Microeconomics Final Review

Specialization - Division of Labor (6)

do what we do best and trade all the rest

-can’t specialize w/o opportunity to trade

Benefits of Specialization (6)

makes people more physically productive and makes people wealthier even w/o increasing physical productivity

Theory of Absolute Advantage x (6)

specialize in producing good for which they have lowest resource cost

Ex. Takes the least amount of resources/time in all tasks

Theory of Comparative Advantage (6)

specialize in producing good for which they have the lowest opportunity cost

-people specialize in this way

-every person has this in something

Implications of Comparative Advantage (6)

-understanding trade

-doesn’t make sense / irrational with Abs. Adv.

-understanding social cooperation

-every war starts w/ trade barriers

Exports (6)

selling something to a buyer in another country

-Difference b/w Qd and Qs

Imports (6)

buying something from a seller in another country

-Difference b/w Qs and Qd

Free Trade (6)

trade unrestricted by physical force, such as government intervention or special taxes

-growth and prosperity

Effects of Export (6)

in order for US to buy, domestic prices must be raised until it meets world price

Gap- exports - more goods being made in the US than being bought domestically

Effects of Imports (6)

in order for US to sell, domestic prices must be lowered until it meets world price

Gap - imports - more goods being bought foreign instead of domestically

Trade Barriers (6)

any gov’t action that restricts international trade

Protectionism (6)

support for trade barriers

Tariff (6)

tax on imports

Price of Good (7)

amount of money buyer has to spend to buy it from the seller

Cost of Good (7)

amount of money the seller has to spend to produce it

Total Cost (TC) (7)

cost of producing a certain quantity of units of a good

VC + FC

Fixed Cost (FC) (7)

costs that don’t vary w/ quantity of units produced

Variable Cost (VC) (7)

costs vary w/ the quantity of units produced

Marginal Cost (7)

cost of producing one more unit of good

Law of Diminishing Return (7)

fixed outputs and increasing variable outputs, at some point the marginal product of the variable input must decline

Marginal Product (7)

additional output produced when one more unit of variable input is added

Average Total Cost (ATC) (7)

total cost divided by the quantity of units

TC / q

Average Fixed Cost (AFC) (7)

total fixed cost divided by the quantity of units

TFC / q

Average Variable Cost (AVC) (7)

total variable cost by the quantity of units produced

TVC / q

AC/MC/AVC Curve (7)

when marginal is below the average, average is decreasing

when marginal is above the average, average is increasing

Short Run (7)

time horizon where some inputs and costs are fixed, and some are variable

Long Run (7)

time horizon where all inputs and costs are variable

Economies of Scale (7)

range where long run average total costs decrease as outputs increases

Diseconomies of Scale (7)

range where long run average total costs increase as output increases

Constant Returns to Scale (7)

range where long run average total cost stays constant as output increases

Optimal Firm Size (7)

quantity of production that minimizes long run average total costs

Perfect Competition Model (7)

zero transaction cost

no coercive barrier to entry

Transaction Costs (7)

any cost going through with an exchange other tha price of good itself

Coercive Barrier to Entry (7)

use or threat of force to prevent others from offering their products for sale to same consumers

Competition and Price Elasticity of Demand (7)

individuals can’t fix their own price buy must go with market

S-D graph for Industry as whole but all firms see is set price

Total Revenue (7)

amount of money a seller receives in exchange for their products

Marginal Revenue (7)

additional revenue a seller gets from selling one more unit of a good

Profit (7)

difference between a firm’s total revenue and total costs

Accounting Profit (7)

total revenue minus explicit cost

Economic Profit (7)

total revenue minus explicit and implicit costs

How much better off are you buy doing a certain job

Profit Maximizing (7)

when Marginal Cost = Marginal Revenue

selling all profitable units and no unprofitable units

Zero Economic Profit in Long Run (7)

firms will leave and enter industry based on losses and profits

losses: supply decreases (left), increasing prices as firms leave, going back to equilibrium, shrinking losses

profit: supply increases (right), decreasing prices as firms enter, going back to equilibrium, shrinking profit

Comparative Statics (4)

studying how supply and demand curve shift (increase = right, decrease = left)

Change in Quantity Demanded vs Change in Demand (4)

Along Curve vs Shifting Market Clearing Prices (Left/Right)

- if demand changes, the quantity demanded changes

Shifts of the Demand Curve (Qd) (4)

price(along), consumer tastes, number of buyers, income, prices of related goods)

Consumer Tastes (4)

More Interest = left/increases; less = right/decreases

Number of Buyers (4)

More Buyers = left/increases; less = right/decreases

Income Elasticity of Demand (4)

effect that a change in a person’s income has on their demand for a certain good

Normal Good (4)

demand increases (shifts right) when income increases

demand decreases (shifts left) when income decreases

Inferior Good (4)

demand decreases (shifts right) when income increases

demand increases (shifts left) when income decreases

Elasticity (4)

measure of responsiveness of one variable to change in another variable

Prices of Related Goods - Cross Price Elasticity of Demand (4)

effect that a change in price of one good has on demand of another good

Substitutes (4)

goods that perform a similar function of satisfying a similar human desire

-if good y and x are … when price of good y increases, demand for good x shifts right (increases)

-if good y and x are … when price of good y decreases, demand for good x shifts left (decreases)

Complements (4)

goods that are more valuable when consumed together

-if good y and x are … when price of good y increases, demand for good x shifts left (decreases)

