ECO 2023 - MICROECONOMICS

ECONOMIC PROBLEM

society's wants are unlimited while the resources available to produce these goods & services are limited - SCARCITY

TYPES OF ECONOMIC SYSTEMS

MARKET SYSTEM OR CAPITALISM:consumers & producers determine the market

COMMAND SYSTEM OR COMMUNISM: control economic decision

MIXED CAPITALISM:

FUNDAMENTAL ECONOMIC QUESTIONS

WHAT IS TO BE PRODUCED?

HOW IS IT TO BE PRODUCED?

FOR WHOM IS IT TO BE PRODUCED?

WHAT ABOUT ECONOMIC GROWTH?

PRODUCTION POSSIBILITIES CURVE

WHAT IS IT?

WHAT DOES A POINT INSIDE REPRESENT?

WHAT DOES A POINT OUTSIDE REPRESENT?

WHAT MIGHT CAUSE IT TO TO SHIFT & WHAT DOES A SHIFT REPRESENT?

POSITIVE VS. NORMATIVE ECONOMICS

POSITIVE ECONOMICS ARE FACTUAL STATEMENTS ABOUT THE WAY THINGS ACTUALLY ARE; NORMATIVE ECONOMICS ARE POLICY ORIENTED WITH HOW THINGS 'SHOULD' OR 'OUGHT' TO BE.

ECONOMIC RESOURCES

LAND OR NATURAL RESOURCES:

CAPITAL OR INVESTMENT GOODS:

LABOR:

ENTREPRENEURIAL ABILITY:

DEMAND FUNCTION

Shows quantity demanded & all the things that effect it

DEMAND CURVE

shows the relationship between the quantity demanded of a good & it's price; negative

LAW OF DEMAND

PRICE EFFECT:

SUBSTITUTION EFFECT:

INCOME EFFECT:

CHANGE IN DEMAND

SUBSTITUTE GOODS:

COMPLEMENTARY GOODS:

CHANGE IN QUANTITY DEMANDED

SUPPLY FUNCTION

SUPPLY CURVE

positive

LAW OF SUPPLY

qty supplied & price are positively or directly related. The greater the price, the greater the quantity supplied

CHANGE IN SUPPLY

(shift in the entire supply curve) Results from change in the production, business taxes, expected future price or qty, change in the price of the other produced goods, changes in the number of sellers, change in planned sales at all prices, & change in technology

CHANGE IN QUANTITY SUPPLIED

(movement along supply curve) caused by a change in the price of the given good

EQUILIBRIUM PRICE & QUANTITY

(Pe) Occurs where qty demanded = qty supplied. @ Pe, all sellers willing to sell will be able to sell & all buyers willing to buy will be able to buy.

SURPLUSES

Price > Pe, price floor - above Pe mean Qd

SHORTAGES

Price < Pe, price ceiling - below Pe means Qd>Qs

TOTAL REVENUE (TR)

total sale $ TR =Q*P ; Q=quantity, P=price

AVERAGE REVENUE (AR)

AR = TR/Q = Revenue per unit sold on average; if all units are sold at the same price then AR=TR/Q=PQ/Q=P

MARGINAL REVENUE (MR)

MR=CHANGE IN TR/CHANGE IN Q ; Revenue from selling one more unit, 'the additional'

PRICE ELASTICITY OF DEMAND : (Ep)

ELASTIC: >1

UNITARY ELASTIC:=1

INELASTIC:

RELATIONSHIP BETWEEN PRICE ELASTICITY OF DEMAND & TR

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND PROBLEMS

INCOME ELASTICITY OF DEMAND

NORMAL GOODS: goods w/ a positive income effect are bc that is what we normally expect

INFERIOR GOODS: goods we buy less of as our incomes go up. Inf. goods have a negative income effect. these are in conflict w/ the LOD

GIFFEN GOODS: a good that violates the law of Demand. When the price goes up of this good, people buy more of it. this is a special case and there must be no cheaper subs goods

ELASTICITY OF SUPPLY

TOTAL UTILITY (Tu)

the total amount of happiness or satisfaction associated w/ diff. amounts of something

AVERAGE UTILITY (Au)

Utility per unit of something; Au=Tu/Q=total utility/quantity

MARGINAL UTILITY (Mu)

addition to total utility from one more unit of something; Mu is the slope of the Tu curve, decreases as qty consumed increases. Mu=change in Tu/Q

LAW OF DIMINISHING UTILITY

as someone consumes/has more & more of units of one particular good, while total utility from that good may continue to rise, the marginal utility from on e more unit will eventually begin to fall...

UTILITY-MAXIMIZING RULE

to maximize satisfaction (utility) overall, a consumer must allocate his/her budget so that the:

Mu/P$g1 = Mu/P$g2 = Mu/P$g3 .... in other words, Mu per $ should be the same (approx) for the LAST unit purchased of all goods.

SOLVING UTILITY-MAXIMIZING PROBLEMS

Practice Apples & Oranges

DERIVING THE DEMAND CURVE OR SCHEDULE

MARKET DEMAND CURVE VS. INDIVIDUAL DEMAND CURVES

MDC - horizontal sum of all the individual demand curves.

INDIFFERENCE CURVE ANALYSIS

ICA - ASSUMPTIONS OF MODERN CONSUMER THEORY

MODERN - BASED ON ORDINAL NUMBERS FOR UTILITY(rank/intrinsic) / CLASSICAL - BASED ON CARDINAL NUMBERS (lbs,ft..)

-RATIONAL & wish to max their utility/satisfaction

-CONSUMER CAN TELL WHETHER ONE GROUP OF GOODS IS PREFERRED TO ANOTHER OR IF BOTH ARE LIKED EQUALLY WELL rank combos of goods so that more preferred sets of goods have higher utility numbers

-CONSUMER PREFERENCES MUST BE CONSISTENT

-CONSUMERS MUST PREFER MORE OF A GOOD TO LESS IN THE RELEVANT CHOICE RANGE

-CONSUMERS ARE FACED WITH A BUDGET CONSTRAINT

ICA - INDIFFERENCE CURVE

-cannot intersect bc of rule want more than less.

-show the diff. combinations of two goods that you like equally well.

-the slope of the curve shows the rate at which consumer is willing to trade one good for another & stay equally happy

-the abs. value of the slope is called the marginal rate of substitution [-2]=2

ICA - MARGINAL RATE OF SUBSTITUTION

-the rate at which I am willing to trade one good for more of another. decreases as I move down on Indifference Curve (L to R)

ICA - BUDGET LINE

the slope of the budget line tells us the rate at which we can substitute one good for another

ICA - POINT OF MAXIMUM CONSUMER SATISFACTION

this shows the qty of two goods that will max. the consumers satisfaction given the budget constraint. This is the highest indifference curve (Tu lvl) the consumer can react given this budget.

CONSUMER SOVEREIGNTY

consumer rules; consumers determine the products that are mad by what they buy & don't buy

DEPENDENCE EFFECT

consumers are brainwashed by advertising by producers