Microeconomics

-Start of Chapter 1

Economics:

The study of choice when dealing with scarcity

Scarcity

Not having enough to fulfill all wants and needs.

*Microeconomics

Study of choices by ppl & firms when dealing with scarcity

…Macro

Study of choices by households, firms, govs + how choices interact

Efficiency:

Get most benefit from LIMITED Resources

Ex: Reese’s pieces for whole class, some are allergic, ppl who aren’t get most benefit

Equity

Equal shares to all individuals

Ex: Every student gets Reese’s Pieces

Equality

Individual and group given Equal OPPORTUNITIES + Resources

Ex: Everyone can sell each Reese for $3

#1st Principle (1-7)

Ppl face tradeoffs(?) due to scarcity

#2 Principle, Opportunity Cost

What you MUST GIVE UP to get something else.
Ex: Sleep for class at 9am.(Taking away hrs of sleep)

3) Rational Choice

Making decisions BASED on Info i CURRENTLY Have

4)Ppl respond to Incentives

Smth that causes a person to ACT

Ex: Getting a god grade because if you do you reward urself with a sweet treat.

5) Trade makes everyone better off overall

Helps society increase well being, but some firms will SUFFER.

Ex: The people in Congo bc of their minerals (being taken/labor)

6) Markets (are a good way to organize trade)

Place where buyers and sellers come together.

7) Governments

Can sometimes improve Market conditions.

Start of Chapter 2

Variable:

A quantity that can CHANGE

Ex: Temp in Dallas

Relationship:

How TWO or MORE Variables are RELATED

Causation:

Changing 1 variable causes OTHER to change

Correlation:

2 variables changing at the SAME Time + Same direction (Up or Down)

Scientific Method

Make observations of the natural world + develop theories

Make assumptions to simplify reality

Collect and analyze data to evaluate theories

Look at natural experiments to see if theory is relevant

Goal of an Economic Model:

To simplify reality to increase understanding

Assumptions:

Limits on the model.

EX: Households own ALL inputs

Inputs vs Outputs:

-Input: Something a firm uses to MAKE a product.

Ex: Flour, cheese, workers, ovens

-Output: what a firm makes

Ex: Pizza (so like end product)

Circular Flow Diagram (put picture of it)

PPF (Production Possibilities Frontier):

Dot on the inside: Possible, inefficient

Dot on the line: Possible, efficient (using all resources)

Do outside of the line: Beyond, impossible

Start of Chapter 3

Absolute Advantage:

The ability to produce MORE units of Output with the same units of INPUT than another producer.

Comparative Advantage

One producer can produce the Output at a LOWER Opportunity COST than the other producer.

Start of Chapter 4

Market:

A place where Buyers and Sellers come TOGETHER (to exchange GOODS/SERVICES and CURRENCY)

Assumption:

The market is competitive

(Sellers are PRICETAKERS, Buyers are TOO)

Demand

The relationship between Price (P) and Quantity Buyers WANT to buy at EACH price in the Market.

Quantity Demanded (Qd)

The quantity that buyers WANT to buy at a particular (SPECIFIC) PRICE!

Law of Demand

As Price INCREASES, the quantity that buyers want to buy DECREASES

Demand Schedule

Market Demand

At Price (P), add TOTAL Quantities demanded by ALL Buyers to get this!

IF Price (P) or Quantity Demanded (Qd) changes,

move ALONG the Demand Curve.

-Shifts in Demand: Something from OUTSIDE affects the graph

Why?

1. Changes in income (y)

A) Normal Good: Increased INCOME »»» INCREASED Demand

Ex: I buy clothes, if I have more money, I buy MORE clothes

B) Inferior Good: Increased INCOME »»» DECREASED Demand

Ex: I buy soap for cheap, but if I get money, I won’t buy that soap for cheap.

Shifts in Demand

2.Price of Related Goods: ???

A) Substitutes: Choosing one or the other.
Ex: Clothes or Perfume, Increase in Price of Good A, decrease in QD of A, demand for Good B goes up?

B) Complements: You buy one, you buy the other.

Ex: Flashlight and batteries, Increase in price of one decreases the demand of the other.

Shifts in Demand

3.Changes In Expectations: Changes in Future affect prices NOW

-Changes in Future INCOME: If expecting increased income in two weeks, Demand goes UP Today (you buy more cuz yk you’ll have $ later)

-Changes in Future PRICES: If prices are expected to decrease, demand will DECREASE (cause you wait till price is lower)

Shifts in Demand:

4.Changes in Tastes:

What people like to buy (preferences)

Shifts in Demand:

5.Number of Buyers:

EX: Migration into DFW, WAY HIGHER Demand (More housing, more students into schools)

Supply(S):

Relationship between prices and the quantities Firms CHOOSE to Supply at DIFFERENT prices.

Quantity Supplied:

The quantity firms CHOOSE to sell at a SPECIFIC Price.

Ex:Sell water for ____ amount at EACH price.

Law of Supply:

AS price INCREASES, the Quantities Firms want to Produce and SELL Increases (make more money)

Supply Schedule:

Changes (Shifts in Supply)

1.Changes in INPUT Prices: Paid by FIRM

Caused by a change in a variable OUTSIDE the graph (not Price or Q)

Ex: Higher input prices, makes firm production more EXPENSIVE

(Changes, Shifts in Supply)

2) Changes in Technology

A) Positive Change: Helps firm produce MORE (Upgraded computer system)

B) Negative Change: (Computer virus) = Lower SUPPLY

Changes, shifts in Supply

3) Expectations ????

A) Expect Input prices to change in future > > > Firm may INCREASE Supply now

If expect lower input(paid by firm) prices, firm will decrease Supply now

B) Expect output (paid TO Firm) prices to decrease, firm will INCREASE Supply now?

4) Number of Sellers (suppliers)

Higher number of sellers? > > > Higher Supply

Lower number, LOWER supply

Equilibrium

Price at which Quantity Supplied by firms = Quantity Demanded by Buyers

Qs= Qd

Shortage:

Qs < Qd , Qd- Qs

Surplus

Qs > Qd, Qs - Qd