-if good y and x are … when price of good y decreases, demand for good x shifts right (increases)

Shifts of the Supply Curve (Qs) (4)

price, number of sellers, technology, input prices, pre-unit taxes/subsidies

Number of Sellers (4)

More of = shifts right (increases)

Technology (4)

Improvement = shifts right (increases)

Destruction = shifts left (decreases)

Input Prices (4)

Increases = Shift Left (Decreases)

Decreases = Shift Right (Increase)

Taxes (4)

gov’t takes money when engaging in a certain activities (shifts left = decreases)

Subsidies (4)

gov’t gives money when engaging in certain activities (shifts right = increases)

General Form of Equation - Elasticity (4)

Percent Change of Y / Percent Change of X

Own-Price Elasticity of Demand (4)

responsiveness of quantity demanded for a good to change in the price of that good

EQxD, Px = Percent Change of Quantity Demanded / Percent Change of Price of X

-always negative

Own-Price of Supply (4)

EQxS, Px = Percent Change of Quantity Supplied / Percent Change of Price of X

-always positive

Inelastic (4)

-When abs. value of good’s O-PED < 1

Percent Change of Quantity Demanded < Percent Change of Price of X

Elastic (4)

-When abs. value of good’s O-PED > 1

Percent Change of Quantity Demanded > Percent Change of Price of X

Total Revenue (4)

Price times Quantity

if Inelastic: Percent Change of TR Increase = Increase Percent Change of Price and small Decrease in Percent Change of Quantity = Increase Profit

If Elastic: Percent Change of TR decrease = small Increase Percent Change of Price and small Increase in Percent Change of Quantity = Decrease Profit

Perfectly Elastic (4)

More Elastic = Flatter Curve (Horizontal)

Perfectly Inelastic (4)

More Inelastic = Steeper Curve (Vertical)

Income Elasticity of Demand Equation (4)

EQxD, M = %DeltaQxD / %DeltaM

Normal Good (+) = +/+, -/-

Inferior Good (-) = -/+, +/-

Cross Price Elasticity of Demand Equation (4)

EQxD, Py = %DeltaQxD / %DeltaY

Subsititutes(+) = +/+, -/-

Compliments (-) = -/+, +/-

Consumer Surplus (4)

measure of the gain that the buyer experiences from exchange

-area between the demand curve and the price

Producer Surplus (4)

measure of the gain that the seller experiences from exchange

-area between the supply curve and the price

Total Gain From Trade (4)

sum of consumer and producer surplus

CS + PS

Equilibrium (4)

situation in which no individual, taking the behavior of all other given, wants to change their own behavior

Shortage (4)

quantity supplied is lower than the quantity demanded

-sellers raise their prices and … shrinks and disappears at p*

Surplus(4)

quantity demanded is lower than quantity supplied

-sellers lower their prices and … shrinks and disappears at p*

Dead Weight Loss (4)

gains from trade that is not being made

Economic Efficiency (4)

situation in which all possible gains from trade are being made

Entrepreneurs (4)

people who take advantage of a profit opportunity in the market

Price System (4)

-information system = only common denominator in value systems

-incentive system = free market economy

Direction of Causation (5)

causal relationship between one event and another

Price Control Laws (5)

law that mandates what price buyers and sellers must trade at

Max Price Control Laws (Price Ceiling)(5)

law that prohibits trading above legal max

effective: set below equalibrium

Min Price Control Laws (Price Floor)(5)`

law prohibits trading below legal min

effective: set above equalibrium

Cost-Benefit Analysis of Min Price Control Laws (5)

-creates surplus

-benefits some harms other producers

-harms all consumers

Cost-Benefit Analysis of Max Price Control Laws (5)

-creates shortage

-benefits some and harms other consumers

-harms all producers

-more harm that good

Rent Control Laws (5)

max price control on rental housing

-Effects: shortage, ruining buildings, lawbreaking, misallocation of housing

Price-Gouging / Laws (5)

charging a price that is too high

-max price control laws imposed on necessities during an emergency, typically set at the pre-emergency price

Economics (1)

social science that studies production and trade

Spontaneous Order (1)

order that is a product of human action, but not human design; generated by human behavior without a hierarchy

Positive Analysis (1)

analysis that attempts to describe the way things are in reality; “what is” - more objective

Normative Analysis (1)

analysis that describes a value judgement; “what should be” - more subjective

Economics is… (1)

a positive science; doesn’t mean economists don’t care about normative issues and that lessons learned from econ can’t affect normative beliefs

Theory (1)

abstract explanation of some phenomenon; tell how things are related to each other and leaves out nonessential details

Society (1)

group of people who have moral, political, or economic relationships with each other

Social System (1)

set of rules that determine role of physical force in human relationships

Property Right (1)

moral / legal right to control a resource and to exclude other from using it

Market Economy (1)

social system in which resources are privately owned and controlled;

Ex: Free-Market System, Laissez-Faire, Capitalism

Implications: Initiation of force is prohibited; social interaction is based on consent (voluntary)

Command Economy (1)

Social System in which resources are collectively owned and controlled (through the government)

Ex: Socialism, Communism, Fascism, Feudal Estate, Prison / Slave Labor

Implications: manged by “planning agency”; social interaction is not voluntary; must be explicit / implicit threat of physical force to compel people to conform

Mixed Economy (1)

Social System in which some resources are privately owned and controlled and some owned and controlled by government