Micro units 1-4 vocab (copy)

Scarcity

Limited recourses versus unlimited wants

Economics

The study of how people and societies use scarce recourse

Factors of production

Land ( natural resources)

Labor (human effort)

Capital (tools/machinery)

Entrepreneurship (innovation and risk taking)

Opportunity cost 

The value of the next best alternative that is forgone when a choice is made

Trade offs

All alternatives that are given up when making a choice

Marginal analysis 

A process of comparing expected costs and benefits of an action or decision 

Cost - benefit analysis

A process of comparing expected costs and benefits of an action or decision

What does a PPC (production possibilities curve) show?

The trade offs between two goods an economy can produce using all recourses

Efficiency

Points that are ON the PPC

Inefficiency

Points INSIDE the PPC

Unattainable

Points OUTSIDE the PPC

Law of increasing opportunity cost

As production of one good increases, the opportunity cost of producing another rises

What does economic growth do the PPC?

Shifts the PPC outwards due to more recourses or better technology

Absolute advantage

The ability to produce more of a good with the same resources

Comparative advantage

The ability to produce a good at a lower opportunity cost

Specialization and trade

Both parties can gain if they specialize according to comparative advantage

Example: if country A can produce 10 cars or 20 computers, and country B can produce 5 cars or 10 computers, both benefit by specializing in the good they produce at lower opportunity cost

Law of demand

As price decreases, quantity demanded increases (inverse relatioship)

Law of supply

As price increases, quantity supplied increases (direct relationship)

Equilibrium

The point where quantity demanded equals quantity supplied

Shortage

Demand > supply (price below the equilibrium)

Surplus

Supply > demand (price above equilibrium)

Shifters of demand 

M.E.R.I.T :

1. Market size (number of consumers)

2. Expectations of future prices

3. Related prices (substitutes and complements)

4. Income

5. Tastes and preferences

Shifters of supply

T.R.I.C.E : 

1. Technology (rightward shift when advanced)

2. Related prices (complements and substitutes)

3. Input prices/ costs (wages, energy prices, and raw materials)

4. Competition (number of producers)

5. Expectations

Complements

If a rise in price one of the goods (ex. Hot dogs) it leads to a decrease in demand for the other (hot dog buns)

Substitutes

If a rise in the price of one good (ex. Coffee) it leads to an increase in the demand for the other (tea)

• (things that can replace each other)

Normal goods

Most goods.

If income increases, the demand for these normal goods increase (ex. Something more expensive like lobster)

Inferior goods

If income increases, the demand for the inferior goods decrease (ex. Something less expensive like frozen fish sticks)

Complements in production

Two goods that are produced together — making one automatically helps make the other.

Example:

• Beef and Leather → When cows are raised for beef, leather comes from the same cow. Producing more beef also produces more leather.

Substitutes in production

Two goods that use the same resources, so producing more of one means producing less of the other.

Example:

• Wheat and Corn → A farmer can use the same land to grow wheat or corn. If they grow more wheat, they have less land for corn.

Explicit cost

Costs involving monetary (money) payment

Implicit cost

Non monetary costs

Marginal

Means “Additional” and many decisions are made by comparing the marginal benefit and marginal costs

Utility 

A measure of satisfaction 

Diminishing marginal utility 

As a consumer purchases more of a good/service, the additional satisfaction decreases for each additional unit 

Formula for Utility Maximization

MUx/Px = MUy/Py

Consumer surplus

The area above price equilibrium and below the demand curve.

Represents points that consumers don’t have to pay but can choose to pay if they want. 

Formula: ½ (b x h)

Producer surplus

Area above supply curve and below equilibrium price.

Represents how much lower sellers would be willing to sell a product below the equilibrium price.

Formula: ½ (b x h)

Total economic surplus

Consumer Surplus + Producer Surplus