Microeconomics

Scarcity

The condition in which human wants are forever greater than the available supply of time, goods, and resources

What does scarcity force us to do?

Every nation must decide:

1. What to produce

2. How to produce

3. For Whom are the producst produced

Economics

The study of how society chooses to allocate its scarce resources to the production of goods and services to satisfy unlimited wants

Macroeconomics

The branch of economics that studies decision making for the ecnomy a a whole

Microeconomics

The branch of economics that studies decisions making a single individual, household, firm, industry, or level of government

Resources

the basic categories of inputs used to produce goods and services

Land

Any natural resource provided by nature that is used to produce a good or service

Labor

the mental and physical capacity of workers to produce goods and services

Capital

A human-made good used to produce other goods and services

Model

A simplified description of reality used to understand and predict the relationship between variables

ceteris paribus

“all other things remain unchanged”

equity

fairness in the way production is distributed among members of society

positive economics

an analysis limited to statements about “ what is” that can be tested and determined to be true or false

Normative economics

An analysis based on subjective value judgements regarding “what ought to be” that cannnot be tested.

Direct Relationship

a positive association between two variales. when one variable increases, the other variable increases, and when one variable decreases, the other variable decreases.

How are direct relationship expressed graphically?

A direct relationship is expressed graphically as an upward sloping curve

Inverse Relationship

A negative assocation between two variables . When one variable increases the other variable decreases, and when one variable decreases, the other variabkle increases.

How are all inverse relationships expressed graphically?

An inverse relationship is expressed graphically as a downward sloping curve.

Independent relationship

A zero association between two variables. When one variable changes, the other variable remains unchanged (horizontal line)

How is a three-variable relationship depicted?

by a graph showing a shift in a curbe when the ceteris paribus assimption is related and a third varible (such as annual income) not on either axis of the graph is allowed to change

Movement along a curve?

a change in one of the variables shown on either of the coordinates axes of the graph

Shift in a curves postion on the graph?

A change in a variable not shown on one of the coordinates axes of the graph causes a shift in a curve’s position on the graph

Demand curve

A curve that shows the diferent quantities of product consumers are willing to purchase at various prices during a specified period of time, ceteris paribus

Law of demand

The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchases in a defined time period, ceteris paribus

Why does a demand curve have a nagative slope?

As the price per unit of a good or service falls, buyers can afford to buy more units per period of time.

Market Demand

The horizontal summation of the individual demand curves in a market.

What causes a a change in the quantity demanded?

is caused by a change in the price and its reflected as movement along a demand curve

change in demand?

an increase or a decrease in the quantity demanded at each possible price

Increase in demand

an increase in the quantity demanded at each possible price. rightward shift on the demand curve

decrease in demand

a decrease in the quanitity demanded at each possible price. Leftward shift of the demnd curve.

What causes a change in demand?

caused by a change in one or more non-price determinants of demand

1. numbers of buyers

2. taste and preferences

3. income

4. expectation of buyers

5. prices of related goods

non price determinants of demand that could shift the demand curve

Normal Good

any good for which there is a direct relationship betwen changes in income and its demand curve. (an inreanse in income will increase demand)

Inferior good

any good for which there is an inverse relationship between changes in income and its demand curve (an increase in income will decrease demand)

substitute good

A good that competes with another good for consumer purchases

What happeens when the price increases for a good that has a substitute

The demand curve for the subistute good increases (shifts to the right)

Complementary good

A good that is jointly consumed with another good

What happens when the price increases for a good that ha a complement?

The demand curve for the complementary good decreases (shifts to the left)

Supply Curve

A curve that shows the different quantities of a product sellers are willing and able produce and offer for sale during a specified period of time, ceteris paribus

Law of supply

The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus

Why does a supply curve have a positive slope?

As the price per unit of a good or service rises, sellers have an incentive to offer more for sale, per peirod of time, our of the profit motive.

Market Supply

The horizontal summation of the individual supply curves in a market.

What casues a change in the quantity supplied?

caused by a change in the price which is reflected as movement along a supply curve

What is a change in supply?

A change in supply is an increase or deacrease in the quantity supplied at each possible price

increase in supply

an increase in the quantitiy supplied at each possible price.(rightward shift on the supply curve)

decrease in supply

a decrease in the quantity supplied at each possible price. (leftward shift of the supply curve)

What causes a change in supply?

caused by a change in one or more non-price determinants of supply

1. number of sellers in the market

2. technology

3. resource prices

4. expectation os sellers

5. prices of other goods the firm can produce

Non-price determinants of supply

What can cuase an increase in supply (rightward shift)

• An increase in the number of sellers in the

market

• An increase in production technology

• A decrease in resource prices

• Expectations of a lower future price

• A decrease in the prices of another good the

firm can produce

Market

Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged.

surplus

A market condition existing at any price where the quantity supplied is greater than the quantity demanded

shortage

market condition existing at any price at where the quantity supplied is less than the quantity demanded.

equilibrium

A market condition that occurs at any price and quantity at which the quantity demanded and the quantity supplied are equal

What is the price system?

A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices.

What causes a change in market equilibrium?

• A change in demand

• A change in supply

Consumer surplus

the value of the difference between the price consumers are willing to pay for a product on the demand curve and the price actually paid for it.

How is consumer surplus represented on a demand curve?

Total consumer surplus is represented by the total area under the market demand curve and above the equilibrium price.

producer surplus

the value of the difference between the actual selling price of a product and the price producers are willing to sell it for on the supply curve

How is producer surplus represented on a supply curve?

Total producer surplus is represented by the

total area above the supply curve and below the

equilibrium price

deadweight loss

the net loss of consumer and producer surplus from underproduction or overproduction of a product.