MICROECONOMICS CHAPTERS 1-4 SUMMARYChapter 1:How people make decisions:1. People face tradeoffs ex. efficiency v. equality (tradeoff redistribution of wealth from rich to poor works toward equality but reduces incentive to work, produce). 2. Cost of something is what you give up to get it (opportunity cost).3. Rational people think at the margin - Systematically and purposefully do the best they can to achieve objectives at the least possible cost.- Make decisions by evaluating costs and benefits of marginal changes. 4. People respond to incentives ex. punishment- taxes, reward- tax cuts. 5. Trade can make everyone better off- Specialization makes for more efficiency (buying goods at lower price than a country can produce domestically; importing goods that another country can produce better).6. Markets are a good way to organize economic activity- What to produce, how and how much to produce, who gets goods, what inputs are necessary for production.- Invisible hand7. Government can improve market outcomes (by enforcing property rights as incentive and promoting efficiency and competition). - Market failure caused by externalities and market power. 8. Country’s standard of living depends on its ability to produces goods and services (productivity). 9. Prices rise when the government prints too much money (inflation).10. Society faces short-run tradeoff between inflation and unemployment. Other trends: when prices are increasing, there are good economic conditions (low unemployment, demand for labor, growth in wages) but when prices are lowering, there are bad economic conditions (high unemployment, no growth in wages, more in need of work). Low demand for labor increases unemployment and a high demand for labor decreases unemployment. Chapter 2Roles of Economists:1. Scientist- scientific method, models, simplifying assumptions.2. Policy advisors- positive and normative statements; what to do to improve economy.Models:Circular Flow Diagram- shows flow of inputs and outputs and dollars between firms and households. Production Possibilities Frontier (PPF)- shows combinations of 2 goods the economy can produce given the available resources and technology. - Slope is the opportunity cost of one good in terms of the other. - When opportunity cost is constant, the slope is a straight line. - If opportunity cost rises or lowers and economy produces more or less of a good,the PDF is bow shaped (caused by differences in skill levels, equipment). Chapter 3Exports- produced domestically and sold abroad.Imports- produced abroad and sold domestically.Absolute advantage- ability to produce a good using fewer resources than another producer. Comparative advantage- ability to produce a good at a lower opportunity cost than another producer (specialization; the good in which the country has a comparative advantage is exported). Chapter 4Competitive market- many buyers and sellers that do not influence price. Perfectly competitive market- all goods are the same and buyers and sellers are so numerous that no one can affect market price. Quantity demanded- amount buyers are willing and able to produce. Law of Demand- the quantity demanded of a good falls when the price of a good rises.Demand Curve- shows how price affects quantity demanded. Shifters:- Increase in number of buyers increases quantity demanded and shifts D curve to right.- Increase in income for a normal good increases quantity demanded at each price and shifts D curve to the right (for an inferior good, increase in income shifts curve to left). - Prices of related goods: substitutes (increase in price of one causes an increase in demand for the other; one can be used in place of other) and complements (increase in price of one causes a fall in demand for the other; tend to be bought together). - Tastes: anything that causes a shift toward a good will increase demand for that good and shift demand curve to the right.- Expectations: If the price is expected to increase, that could encourage consumers to buy now and shift demand curve to the right. If the price is expected to decrease, that could encourage consumers to wait to buy and shift demand curve to the left.- Note: Price causes a movement along the D curve (increases or decreases quantity demanded) while the number of buyers, income, price of related goods, tastes and expectations shift the D curve. Quantity Supplied- amount that sellers are willing and able to sell. Law of Supply- claim that quantity supplied of a good rises when the price of the good rises (as price increases, more of a good is supplied). Supply curve- shows how price affects quantity supplied. Shifters: - Input prices (wages, prices of raw materials) - a fall in input prices makes production more profitable so firms are able to supply a larger quantity at each price and S curve shifts to the right. - Technology- cost saving technological innovation shifts S curve to the right (same inputs can produce more at a lower cost- more outputs per unit of input). - Number of sellers- an increase in the number of sellers (firms), increases the quantity supplied at each price and shifts S curve to the right (good economic times, more firms coming into the market).- Expectations- when prices are expected to decrease, sellers supply more now at the higher price which shifts the S curve to the right. Holding back supply increases price and selling more at a higher price increases supply (causing lower prices). - Note: Price causes a movement along the S curve (increases or decreases in quantity supplied) while the input prices, technology, number of sellers, and expectations shift the S curve. Supply and Demand Curves Downward slopping demand curve reflects law of demand and upward slopping supply curve reflects law of supply. Intersection of the curves causes market equilibrium at equilibrium price (quantity demanded isequal to quantity supplied). Surplus- excess supply; quantity supplied is greater than quantity demanded; occurs when priceis above equilibrium price; causes a decrease in price to induce sales. Shortage- excess demand; quantity demanded is greater than quantity supplied; occurs when price is below equilibrium price; causes an increase in price (increase in input costs). Steps to analyzing changes in equilibrium: decide whether event shifts S or D curve, which direction, compare new equilibrium to initial equilibrium. Shifts v. MovementsChange in supply occurs when a non-price determinant of supply changes