Principles of Microeconomics (Lectures 1–7)

Comprehensive review flashcards covering foundational principles of microeconomics, supply and demand dynamics, elasticities, price controls, taxation, and market efficiency.

What is the Greek linguistic origin of the word "economy"?

It originates from the Greek phrase meaning "one who manages a household," reflecting how decisions are made regarding the allocation of scarce resources.

How does the lecture distinguish between microeconomics and macroeconomics?

Microeconomics studies how individual households, firms, or specific industries make decisions and interact in markets. Macroeconomics studies economy-wide phenomena such as inflation, unemployment, or national economic growth.

What is the classical societal trade-off between efficiency and equity?

Efficiency means society is getting the maximum benefits from its scarce resources (making the economic pie as large as possible), whereas equity means those benefits are distributed fairly among society's members (dividing the pie equally, which often reduces incentives and shrinks the overall pie).

How do economists and accountants differ in their calculation of costs?

Accountants only track explicit costs involving direct monetary outlays (such as tuition and books). Economists track both explicit costs and opportunity costs (implicit costs, such as the $15\,\text{per hour}$ or $30,000\,\text{to}\,40,000\,\text{dollars per year}$ of foregone income given up to attend college full-time).

What does it mean for rational people to think at the margin?

Rational decision-makers make choices by evaluating small incremental adjustments to an existing plan of action, comparing the additional (marginal) benefit of an action to its additional (marginal) cost.

According to Adam Smith in his 1776 book The Wealth of Nations, what coordinates decentralized market activity?

The "invisible hand," which works through the price system and the forces of supply and demand, directing self-interested individuals and firms to promote general economic well-being.

What is an externality?

The uncompensated impact of one person's or firm's actions on the well-being of a bystander, such as pollution generated by an industrial oil facility.

What is the primary determinant of a country's standard of living?

Its productivity, defined as the quantity and value of goods and services produced from each hour of a worker's time.

How is inflation defined in the lectures, and what is its primary cause?

Inflation is "too much money chasing too few goods," which primarily occurs when the government increases the quantity of money too rapidly.

What short-run macroeconomic trade-off does society face over the business cycle?

A short-run trade-off between inflation and unemployment; lowering unemployment often puts upward pressure on wages and prices, increasing inflation.

What does the Latin phrase ceteris paribus mean in economic modeling?

It means "all other things being equal," an assumption used to isolate and analyze the specific effect of one variable on another by holding all other variables constant.

What are the two types of decision-makers and the two markets in the Circular Flow Diagram?

The two decision-makers are households and firms; the two markets are the markets for goods and services (where households buy and firms sell) and the markets for factors of production—land, labor, and capital (where households sell and firms buy).

What is represented by points on, inside, and outside the Production Possibilities Frontier (PPF)?

Points on the frontier represent efficient production combinations; points inside the frontier represent inefficient outcomes; points outside the frontier are unattainable/impossible given current factors of production and technology.

What is the difference between a positive statement and a normative statement?

A positive statement is descriptive and attempts to describe the world as it is (a testable matter of fact), whereas a normative statement is prescriptive and expresses an opinion on how the world ought or should be (a matter of values).

What percentage of economists surveyed agree that a ceiling on rents reduces the quantity and quality of housing available?

$93\%$ of economists agree with this proposition.

What core assumption defines buyers and sellers in a perfectly competitive market?

Buyers and sellers are so numerous and goods offered for sale are so identical that no single participant has market power; thus, all participants are price takers rather than price makers.

What is the Law of Demand?

The claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises (an inverse relationship resulting in a downward-sloping curve).

What distinguishes a movement along the demand curve from a shift of the demand curve?

A change in the price of the good itself causes a movement along the curve (change in quantity demanded). A change in non-price determinants (tastes, expectations, number of buyers, income, or prices of related goods) causes a shift of the curve (change in demand).

What is the difference between a normal good and an inferior good?

For a normal good, an increase in consumer income leads to an increase in demand (rightward shift). For an inferior good (such as bus rides or Mr. Noodles), an increase in income leads to a decrease in demand (leftward shift).

How do price changes in substitutes versus complements affect demand?

For substitutes (e.g., butter and margarine), a price increase in good $2$ causes a rightward shift in demand for good $1$. For complements (e.g., wieners and hot dog buns), a price increase in good $2$ causes a leftward shift in demand for good $1$.

What are the four primary factors that cause a shift in the supply curve?

Input prices (e.g., wages), technology, expectations of future prices, and the number of sellers in the market.

If home builders expect home prices to rise sharply next year, how does this expectation affect the current supply curve for homes?

The current supply curve shifts to the left, as builders hold back current inventory to sell at the anticipated higher price in the future.

