Study Guide for Introduction to Microeconomics.
Chapter 1: Demand
Atomistic Buyers: An atomistic buyer is someone who makes purchasing decisions independently and in a way that doesn't significantly affect the overall market. They typically buy small quantities, and their actions don't influence prices or supply.
Quantity Demanded; Demand; Demand Curve
Quantity Demanded is the total amount of a good or service that consumers are willing to purchase at a specific price. Demand represents the relationship between price and quantity demanded across various prices, typically illustrated by a demand curve, which slopes downward, indicating that lower prices lead to higher quantities demanded.
Law of Demand
The Law of Demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa.
Market Reserve Price; Demand’s Price Response
The Market Reserve Price is the highest price that consumers are willing to pay for a good, which reflects their maximum valuation. Demand’s Price Response describes how the total quantity demanded in the market changes in reaction to fluctuations in price.
Normal Goods; Inferior Goods
Normal Goods are products for which demand increases as consumer income rises, while Inferior Goods are those for which demand decreases as consumer income increases.
Substitute Goods; Complement Goods
Substitute Goods are products that can replace each other, meaning an increase in the price of one leads to an increase in the demand for the other. Complement Goods are products that are used together, so an increase in the price of one typically leads to a decrease in the demand for the other.
Aggregate Expenditure; Consumer Surplus
Aggregate Expenditure refers to the total spending on goods and services in an economy at a given level of income and price. Consumer Surplus is the difference between what consumers are willing to pay for a good and what they actually pay, reflecting the extra benefit consumers receive from purchasing at a lower market price.
NUMERICALSKILLS:
– Use demand data to graph demand curves
– Use the graph/data to infer the quantity demanded at a given price
– Compute aggregate expenditure and consumer surplus given a price
SUPPLY • CONCEPTS:
– Atomistic sellers: Atomistic sellers refer to a large number of small producers in a market, each of which has little to no influence on the market price due to their relatively small size.
– Quantity supplied; supply; supply curve: Quantity Supplied is the total amount of a good or service that producers are willing to sell at a given price. Supply is the relationship between the price of a good and the quantity supplied, typically illustrated in a supply curve, which slopes upward, showing that higher prices incentivize more production.
– Law of Supply: The Law of Supply states that, all else being equal, an increase in the price of a good will lead to an increase in the quantity supplied, and vice versa.
– Individual supply; market supply: Individual Supply refers to the supply of a good or service by a single producer, while Market Supply is the total supply from all producers in the market, aggregated at each price level.
– Individual shut-down price; individual price response 1: The Individual Shut-down Price is the minimum price at which a producer can cover its variable costs; below this price, the producer will cease production. Individual Price Response 1 refers to how a single producer adjusts its quantity supplied in response to changes in market price.
– Market shut-down price; supply’s price response: The Market Shut-down Price is the lowest price at which the total industry can cover its average variable costs, leading all firms to cease production. Supply’s Price Response describes how the total supply in the market changes in reaction to variations in price
– Individual revenue; aggregate revenue: Individual Revenue is the total income generated by a single producer from selling goods or services, calculated as price times quantity sold, while Aggregate Revenue is the total income generated by all producers in the market combined.
– Variable costs (VC); fixed cost (FC); profit; individual producer surplus: Variable Costs (VC) are costs that vary with the level of output (e.g., materials), while Fixed Costs (FC) remain constant regardless of production levels (e.g., rent). Profit is the difference between total revenue and total costs, and Individual Producer Surplus is the difference between the price received and the minimum price a producer is willing to accept for their goods.
– Aggregate VC; aggregate FC; aggregate profit; producer surplus: Aggregate Variable Costs are the total variable costs incurred by all producers in the market, while Aggregate Fixed Costs are the total fixed costs for the industry. Aggregate Profit is the total profit earned by all producers, and Producer Surplus is the sum of individual producer surpluses in the market, reflecting the overall benefit producers receive from selling at market prices above their minimum acceptable prices.
• NUMERICALSKILLS:
– Use supply data to graph supply curves
– Use the graph/data to compute the quantity supplied at a given price
– Compute aggregate revenue and producer surplus given a price
MARKETEQUILIBRIUM • CONCEPTS:
– Competitive markets: There made of many buyers and sellers, so no one single consumer or producer has the power to influence the market. This is why it’s considered “perfect” competition because all participants are price takers and have no control over the market price.
– Market equilibrium; equilibrium quantity; equilibrium price: Market equilibrium is the point where the quantity of goods supplied equals the quantity demanded, resulting in an equilibrium price at which transactions occur, and the equilibrium quantity represents the amount of goods exchanged at that price.
• NUMERICALSKILLS:
– Graph demand and supply curves in a single graph
– Identify the equilibrium on demand and supply data/graphs
– Compute consumer surplus and producer surplus in equilibrium