Principles of Microeconomics Review Session for Midterm Exam I

Prioritize study materials as follows:
- Lecture Notes: Focus on key concepts discussed in class.
- Practice/Review Questions: Engage with review questions to test understanding.
- Textbook: Use it for additional support and deeper insights into concepts.

Scarcity: The fundamental economic problem arising from limited resources and unlimited wants.
Types of Resources: Land, labor, capital, and entrepreneurship.
Economic Systems: Various systems (market, command, mixed) determine how resources are allocated.
Microeconomic Principles:
- Trade-offs: Choosing one option over another, reflecting opportunity costs.
- Opportunity Costs: The cost of what is given up to obtain something else.
- Sunk Costs: Costs that have already been incurred and cannot be recovered; should not influence current decisions.
- Marginal Cost/Benefit: The additional cost or benefit associated with a small change in activity.
- Incentives: Factors that motivate or stimulate action.

Normative vs. Positive Language:
- Positive Economics: Descriptive and factual statements about the economy (what is).
- Normative Economics: Prescriptive statements (what ought to be).
Distinction Between Microeconomics and Macroeconomics:
- Microeconomics: Study of individual markets and the decisions of consumers and firms.
- Macroeconomics: Study of the economy as a whole, including inflation, unemployment, and economic growth.
Scientific Method in Economics:
- Observation: Gathering data about economic behavior.
- Assumption: Making analytic assumptions based on observations.
- Theory: Constructing theoretical models to explain phenomena.
- Model: Simplified representations of reality that help to predict outcomes.
Production Possibility Frontier (PPF):
- Definition: A graphical representation showing the maximum combinations of goods that can be produced with available resources.
- Shape of PPF: Typically bowed outward, illustrating increasing opportunity costs as production shifts from one good to another.
- Opportunity Cost Movement: The cost of moving from one point to another on the PPF.
- Changes of PPF: Factors such as technological advancement or resource availability that shift the PPF outward (potential growth) or inward (contraction).

Demand and Supply Concepts:
- Laws of Demand and Supply:
- Law of Demand: As price decreases, quantity demanded increases, and vice versa.
- Law of Supply: As price increases, quantity supplied increases, and vice versa.
- Demand/Supply Shifters:
- Factors that cause shifts in the demand or supply curves.
- Examples: Consumer preferences, income changes, price of related goods for demand; production costs, number of suppliers for supply.
- Market Equilibrium: The point where quantity demanded equals quantity supplied.
- Changes in Equilibrium: Factors that can shift the equilibrium price and quantity.
- Invisible Hand: A metaphor introduced by Adam Smith suggesting that individual self-interest in a free market leads to economic well-being.
- Surplus and Shortages: Situations where quantity supplied exceeds quantity demanded (surplus) or vice versa (shortage).

Price Elasticity of Demand:
- Definition: A measure of how much the quantity demanded of a good responds to a change in price.
Calculating Elasticity:
- Use the following formulas:
- Traditional formula: E = \frac{% \Delta Q}{% \Delta P}
- Midpoint formula: E = \frac{(Q1 - Q2)}{(Q1 + Q2)/2}\frac{(P1 - P2)}{(P1 + P2)/2}
Determinants for Elasticity of Demand:
- Availability of substitutes, necessity vs luxury of goods, time period for adjustment, proportion of income spent on the good, etc.
Impact on Total Revenue and Policy Decisions:
- High elasticity leads to significant changes in quantity demanded with small price changes, affecting total revenue.
Application of Elasticity: Understanding how elasticity affects pricing strategies and tax policies.

Scenario: You decide to study an extra hour for an exam.
- Identify potential opportunity costs:
  - a. Hour of work not done.
  - b. Higher grade (not a cost, but a benefit).
  - c. Hour missed watching Netflix.
  - d. Another hour of studying (for a different class).
  - e. Hour on the phone (not studying).
Example: Abby's fishing decision.
- Question: Opportunity cost of fishing (given hourly wage and license fees).
  - Calculation: Opportunity cost = License fee + Lost wages = $50 + (4 hours * $10/hour) = $90.

Questions about Points on the PPF:
- What points are possible, efficient, inefficient, not possible?
- Analyze moves from one point to another:
  - Example: Moving from point F to point C, or A to B, and their opportunity costs.

Market for Pepsi: Effects of technological changes on supply and equilibrium.
Household Income Increases and Demand for Inferior Goods: Analysis of demand curve shifts for instant ramen noodles.
Electricity Market Trends: Effect of increased demand on price and quantity.
Elasticity Calculations:
- Calculate elasticity between specific price points (e.g., $90 to $100).
Revenue Predictions Based on Price Changes:
- Calculate impacts of price increases on quantity demanded and total revenue from Oreo sales.

Original Formula: E = \frac{% \Delta Q}{% \Delta P}
Traditional Formula: E = \frac{(Q1 - Q2)}{Q2} \cdot \frac{P1}{(P1 - P2)}
Midpoint Formula: E = \frac{(Q1 - Q2)}{(Q1 + Q2) / 2} \cdot \frac{(P1 - P2)}{(P1 + P2) / 2}