FSU ECO 2023 - Microeconomics: Final Study Guide

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Microeconomics: Final Study Guide1/9/14Economic Methodology Broken Window fallacy — “creating” jobs only takes other jobs away from a different area. The ones who think like this ignore OPPORTUNITY COST.Methodological fallacy — correlation does not imply causation. Just because two events occur together doesn’t meant that one causes another. Correlation is the tendency for the value of two variables to move in a predictable way.I. Cause and effect relationshipa. Event A causes event B: the first event is the cause of the second. II. Reverse Causationa. Event B causes event A: the second event causes the first. This is basically the opposite of cause and effect relationshipIII. Omitted Variablea. Events A & B are caused by a 3rd event C. No cause and effect relationship between events A & B.IV. Spurious Correlationa. Event A is completely unrelated, in a cause and effect way, to event B.Neither are the cause nor the effect.1/14/14Basic Concepts of EconomicsI. Scarcitya. Requires making choices.b. The value of what you are giving up is the cost… OPPORTUNITY COST c. Choosing one thing is the same as not choosing another. When you make a choice, you are forgoing the alternative.d. SCARCITY — wants for resources are larger than the amounts available. e. For a resource to be scarce, the resource has have a limited amount AND a large enough desire for that resource.II. Choicesa. Principle of substitutionsi. There is always going to be situations where you will have choose between goods.1. Food as example: There are so many kinds of food. It depends on the WANT of the person.III. Opportunity Costa. The value you give up when you choose one thing over another.b. It has NOTHING to do with price1/16/14Basic Concepts (Continued)Marginal Cost — change in total cost when there is a change in the amount of activity. I. The changes are small, usually one unit changes.IV. Economic thinking is MARNGINAL THINKINGa. Thinking at the margins usually leads to the correct answer. Averages are frequently misleading.b. It conserves on a scarce resource, INFORMATION. Trail and error in small amounts cost little and yields a lot of information.Value is determined at the margins. MB = ∆TB / ∆Q MC = ∆TC / ∆QMB = Marginal benefit MC = Marginal cost∆TB = Change in total benefit ∆TC = Change in total cost∆Q = Change in quantity If MB > MC, you will need to increase. You will gain the more you do of it.If MB < MC, you will need to decrease. You will want to do less of it.MB = MC, it’s the optimal amount. Net gain will be greatest.Basic economic decision rule — marginal benefit equals marginal cost (MB = MC). V. Incentives a. People respond to incentives.1/21/14Production Possibilities Frontier I. Productions Possibilities Frontier (PPF) a. The boundary between the combinations of goods and services.b. We can produce at any point inside the PPF or on the frontier.c. Points outside the PPF are unattainable.d. Its separates attainable combinations from the unattainable ones.Full employment occurs when all resources are being used and is represented with a point on the frontier.Unemployment occurs when some resources aren’t being used and is represented with a point inside the PPF. Unemployment doesn’t only mean people but all so resources.II. Tradeoffs a. Tradeoffs limit what is possible to produce. b. It forces an exchange of one good for another.c. To get more of one good, we must forgo some other good as we move alone the PPF.d. PPF is not affected by employment of resources. You can move along the PPF but it won’t cause the PPF the shift.An increase in resources will cause the PPF to shift out. A change in technology will so cause a shift in the PPF.III. Available Resourcesa. Land (anything that comes from the earth)b. Capital (anything that will be used to produce good and services in thefuture i.e. equipment)c. Labor (Labor force = Employed + Unemployed) Government SpendingG1P1P2G2BAPrivate SpendingA decrease in private spending and an increase in government spending cause the point on the PPF the move from A to B.“Free Lunch” — untrue because you will always have to give something up. You can’t ignore OPPORTUNITY COST.1/23/14Comparative AdvantageI. Comparative Advantage a. One group might be better at both tasks; however, one has more of an advantage than the other so they choose to have the other perform the task.b. The ability to perform an activity or produce a good or service at a lower opportunity cost has the comparative advantage (greater economic efficiency).c. Absolute advantage is when one person can perform a task better if allhis energy was focused on it.II. Comments a. A person, state, region, or country can have an absolute advantage in everything.b. A person, state, region, or country cannot have a comparative advantage in everything.c. Everyone has a comparative advantage in something.III. Law of Comparative Advantage a. All groups gain byi. Specializing in the production of goods for which their opportunity cost is relatively low.ii. Not producing goods for which their opportunity cost is relatively high.iii. Exchanging the goods they produce for other goods they wish to consume.1/28/14Demand and SupplyPrices are determined in a market by the interaction of both buyers and sellers in accordance with the laws of supply and demand.I. Demanda. Demand curve is downward sloping.b. Price and quantity demanded have an inverse relationship.i. Demand is the entire curve; quantity demanded is a single point on the curve.c. When there is a change in price, you move along the demand curve (not a shift in the curve).d. A change in demand cause a change in every quantity demanded.II. Change in demand are caused bya. Prices of related goods.b. Consumer incomes.c. Buyer’s expectations.d. Number of buyers.e. Preferences III. Related Goodsa. Substitutes and complementsb. Example of complement for demandi. Eggs and bacon are complements1. Price of eggs increases2. Quantity demanded of eggs decreases (a move along theegg demand curve)3. The demand for bacon decreases (a left shift in bacon demand curve)c. Example of substitutes for demandi. Bacon and ham are substitutes 1. Price of bacon increases2. Quantity demand of bacon decreases (a move along the bacon demand curve)3. Demand for ham increases (a right shift in the ham demand curve)IV. Buyer’s Incomea. Normal (superior) goods: most goodsi. If income goes up, the demand for these goods also


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FSU ECO 2023 - Microeconomics: Final Study Guide

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