Intro to Microeconomics

Explicit Cost

a cost that involves spending money

Implicit Cost

A cost that doesnt require an outlay of money; its measured in dollar terms of benefits that are forgone

Opportunity Cost

What you give up to gain something

Accounting Profit

revenue - explicit costs

Economic Profit

revenue - opportunity cost

- usually less than accounting profit

Marginal cost curve

shows how the cost of producing one more unit depends on the quantity of what was already produced

Decreasing marginal cost

when each additional unit costs less to produce than the previous one

Profit maximizing principle of marginal analysis

when making a profit maximizing "how much decision" the optimal quantity is the largest quantity at which the marginal benefit is greater than or equal to the marginal cost.

Sunk Cost

A cost that has already been incurred/non-recoverable- should be ignored.

Sunk Cost Fallacy

belief that sunk cost is an opportunity cost

Bounded Rationality

decision maker using this makes a choice that is close to, but not exactly the one that leads to the best possible economic outcome.

Risk Aversion

sacrifice some potential economic payoff to avoid potential costs- ex: avoid gambling

Loss Aversion

we emphasize losses more than gains--unwilling to recognize loss and move on

Marginal Thinking

compare costs and benefits of doing a little more of something vs. a little less

Status Quo bias

tendency to avoid making a decision and sticking with the majority--ex:automatically enrolled in retirement savings at job and can unenroll, but wont bc status quo

Law of Diminishing Marginal Utility

after some point each additional unit of a good will provide less satisfaction or benefit than the previous unit. Decreasing personal satisfaction

positive statement

based on fact and cant be approved or disproved

normative statements

express opinion and judgement no facts

elastic demand

willingness to shop somewhere else if the price isnt good

\>1

inelastic demand

dont care about price will pay-- gas

utility

a measure of customer satisfaction from consumption of goods or services

consumption bundle

the set of all goods and services an individual consumes

utility function

the relationship between an individual's consumption bundle and the total amt of utility it generates for that individual

marginal utility curve

shows how marginal utility depends on quantity of a good consumed

principle of diminishing marginal utility

one more unit adds less and less utility to the total utility than the previous unit

production possibilities frontier

a diagram that shows the combinations of 2 goods that are possible for a society to produce at full employment. illustrates trade -offs facign an economy that produces only 2 goods. shows max quantity of 1 good that can be produced for any given quantity produced of the other

what causes economic growth?

1. An increase in factors of production: resources used to produce goods and services.

2. An increase in productivity of factors of production (Better technology, education, healthcare)

comparitive advantage

The situation where someone can produce a good at lower opportunity cost than someone else can

circular flow

households supply their income and demand goods firms supply goods and demand income

absolute advantage

refers to the ability of one producer to make more than another producer with the same quantity of resources (comparative advantage about lower opportunity cost, not necessarily more volume/quality)

market demand curve

the horizontal sum of all individual demand curves of consumers

rightward shift in demand

increase in demand (when demand shifts, ppl are buying more or less at every price)

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 that are bought and used together

inc in gas price= decrease demand for suvs

normal good

inc in income inc demand

inferior/giffen

demand decreases when income increases

quantity supplied vs. supply

quantity producers are willing and able to sell at a particular price vs. relationship between price and seller's willingness and ability to sell

law of supply

higher the price higher the quantity supplied

expectations of a higher price increase or decrease supply of a good?

decrease

market clearing price

price at which market is in equilibrium

shortage

A situation in which quantity demanded is greater than quantity supplied--market prices rise, and bc of this, shortage won't last

competitive markets

many buyers and sellers--none control/influence price

law of demand

higher the price, lower quantity demanded

economic signal

any piece of info that helps ppl make better decisions

ex: prices rise when ppl want more

price ceiling

A legal maximum on the price at which a good can be sold- causes shortages (neither curve shifts). demand increases, supply decreases bc sellers dont want to sell for low price

price ceilings lead to

shortage, black markets, lower quality, wasted resources, deadweight loss, missed transactions, black markets, inefficient allocation to customers, and discrimination- think rent control

price floor

A legal minimum on the price at which a good can be sold- causes surplus --everyone wants to sell for the high price but no one wants to buy

price floors lead to...

surplus, low quality, inefficient allocation of sales, wasted resources, temptation to sell below price, creates deadweight loss. think min wage laws

price effect

To sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue.

quantity effect

one more unit is sold, increasing total revenue by the price at which the unit is sold

cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good--will be negative if goods are complements, large and pos if close substitutes

perfectly elastic

horizontal line/=1

quantity control (quota)

an upper limit on the quantity of some good that can be bought or sold

wedge

difference between supply and demand price at quota limit

incidence of tax

who really pays tax (inelastic demand and high supply elasticity-consumers, demand highly elastic and low supply elasticity-producers)

lump-sum tax

a tax that is the same amount for every person

proportional tax

a tax for which the percentage of income paid in taxes remains the same for all income levels

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

ability to pay principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

benefits principle

those who benefit from public spending should bear the burden of the tax that pays for that spending

demand price

the price at which consumers will demand that quantity

supply price

the price at which producers will supply that quantity

excise tax

a tax on each unit of a good thast sold

tax base

measure that determines how much tax an individual or firm pays such as income

marginal tax rate

amount of tax payable on the next dollar earned

nonrival

more than one can use at a time-digital music

rival

one person uses and its done-hamburger

private goods

rival and excludable-burgers

common good

rival and non excludable- fish in a lake

artificially scarce good

nonrival and excludable- cable tv

public goods

nonrival and nonexcludable-national defense

negative externality

side effect that imposes cost on others--driving in rush hour

positive externality

side effect w benefit to society-get flu shot

coase theorem

solution can be reached by two parties if costs are low

transaction costs

costs of making a deal--can prevent mutually beneficial trade from occuring

subsidy

payment made to encourage activities that generate positive externalities

adverse selection

seller knows more than buyer-hiding information--ex car for sale could be lemon (avoid w second opinion if doctor related, or if seller offers warranty signaling not a lemon)

moral hazard

buyer know more than seller-- someone tries to scam insurance company(solution=deductibles )

government transfer

a government payment to an individual or a family

social insurance program

protect against unpredictable disasters (flooding, unemployment)

type of person likely to be poor

woman, non-white, single parent, don't speak english, no college education, bad luck

benefits notch

poor lose out on working-if get a job earn less than benefits offer and lose that benefit by working

consumer surplus

willing to pay-actually paid

producer cost

sell price-cost

corrective taxes

tax on negative externalities --gives incentive to do good--tax on pollution push pollution down to socially benefical amount

monopsony power

a business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages (ex. only hospital in small town pay less bc no where else to go and use skills)

short run

the period of time during which at least one of a firm's inputs is fixed

long run

the time period in which all inputs can be varied

Efficiency wage model

some employers pay an above-equilibrium wage as an incentive for better performance and loyalty--leads to surplus of labor like min wage laws- lead to unemployment

production function

relationship between the quantity of inputs a firm uses and the quantity of output it produces

total product curve

shows how the quantity of output depends on the quantity of the variable input for a given quantity of fixed input

marginal product of labor

the change in output resulting from a one unit increase in amount of labor input (ΔQ/ΔL)-- initially rises as more workers are hired then it declines bc of the principle of diminishing returns

total cost

fixed costs plus variable costs

marginal product

of an input is the additional quantity of output that is produced by using one more unit of that output