Micro Economic Vocab

Economic Surplus

Benefits - Costs

The Opportunity Cost Principle

Opportunity cost = next best alternative you give up

Sunk Cost

Already incurred and cannot be reversed - should not factor in to decisions

Production Possibility Frontier

Shows the different sets of outputs attainable with your scarce resources

Marginal Principle

Decisions about quantities are best made in small steps(one unit at a time)

Cost - Benefit Principle

Do it only if benefits > or = costs

Rational Rule

It is worth doing until MB = MC

Normal Goods

As income increases demand for normal goods increases(ex: specialty coffee)

Inferior Goods

As income increases demand for inferior goods decreases(ex: instant coffee)

Demand Shifters

1) Income

2) Preferences

3) Price of related goods

4) Expectations

5) Congestion and Network effects

6) Type and number of buyers

Network Effect

A good is more useful the more people use it(facebook)

Congestion Effect

A good is less useful the more people use it

Ceteris Paribus

"holding other things constant”

Law of demand

The tendency for the quantity of demanded to be higher when the price is lower

Rational Rule for Buyers

Keep buying until Price = MB

Demand curve is downward sloping because …

Diminishing marginal benefit: each additional item yields a smaller marginal benefit than the previous item

4 steps to estimate market demand

1) Survey

2) For each price, add qD

3) Scale up

4) Plot QD and P

Law of Supply

The tendency for quantity supplied to be higher when price is higher

Price takers

Firms charge the prevailing market price

Variable cost

Vary with the quantity of output produced

Fixed cost

Does not vary with the quantity of output produced

Rational Rule for Seller

sell one more unit if P >= MC

Supply curve is upward sloping because …

Rising MC

Reasons for rising MC in a supply curve

• Diminishing marginal product

• Rising input costs

Supply Curve Shifters

1) Input prices

2) Productivity and technology

3) Prices of related outputs

• complements

• substitutes

4) Expectations

5) Type and number of sellers

Diagnose Marker Outcomes

Rule 1: If prices and quantities move in the same direction the demand curve has shifted

Rule 2: If prices and quantities move in different directions the supply curve has shifted

Positive Analysis

Describes what is happening, explaining why, or predicting what will happen

• objective/testable

Normative Analysis

Describes what should happen

• involves value judgements

Economic Efficiency

Outcome is more economically efficient if it yields the largest possible economic surplus