Microeconomics- Test 1

Demand Determinants

• Taste (Desire)

• Income

• Other Goods

• Expectations ( not based on price, but what the end goal is for the consumer)

• Number of Buyers 

Law of Increasing Opportunity Cost

Due to scarcity or lack of resources Opportunity Cost is constantly increasing. For example if you use up a ton of coal to run a factory you are not only having an opportunity cost of not being able to use that coal anywhere else but you also can never reuse that ton of coal meaning there is less of the resource coal. Increasing the opportunity cost for the next time you use coal as we all will eventually run out. 

Law of Demand

as price decreases the quantity demanded increases

Law of Supply

as price increases the quantity supply increases 

Economic Rationals of Government Intervention

• Public Goods

• Externalities

• Market Power

• Inequity

Public Goods

Are goods that the consumption by one individual does not interfere with the consumption of another. Governments intervene to produce public goods, such as police, flood control, or military services, because of the free-rider dilemma.

Externalities 

An externality refers to a cost or benefit that affects a party who did not choose to incur that cost or benefit. They can be negative or positive effects. Government intervention can come from negative externalities like second hand smoking, in attempts to cut those negative effects. Or in positive externalities like promoting vaccines which help to keep not only individuals safe but also others around them as it limits the spread of disease. 

Market Power

In this case, government intervention would come if monopolies started to form in any given sector. In order to avoid the negative effects of restricted supply. It refers to the situation in which one producer or consumer has the power to impact the entire market price of a single good or service. Anti-Trust policies protect against monopolies.

Inequity

Depending on our vision of equity, governments might intervene when certain market benefits are seen as unequal to the wider population than those they benefit. Progressive taxation systems are an example of government intervention because of inequity.

Supply Determinants 

• Technology

• Factor Cost

• Number of Sellers

• Taxes 

• Other Goods (What else could they produce)

• Expectations 

Optimal Mix

The most desirable combination of output attainable with existing resources, technology, and social values.

Market Mix

The mix of output of goods and services based on market forces/marketmechanism

Normal Goods

Good for which demand increases when income rises.

Inferior Goods

Goods for which demand decreases when income rises.

What, How, For Whom

• What Goods and Services do we make? (GDP)

• How do we make those goods (Factors of Production)

• For whom do we make those goods or services

Factors of Production

• Land 

• Labor

• Capital

• Entrepreneurship 

Equilibrium Price

Price where Qd = Qs

• Prices above equilibrium result inn a surplus, and apply downward pressure to price and supply

• Prices below equilibrium result in a shortage, and apply upward pressure on supply and price 

Social Cost

The total cost of all resources used for a particular production activity, includes externalities

Private Cost

Resource cost for specific producer, does not include externalities

Utility

Economic term used to refer to expected satisfaction from consumption of a good or service

Total Utility

Refers to satisfaction received from consumption of entire good

Marginal Utility 

Refers to satisfaction from consuming the last unit of product

Marginal Utility Formula

• MU= Change in Total Utility / change in quanity 

Law of diminishing marginal utility

Additional utility obtained from a product declines with each consumption 

Marginal utility per dollar formula

• MU per dollar = MU/P

Use to calculate the maximum utility for a consumer 

Elastic 

Means that the percent change in Qd will be noticeable affected by a percent change in price. In this case the percent change of Qd exceeds the percent change of price

Inelastic

Means that the percent change in Qd will not noticeably be affected by a percent change in price. In this case the percent change of Qd does not exceed the percent change of price. 

Unitary Elastic

The percent change in Qd is exactly equal to the percent change in pirce

Progressive Tax System 

A tax system in which tax rates rise as incomes rise. Federal Income taxes are progressive 

Proportional Tax

A tax that levies the same rate on every dollar of income.

Regressive Tax

A tax system in which tax rates fall as incomes rise.

Production Possibilites Curve

Each point on the PPC depicts an alternative mix of output that could be produced.

Total Revenue Formula 

Price x Quanity 

Price Elasticity of Demand

Measure of how the Qd changes in response to change in price

Price Elasticity of Demand Formula

PE= % change in Qd / % change in price 

Percent Change Formula

= Change in Qd, P (old-new)/ Average quantity/P

Cross-Price elasticity of demand;

Percent change in Qd of one good divided by percent change in the price of another good

Cross-Price Elasticity Formula

% change Qd of good x/ % change of P for good y

Income Elasticity of Demand:

Relate the percent change in Qd to the percent change in income

Income Elasticity Formula 

% change in Qd/ % change in income 

Price Elasticity of Supply Formula

% change in Qs/ % change in price

Why is the PPC Curve generally considered to be both negatively slopped and concave

The Production Possibilities Curve (PPC) is typically downward sloping because of scarcity; to produce more of one good, resources must be diverted from the production of another, resulting in a trade-off. The curve is usually concave (bowed outward) due to the principle of increasing opportunity cost. As you move along the curve, shifting resources from one good to another, these resources are not perfectly adaptable. Initially, you might transfer resources that are well-suited for the new production, but as you continue to shift, you’re forced to use resources that are less and less suited, leading to progressively larger decreases in the production of the alternative good for each additional unit produced. This increasing opportunity cost results in the concave shape.