Principles of Microeconomics ECO211

definition of economics

The study of how individuals, institutions, and societies allocate scarce resources. how to make choices in a world of unlimited wants and limited means/ability to meet them

scarcity

all resources are scarce, matter can not be created or destroyed - finite amount of matter + energy in the world

result of scarcity

all people/groups/societies face tradeoffs in decisions making

opportunity cost

the cost of the next best alternative that is given up when an action is undertaken

utlity

The pleasure, happiness, or satisfaction obtained from consuming a good or service

individuals allocate xyz to ...

time energy money to maximize their satisfaction

when someone weights costs + benefits

their economic decisions are rational and purposful not random or chaotic

rationality does not imply

correctness

rationality implies

deliberateness

marginal

additional or next - incremental cost/revenue/benefit

marginal benefit

additional benefit provided by a choice

marginal cost

additional cost incurred by a choice

all humans engage in

marginal thinking whether they recognize it or not

what is it costing you?

direct costs

what else would you be doing with the time/money/resources spent?

opportunity costs

ceteris paribus

"all things stay the same" only study the direct impact of the variable in question

economic theories are principles are developed through

scientific method

theory

hypothesis that has held up to continuous independent verification

evolution

a theory that has held up to repeated independent evaluation

well tested and widely accepted economic theory is referred to as

economic law/economic principle

positive statement

factual statement that can be verified

positive economics

focuses on facts and cause-and-effect relationships

normative statement

moral/ethical statement

normative economics

Incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal

markets

every good or service has a market, brings buyers and sellers together, where exchange between buyers and sellers occurs

externality

A cost/benefit not directly born/received by the parties in a transaction ex) Pollution, Herd Immunity, etc

2 systems

command and market systems

answers 2 questions

Who owns the factors of production? What method used to motivate, coordinate, and direct economic activity?

command system

socialism and communism, gov owns most or all of the property

market system

private ownership of resources, private economic decision marking thru markets, Goods and services are produced and resources are supplied by whoever is willing and able to do so - results in competition among independently acting buyers and sellers of each product and resource AKA Capitalism

self interest

each economic unit tries to achieve its own particular goal

competition

market system depends on competition between economic units - requires 1) two or more buyers and two or more sellers acting independantsly in a particular product or resource market 2) freedom of buyers and sellers to enter or leave markets freely

specialization

Use of resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services

division of labor

specialization of individuals based on natural abilities - improves the skills of individuals

five fundamental q's

1) what goods and services will be produced? 2) how will the goods and services be produced? 3) Who will get the goods and services? 4) how will the system accommodate change? 5) how will the system promote progress?

microeconomics focuses on

individual units

law of demand

As the price of a product increases, the quantity of the product demanded decreases

diminishing marginal utility

The additional benefit of the next unit consumed reduces (diminishes) as consumption rises (u like it less the more you consume)

income effect

Lower product prices result in an individual being able to purchase more of the product without a change in income vice versa higher product prices result in an individual being able to purchase less of the product without a change in income

substitution effect

Lower product prices mean that buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive. The product whose price has fallen is now "a better deal" relative to the other products Ex.) If the price of chicken falls, ceteris paribus, then chicken will be purchased instead of beef or pork

changes in quantity demanded

•Movement along the demand curve
•Caused by a change in supply

change in demand

•Shift of the entire demand curve
•Leftward shift = Decrease in demand
•Rightward shift = Increase in demand
•Caused by a change in the determinants of demand

determinants of demand

Consumer Tastes and Preferences, # of buyers, income, price of related products, price of related products, consumer expectations

normal good

superior goods (most goods), increase in income = increase in demand, decrease in income = decrease in demand

substitutes

one product that can be used in place of another

complements

one product that is used w another - they go together ex: peanut butter and jelly, directly realated

decrease in the price of a product w a complement

increases demand for product + compliment

increase in the price of product w a compliment

decreased demand for product + compliment

law of supply

As the price of a product increases, the quantity supplied increases

change in quantity supplied

movement along the supply curve

change in supply

•Shift of the entire supply curve
•Leftward shift = Decrease in supply
•Rightward shift = Increase in supply
•Caused by a change in the determinants of supply

determinants of supply are (general)

•Anything that affects the profitability of a product to suppliers

determinants of supply

resource prices, technology, taxes, subsidies, price of other goods, producer expectations, # of sellers

equilibrium

point where quantity supplied = quantity demanded

equilibrium price

price where output and consumption are equal

elasticity

price sensitivity of deamnd/supply

elasticity measures

the magnitude of the change in quantity for a given change in price

elastic

large changes in quantity demanded when theres a change in price, usually have substitutes and are not necessities

inelastic

smaller changes in quantity demanded when theres a change in price, usually necessities - no subsititues ex: medicine, electricity, gas

perfectly elastic

price is fixed across all output levels (horizontal line)

perfectly inelastic

output is fixed at all price levels (vertical line)

more substitutes

greater price sensitivity - greater elasticity

less substitutes

lower price sensitivity - greater inelasticity

luxury goods

very price sensitive

necessitities

less price sensitive - need to buy them regardless

excise taxes

elastic goods/services

antiques

limited + fixed supply, highly inelastic supply, higher prices compares with reproductions

reproductions

•Output is variable based on demand
•More elastic supply than antiques
•Lower prices than antiques

fluctuations in gold prices

•Highly inelastic supply
•Increases in demand cause large price increases

cross price elasticity of demand when e>0

products x and y are subsititutes

cross price elasticity of demand when e<0

products x and y are compliments

cross price elasticity of demand when e=0

products x and y are independent

income elasticity of demand when e>0

normal good

income elasticity of demand when e<0

inferior good

elasticity when e<0

inelastic

elasticity when e>0

elastic