Microeconomics Exam 1 Chapters 1-3

Economics Definition

study of how people make choices when scarcity exists

Tradeoffs

Expressed as an opportunity cost, which is the most preferred possible alternative.

Involves a sacrifice that must be made to get a certain product or experience.

Microeconomics

Study of how households and firms interact with markets, and how the government attempts to influence their choices

Macroeconomics

Study of economy as a whole, including inflation, unemployment, and economic growth.

Scarcity

Society has limited resources and cannot produce all the goods people wish to have.

TINSTAAFL

There is no such thing as a free lunch

Marginalism

In decisions making people weigh extra benefits and costs of an action relative to some other alternative actions

Weigh marginal benefit and marginal cost

"Sunk" or Committed Cost

A cost that has already been incurred and cannot be recovered

Opportunity Cost

Highest valued alternative that must be given up to engage in that activity

Incentive

something that motivates an individual to make a certain decision

Rationalism

Economist assumption that consumers and firms use all available information as they act to achieve their goals.

First Economic Question

What goods and services will be produced?

Second Economic Question

How will the goods and services be produced?

Third Economic Question

Who will receive the goods and services produced?

Productive Efficiency

When a good or service is produced at the lowest possible cost

Allocative Efficiency

Occurs when production is in accordance with consumer preferences

Voluntary Exchange

A situation that occurs in markets when both buyer and seller of a product are better off by the transaction

Equity

Fair distribution of economic benefits

Scientific Method

Abstract models to analyze a complex and real world.

Assumptions, hypothesis, and data collection

Positive Analysis

Concerned with what is.

Measures the costs and benefits of different courses of action

Normative analysis

Concerned with what ought to be

Market System

Individuals answer the 3 questions

Central Planning System

Government answers the 3 questions

Mixed System

Individuals and government answer the 3 questions

PPF

A graph that shows the maximum production of 2 goods given all resources used efficiently

Opportunity Cost equations

Slope= OC of X-Axis variable (Y/X)

1/Slope= OC of Y-Axis variable

Comparative Advantage

Producing a good at a lower OC than competition

Absolute Advantage

The ability to produce more of a good or service than competition, using the same amount of resources

Specialization and Trade

Focus of production efforts on a limited variety of goods.

Use trade for consumption outside PPF

Terms of Trade

Export Prices/Import Prices x100

Demand

Relationship between quantity demanded and price

Law of Demand

Inverse relationship between price and quantity.

Downward sloping line

Quantity Demanded v. Demand

A change in demand will shift the whole curve and a change in quantity demanded is a movement along the demand curve due to change in price.

Demand Shifters

Income, price of substitutes, price of compliments, tastes and preferences

Supply

The direct relationship between quantity supplied and price.

Increasing line on the graph.

Quantity Supplied v. Supply

A change in supply will shift the entire line and a change in quantity supplied will move along the line.

Surplus

When quantity supplied is greater than quantity demanded (above equilibrium)

Shortage

When quantity demanded is greater than quantity supplied (below equilibrium)