EC201 Principles of Microeconomics: Key Concepts and Graphs

Positive vs. Normative Economics

Positive statements: fact-based, testable ("A new garage will reduce congestion.") Normative statements: value judgments ("The state should spend more on snow removal.")

Economics

Study of allocating scarce resources to satisfy unlimited wants.

Scarcity

Always exists, even at equilibrium.

Opportunity Cost

Value of next best alternative forgone.

Production Possibilities Frontier (PPF)

Points on PPF = productively efficient; Points inside = inefficient; Points outside = unattainable with current resources.

Movement along PPF

Represents opportunity cost.

Absolute Advantage

Can produce more with same resources.

Comparative Advantage

Lower opportunity cost.

Law of Demand

↑ price → ↓ quantity demanded.

Causes of Increase in Demand

↑ income (normal goods), ↓ income (inferior goods), ↑ price of substitutes, ↓ price of complements, ↑ tastes/preferences.

Inferior Goods

Demand falls as income rises.

Causes of Increase in Supply

Improved technology, ↓ input costs, ↑ number of sellers.

Surplus

Price above equilibrium → quantity supplied > quantity demanded.

Shortage

Price below equilibrium → quantity demanded > quantity supplied.

Price Ceiling

Causes shortage, ↓ producer surplus, ↓ total surplus → deadweight loss.

Price Floor

Causes surplus, ↓ consumer surplus, creates deadweight loss.

Elastic Demand

|Ed| > 1 → quantity responds strongly to price.

Inelastic Demand

|Ed| < 1 → quantity responds weakly to price.

Consumer Surplus

WTP - price.

Producer Surplus

Price - marginal cost.

Total Surplus

Maximized at equilibrium; Taxes reduce total surplus → deadweight loss.

Tax on Sellers

Shifts supply curve left; Buyers pay higher price; sellers receive lower price.

Perfect Competition

Many sellers, identical products, firms are price takers.

Monopolistic Competition

Many firms, differentiated products, firms use advertising to increase perceived demand.

Monopoly

One seller, charges price on demand curve at quantity where MR = MC.

Explicit Costs

Out-of-pocket payments.

Implicit Costs

Opportunity costs of resources you own (e.g., foregone rent).

Diminishing Marginal Utility

Additional units give less utility.

Indifference Curve

All bundles that yield same utility.

Labor Demand Curve

Slopes downward (diminishing marginal product of labor).

Negative Externality

Production imposes external cost (pollution).

Public Goods

Nonrival + nonexcludable; result in free rider problem.

Types of Goods

Private goods: rival & excludable; Public goods: nonrival & nonexcludable; Common resources: rival but nonexcludable; Club goods: nonrival but excludable.