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