Untitled Flashcards Set

Principles of Microeconomics – Summary Sheet

1. Economic History & Key Thinkers

• Starting point: 90% of humanity lived in poverty. Wealth creation takes centuries.

• Douglass North: Institutions (law, banking, money, insurance, patents) drive commercial societies.

• Industrial Revolution (1700s-1800s): Increased output, cheaper goods, Britain led.

• Adam Smith (1776, Wealth of Nations): Market order arises naturally (Invisible Hand).

• Karl Marx (1800s): Critique of capitalism (Labor Theory of Value).

• Alfred Marshall (1900s): Supply & Demand graphs.

• Keynesian Economics (1930s): Government intervention in economy.

• Counter-Keynesian (1980s): Return to free markets.

2. Core Economic Concepts

• Goods: All things bought and sold.

• Scarcity: Limited resources force trade-offs (opportunity cost).

• Opportunity Cost: What you give up to get something else.

• Ceteris Paribus: “All else equal” assumption in economic models.

• Rationality Assumption: People make decisions that benefit them.

• Positive-Sum Game: Both parties gain from trade.

• Wealth Creation: Comes from production & trade, not just physical goods.

Factors of Production:

1. Labor – Human effort

2. Land – Natural resources

3. Capital – Tools, machines

4. Savings – Enables investment

Exchange creates wealth!

3. Supply & Demand

Demand

• Definition: How much consumers are willing & able to buy at a given price.

• Curve: Slopes downward (↓ Price → ↑ Quantity Demanded).

• Shift Factors (T-I-P-E-D):

  • Tastes & preferences

  • Income changes (Normal vs. Inferior Goods)

  • Prices of related goods (Substitutes vs. Complements)

  • Expectations of future price changes

  • Demographics

Supply

• Definition: How much producers are willing & able to sell at a given price.

• Curve: Slopes upward (↑ Price → ↑ Quantity Supplied).

• Shift Factors (T-R-E-N-T):

  • Technology improvements

  • Regulations & government policies

  • Expectations of future profits

  • Natural disasters or events

  • Taxes & subsidies

Market Equilibrium

• Where Supply = Demand.

• Shortage: Demand > Supply (Price too low).

• Surplus: Supply > Demand (Price too high).

4. Elasticity

• Elasticity of Demand (ED) = % Change in QD / % Change in Price

• Elastic (ED > 1): Price ↑ → TR ↓ (Luxury goods, many substitutes).

• Inelastic (ED < 1): Price ↑ → TR ↑ (Necessities, few substitutes).

• Unitary Elastic (ED = 1): TR unchanged.

Cross-Elasticity:

• Substitutes (+): ↑ Price of Good A → ↑ Demand for Good B.

• Complements (-): ↑ Price of Good A → ↓ Demand for Good B.

5. Government & the Market

Price Controls

• Price Ceiling (Max Price) → Shortage (e.g., rent control).

• Price Floor (Min Price) → Surplus (e.g., minimum wage).

Taxation & Efficiency

• Progressive Tax: ↑ Income → ↑ % Paid (e.g., income tax).

• Regressive Tax: ↑ Income → ↓ % Paid (e.g., sales tax).

• Proportional Tax: Flat % for all (e.g., payroll tax up to a cap).

Deadweight Loss: Loss of economic efficiency due to taxation or price controls.

Laffer Curve: High taxes discourage production → Less total revenue.

Flashcard Ideas

Concepts & Definitions

• What is scarcity?

• Define opportunity cost.

• What shifts demand? (T-I-P-E-D)

• What shifts supply? (T-R-E-N-T)

• What is deadweight loss?

• What does the Laffer Curve show?

Graphs & Calculations

• Draw a supply & demand curve.

• What happens when a price ceiling is set below equilibrium?

• How do you calculate elasticity?

• What is the formula for total revenue?