Principles of Microeconomics Exam 1

Microeconomics

the study of how
households and firms
make decisions and how
they interact in markets

Macroeconomics

the study of economywide
phenomena, including
inflation, unemployment,
and economic growth

Scarcity

the limited nature of society's
resources

Opportunity Cost

whatever must be
given up to obtain some item

Consumer Surplus

the amount a buyer is
willing to pay for a good
minus the amount the
buyer actually pays for it

Producer Surplus

the amount a seller is
paid for a good minus the
seller's cost of providing it

Direct Relationship

Two variables move in the same direction. It one increases the other increases. If one decreases the other decreases.

Inverse Relationship

Two variables move in opposite directions. If one increases the other decreases; and if one decreases the other increases.

Independent Relationship (Zero Relationship)

No relationship at all.

Price Ceiling

a legal maximum on the
price at which a good can be sold

Price Floor

a legal minimum on the
price at which a good can be sold

Positive Economics

The scientific aspect of economics that determines "what is?"

Normative Economics

The portion of economics that attempts to address "what should be?"

Law of Supply

the claim that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises

Law of Demand

the claim that, other
things equal, the quantity demanded of a
good falls when the price of the good rises

Equilibrium

a situation in which
the market price has
reached the level at which
quantity supplied equals
quantity demanded

Price Elasticity of Supply

a measure of how much
the quantity supplied of
a good responds to a
change in the price of
that good, computed as
the percentage change in
quantity supplied divided
by the percentage change
in price

Cross Price Elasticity of Demand

a
measure of how much the quantity
demanded of one good responds to a
change in the price of another good,
computed as the percentage change in
quantity demanded of the first good
divided by the percentage change in
the price of the second good

Income Elasticity of Demand

a measure
of how much the quantity demanded of
a good responds to a change in consumers'
income, computed as the percentage
change in quantity demanded divided by
the percentage change in income

Utility - Definition

a measure of happiness or
satisfaction

Capital

the equipment and
structures used to produce
goods and services

Production Possibilities Frontier

A graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production.

Goods

A material that satisfies human wants, and provides utility.

Supply Curves

a graph of the relationship
between the price of a good and
the quantity supplied

Demand Curves

a graph of the relationship
between the price of a good and
the quantity demanded

Shortages

a situation in which quantity
demanded is greater than quantity
supplied

Surpluses

a situation in which quantity
supplied is greater than quantity
demanded

Substitutes

two goods for which an
increase in the price of one leads to an
increase in the demand for the other

Complements

two goods for which an
increase in the price of
one leads to a decrease in
the demand for the other

Changes in Demand

Shifts or pivots in the demand curve

Changes in Supply

shifts or pivots in the supply curve

Market Equilibrium

Supply and demand are equal.

Utility - Concept (What does it mean when we say that something gives us utility?)

It is a "good" good.

Types of Economies

See "Lecture 02, Slide 27"

Determinants of Demand

1. Income - Money earned over a period of time
2. Wealth - Net Worth
3. Tastes - Changes in Taste
4. Price of Substitutes - Wine
5. Price of Complements - Pizza
6. Future Prices - Memorial Day

Determinants of Supply

1. Input Prices - Resources and Raw Materials
2. Technology - More Efficient Use of Resources
3. Number of Sellers
4. Future Prices - Price Expectations
5. Government Policies A. Subsidies B. Taxes C. Restrictions
6. Weather (Agriculture)

Cross Price Elasticity of Demand (Between two Products)

a measure of how much
the quantity demanded
of one good responds to
a change in the price of
another good, computed as
the percentage change in
quantity demanded of the
first good divided by the
percentage change in the
price of the second good

Income Elasticity of Demand

a measure of how much
the quantity demanded
of a good responds to
a change in consumers'
income, computed as
the percentage change
in quantity demanded
divided by the percentage
change in income

Tax Incidence

the manner in which the
burden of a tax is shared
among participants in a
market

Resources

Labor, Capital, Land, Natural Resources, and Entrepreneurship

Labor Resources

The time people spend producing goods and services

Land Resources (Natural Resources)

Gifts of Nature such as physical space and prime materials (timber, arable land, crude oil, iron ore, coal, etc.)

Renewable and Exhaustible Resources

Renewable Resources

Resources that can regenerate themselves so they need never run out

Exhaustible Resources

Resources that are available in limited amounts

Entrepreneurial Resources

Entrepreneurship and Management

Entrepreneurship

The willingness by creative people to take risks to create new and innovative products.

Management

The ability to combine the other resources (labor, capital, and natural resources) into a productive venture.

Capital Resources

Something produced that is long-lasting and used to produce other goods

Physical Capital

Long lasting physical goods that are themselves used to produce other products.

Human Capital

Skills and Knowledge possessed by workers, that last for many years, which itself goes into producing other things.

Capital Stock

The total amount of capital available to a nation, in all forms, for productive use at any given time.

Capital Good

Can be used to make other capital goods or consumer goods

Financial Capital

Owners of the resources of a company or society, most often represented by shares of stock.

Bad

Anything with negative value to the consumer.

Inferior Good

a good for which, other
things equal, an increase
in income leads to a
decrease in demand

Normal Good

a good for which, other
things equal, an increase
in income leads to an
increase in demand

Neutral Good

goods that have a demand that is not dependent to the income.

Price Elasticity of Demand

a measure
of how much the quantity demanded of
a good responds to a change in the price
of that good, computed as the percentage
change in quantity demanded divided by
the percentage change in price