MICROECON UN1

1. Economics

The study of how people make choices when resources are limited but wants are unlimited.

2. Scarcity vs. shortage

Scarcity = resources are inherently limited. Shortage = producers don’t supply enough of a good at the current price.

Think: scarcity is always there; shortage can change.

3. Opportunity cost

The next-best alternative you give up when making a choice.

If you choose to study instead of going to a movie, the movie is your opportunity cost.

4. Factors of production

The four resources used to produce goods/services: land, labor, capital, entrepreneurship.

• Land = natural resources

• Labor = human effort

• Capital = tools/machines/buildings + human knowledge/skills

• Entrepreneurship = organizing resources and taking business risks

5. Incentives

Rewards or punishments that influence people’s choices.

Higher wages can incentivize people to work more.

Economic Systems

6. Economic systems

Systems answer WHAT, HOW, and FOR WHOM goods/services are produced.

7. Market vs. command economy

Market: individuals/businesses make most decisions. Command: government/central authority makes most decisions.

8. Traditional vs. mixed economy

Traditional: decisions based on customs. Mixed: combines market forces with government involvement.

9. Property rights + laissez-faire

Property rights give people ownership/control over resources. Laissez-faire means limited government involvement in the economy.

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Making Choices

10. Marginal analysis

Compare the additional benefit of an action to its additional cost.

Do it if MB ≥ MC.

Marginal = “one more.”

11. Cost-benefit analysis

Compare the total expected benefits and costs of a decision to determine whether it is worthwhile.

12. Sunk cost

A cost that has already happened and cannot be recovered. Ignore it when making a current decision.

13. Positive vs. normative economics

Positive = what is/can be tested. Normative = what should be/opinion or value judgment.

PPC — VERY IMPORTANT

14. Production possibilities curve (PPC)

Shows the maximum possible combinations of two goods an economy can produce with its available resources and technology.

15. PPC points

• On the curve = efficient

• Inside = inefficient

• Outside = currently unattainable

16. Why does the PPC slope downward?

Resources are limited, so producing more of one good requires giving up some of the other

17. PPC shape

• Straight/linear = constant opportunity cost

• Bowed outward = increasing opportunity cost

• Bowed inward = decreasing opportunity cost

18. Economic growth

An economy’s ability to produce increases, causing the PPC to shift outward.

19. What shifts the PPC?

Changes in resources, technology, or productivity.

More/better resources or technology

outward.

Loss of resources/productivity

inward.

Comparative Advantage & Trade

20. Absolute advantage

Being able to produce more of a good using the same resources.

21. Comparative advantage

Being able to produce something at a lower opportunity cost.

The easiest way to remember:

Absolute = Amount

Who can make MORE?

Comparative = Cost

Who gives up LESS?

22. Specialization

Producers should specialize in the good for which they have the comparative advantage.

23. Gains from trade

Specialization + trade can allow both sides to consume more than they could produce on their own.

24. Terms of trade

The rate at which goods are exchanged. For both sides to benefit, the trade rate must fall between their opportunity costs.

Utility & Consumers

25. Utility

The satisfaction/benefit a person gets from consuming something.

26. Marginal utility + diminishing marginal utility

Marginal utility = additional satisfaction from one more unit. Diminishing marginal utility = each additional unit generally provides less additional satisfaction.

27. Budget constraint

The limit on what a consumer can afford based on their income and prices.