What market condition exists when the current price is set above the equilibrium price?

A surplus (excess supply) occurs because quantity supplied exceeds quantity demanded, causing an inventory buildup that forces sellers to lower prices toward equilibrium.

If the price of uranium increases (a substitute energy source) and a new extraction technology makes natural gas production cheaper, what happens to the equilibrium price and quantity of natural gas?

Quantity increases unambiguously (both shifts increase quantity), but the net change in equilibrium price depends on the relative magnitudes of the rightward demand shift and rightward supply shift.

What is the midpoint formula for calculating the price elasticity of demand ($PED$)?

$$PED = \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} \div \frac{P_2 - P_1}{(P_2 + P_1)/2}$$

How does price elasticity of demand determine the relationship between price changes and total revenue ($TR$)?

If demand is inelastic ($PED < 1$), price and $TR$ move in the same direction. If demand is elastic ($PED > 1$), price and $TR$ move in opposite directions. If unit elastic ($PED = 1$), $TR$ remains constant.

Why is the price elasticity of demand for a good generally higher in the long run than in the short run?

In the long run, consumers have more time to search for substitutes, change their lifestyle habits, or adopt new technologies (such as switching from gas-guzzling cars to fuel-efficient models).

How do the algebraic signs of income elasticity and cross-price elasticity classify goods?

Income elasticity: positive indicates a normal good, negative indicates an inferior good. Cross-price elasticity: positive indicates substitute goods, negative indicates complementary goods.

Why does the creation of new Bitcoin exhibit a perfectly inelastic supply curve?

New Bitcoin creation is governed by code and time rather than market price; the quantity mined halves every four years (e.g., $900\rightarrow 450\rightarrow 225\,\text{per day}$) until the hard cap is reached around the year $2140$.

Why can an agricultural technological breakthrough that increases crop yields result in lower total revenue for farmers?

Because the demand for basic agricultural crops like wheat is inelastic; a rightward supply shift causes a proportionally large drop in price and only a small increase in quantity sold, decreasing total revenue ($P \times Q$).

According to supply and demand analysis, why is drug education more effective at reducing crime and dealer revenues than drug interdiction?

Interdiction shifts supply left against highly inelastic demand, causing street prices to spike sharply and dealer total revenues to soar. Education shifts demand left, causing both equilibrium price and quantity to fall, reducing total drug dealer revenues.

What is the effect of a binding price ceiling?

A price ceiling is a legal maximum on the selling price. When set below the equilibrium price, it is binding and creates a persistent shortage ($Q_d > Q_s$), leading to non-price rationing such as long lines or seller discrimination.

What is the effect of a binding price floor in the labor market?

A binding price floor (such as a minimum wage set above the equilibrium wage) causes the quantity of labor supplied to exceed the quantity demanded, creating a labor surplus known as unemployment.

What general rule determines which side of the market bears the greater burden (incidence) of a tax?

The tax burden falls more heavily on the side of the market that is less elastic (more inelastic), as that side is less able to respond to price changes by adjusting the quantity bought or sold.

Does legal tax assignment (taxing the buyer versus taxing the seller) alter the economic burden of the tax?

No; whether the tax is formally levied on buyers (shifting the demand curve down) or sellers (shifting the supply curve up), the size of the tax wedge and the ultimate division of the tax burden between buyers and sellers remain identical.

What is consumer surplus ($CS$) and how is it represented on a supply and demand graph?

$CS$ is the buyer's willingness to pay minus the price actually paid ($CS = WTP - P$); graphically, it is the triangular area below the demand curve and above the market price.

What is producer surplus ($PS$) and what does the supply curve represent in this context?

$PS$ is the amount a seller is paid minus the seller's cost of production ($PS = P - \text{Cost}$); graphically, it is the area above the supply curve and below the market price, where the supply curve reflects sellers' opportunity costs.

How is Total Surplus ($TS$) defined and calculated in welfare economics?

Total Surplus is the sum of consumer surplus and producer surplus ($TS = CS + PS$), which equals the value to buyers minus the cost to sellers ($TS = \text{Value to buyers} - \text{Cost to sellers}$).

What are the three insights regarding market equilibrium and economic efficiency?

(1) Free markets allocate the supply of goods to buyers who value them most highly; (2) free markets allocate demand to sellers who can produce at lowest cost; (3) free markets produce the exact quantity of goods that maximizes the sum of consumer and producer surplus.

Why can an omniscient, benevolent social planner achieve no better economic efficiency than a free, competitive market?

Because competitive market equilibrium already automatically maximizes total surplus by equating marginal value to buyers with marginal cost to sellers without requiring centralized administration.