and consumption

Trade-off

give up something to get something else

Individual choice

decisions made by individuals about what to do/not do

Resources (4)

Land- natural resources

Labor- the effort of workers

Capital- all manufactured resources (factory, chainsaw, cash, education)

Entrepreneurship- risk taking, innovation, organization

Scarcity

-not enough stuff to satisfy all of society

-all resources are scarce (all that can be sold)

-everyone wants more than is available

Marginal Analysis

study of cost/benefits of doing a little more of an activity vs. a little less

Marginal Benefit

gain of doing something once more

Marginal Cost

cost of doing something once more

Opportunity Cost

what you must give up to get something compared to next best alternative (utility)

Utility

value, what something is worth (measured in utils)

Positive Economics

economics that uses objective data and facts

Normative Economics

economics that focuses on valuing judgement and opinion

3 Basic Questions every economy has to answer

1. What goods and services will be produced?

2. How will these goods and services be produced?

3. Who will receive the goods and services?

Traditional Economy

how things are done based on tradition (hunter gatherers)

Market Economy

kinda capitalist, no central power but many sellers and consumers

Command Economy

factors of production are publicly owned and central authority makes decisions

Mixed Economy

combines parts of traditional, market, command

Incentive

rewards or punishments that motivate particular choices

Property Rights

establish ownership and grant individuals the right to trade goods and services with each other

Production Possibility Curve

helps understand efficiency, opportunity cost, economic growth

Model

Simplified version of reality, help study effects of one change

Other Things Equal Assumption

all other relevant factors in a model remain unchanged

Efficient

no way of making things better without making things worse for someone

Increasing Opportunity Cost

as you continue to increase production of one good, the opportunity cost of producing that next unit increases

ceteris paribus

all other things being unchanged or constant

Constant Opportunity Cost

a situation where the opportunity cost remains unchanged as more units of a particular good are produced

Economic Growth

increase in max amount of goods/services an economy can produce

Technology

technical means for producing goods/services

Productive Efficiency

produces as much as possible

Allocative Efficiency

all products are consumed/used

Trade

people provide goods and services in exchange for goods and services

Specialization

each person specializes in the task they are good at

Comparative Advantage

producing good or service if that person’s opportunity cost is lowest among possible

Absolute Advantage

individual can produce more of good/service given same time and resources

Terms of Trade

The rate at which one good can be exchanged for another

International Trade

the exchange of goods and services between countries, which can include imports and exports

Rational Agents

consumers, producers, others who behave rationally and make optimal decisions

Sunk Cost

cost that has already been incurred and is nonrecoverable. A sunk cost should be ignore in decisions

Explicit Cost

paid for with money

Implicit Cost

paid for with time and missed opportunities

Marginal Utility

changes in total utility generated by consuming one additional unit of that good or service

Marginal Utility Curve

shows how marginal utility depends on quantity of a good or service consumed

Principle of Diminishing Marginal Utility

each successive unit of good/service adds less to total utility than does previous unit

Budget Constraint

limits consumer consumption bundle to no more than income

Budget Line (BL)

shows consumption value of consumer spending all income

Optimal Consumption Bundle

bundle that maximizes consumer’s total utility given budget constraints

Optimal Consumption Rule

in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle