Chapter 1 Microeconomics How housholds and firms make decisions and how they interact in a market Scarcity Limited nature of resources Efficiency The size of the economic pie making the most out of your resources Equality How the economic pie divided 10 Principles of Economics 1 People face trade offs 2 3 time and money are scarce When you do buy something you give up the opportunity to do buy something else the cost of something is what you give up to get it opportunity cost the alternate that you give up when you make a decision rational people think at the margin Marginal change some incremental adjustment to a plan of action Rational People will make a choice if and only if the marginal cost is less than the marginal benefit 4 People respond to incentives incentives something that induces a person to act 5 Trade can make everyone better off comparative advantage A producer has comparative advantage if they can produce at lower opportunity cost trade allows for specialization trade will only happen if both are better off after Example Me You A 1 1 of Goods Produced B 10 2 You will only have to give up 1 to specialize in A where as Me would have to have to give up 10 so you have competitive advantage 6 Markets are usually a good way to organize economic activity market economy a market that allocates resources through decentralized decisions of households and firms market demand prices are better because they generally reflect both the value of a good to society and the cost of making it 7 Government can sometimes improve market outcomes Market failure A situation in which a market is left on its own Fails to allocate resources Externality the impact of a person s actions on the well being or a by stander Ex pollution as negative Ex education as positive Market Power The ability to influence prices the less of companies the more market power defend property rights Fight for equality taxes social welfare Macroeconomics 8 A country s standard of living depends on its ability to produce goods and services productivity how much you make per unit of labor 9 Price rises when the government prints too much money inflation overall increase in the price level 10 Society faces a short run trade off between inflation and unemployment Market buyers and sellers for a specific good service market of Competitive Market there are many buyers and sellers price takers people with no market power Perfect competition 2 characteristics it s a competitive market many buyers and sellers Quantity demanded the amount that people are willing and able to buy Law of demand when price goes up quantity demanded goes down Chapter 4 Markets and competition goods are PERFECT substitutes Demand Utility a measure of satfation Demand schedule table Demand curve graph both demand schedule and curve show the relationship between price and quantity Marginal benefit the increase in satisfaction that arises from an additional unit Market demand sum of all individual demands Change in quantity demanded represents a movement along the line 1 determinant price as price goes down quantity demanded goes up Change in Demand Increase in demand any change that increases the Quantity Demanded At every price Decrease in demand Any change that reduces the Quantity demanded At every price changes in demand shift the entire curve changes in demand have no change in price 5 determiniants of change in demand income price of related goods tastes and preferances expectations Number of buyers Income Prices of related goods Supply Supply schedule table Supply curve graph Normal good a good for which when your income goes up so does your demand Inferior demand a good for which when your income goes up your demand goes down substitutes two goods for which an increase in the price of one leads to the increase in demand of the other compliments two goods for which an increase in the price of one leads to a decrease in the demand of the other Quantity supplied the amount of a good that sellers are willing and able to sell Law of supply the quantity supplied of a good rises when the price of the good rises both show the relationship between price and quantity supplied Marginal cost the increase in cost associated with making one more unit Market Supply the sum of all individual supplies Change in quantity supplied movement along the supply curve a determinant Price Change in supply 4 determinants Input prices cost of production technology cost of production expectations numver of producers Increase in supply any change that increases Quantity supplied at every price Decrease in supply any change that decreases Quantity supplied at every price both shift the entire curve no change in price Equilibrium quantity supplied quantity demanded at the equilibrium point Equilibrium price price at which quantity supplied quantity demended Surplus Quantity supplied is greater than quantity demanded excess supply Shortage quantity demanded is greater than quantity supplied excess demanded Law of supply and demand prices will adjust to bring Quantity sspplied Quantity demanded Steps to analyze changes in equilibrium which curve shifts in what direction whats the new equilibrium Chapter 5 Elasticity a measure of the respoiveness of quantity demanded supplied to a change in one of its determineants Elastic responds substantially E 1 Inelastic responds slightly E 1 Unit Elastic percent changes are the same E 1 Price elasticity of demand How much quantity demanded changes related to a change in price 4 determinants availabliity of substitutes more subs more elastic Definition of the market more defined market more inelastic time horizon more time more elastic necessity inelastic vs luxuries elastic PED formula change in quality demanded change in price Midpoint formula Q2 Q1 Q2 Q 1 p 2 p1 p2 p1 2 2 Elastic demand is flatter and inelastic demand is steeper Total revenue Total revenue price x quantity If the demand is elastic price goes up then total revenue goes down If demand is inelastic as price goes up then total revenue goes up Elasticity and total revenue along a linear demand curve At points with a low price and high quantity the curve is inelastic at points with a high price and low quantity the curve is elastic The income elasticity of demand change in quality demanded income The cross price elasticity of demand change in quantity demanded price of another good if its positive they are substitutes if its negative they are compliments Price elasticity