Intro to Microeconomics Study Guide

1 January 2017

Economics is the study of allocation of scarce resources 1) Chapter One: The Principles of Microeconomics a. Four resources: Land, Labor, Capital (machinery), Entrepreneurship (human capital) b. Principle #1: People face trade-offs, government also faces them, the main one the gov. faces is efficiency vs. equity i. Efficiency is when everyone who makes the most, keeps the most money ii. Equity would be if everyone was taxed the same c. Principle #2: The cost of something is what you give up iii.

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Opportunity cost = the measurement of trade-off you give up something you can have later, to get something now d. Principle #3: Rational people think at the margin iv. They do what’s best for them and maximize benefits v. Think at the margin = thinking about the NEXT one vi. Margin=small incremental changes e. Principle #4: People respond to incentives vii. Prices are major incentives viii. Taxes/tax credit f. Principle #5: Trade can make everyone better off ix. Everybody can specialize x. More variety of goods xi.

Doesn’t always make everyone better off ex: Jamaica, NAFTA xii. One partner can be strong and over power others g. Principle #6: Markets are a good way to organize economic activity xiii. People are guided by self-interest xiv. Markets are where consumers and suppliers come together and trade-off occurs h. Principle #7: The government can improve market outcomes xv. Main act of government – enforce property rights xvi. Government can step in if there’s market failureexternalities occur (taxes can be enforced for cigarettes), people who aren’t in the market are ffected xvii.

Government can step in when there’s market power xviii. Monopoly/oligopoly-government might step in 2) Chapter 2: What does it mean to think like an economist? i. Objectively j. Scientific method xix. Observe, hypothesis, identify variables, collect data, test hypothesis, draw a conclusion k. Difficult to conduct a controlled experiment in economics l. Circular Flow Diagram = money and goods and services flow from input marketoutput market xx.

Flow of Money: Market for factors of production (input market) households get income spending on markets of goods and services (output market) which generates revenue for firmswhich pay wages and rent for factors of production xxi. Flow of goods and services: Market for factors of production (input market) buys factors (land, labor, capital and entrepreneurship)firms which sell goods and servicesto market of gas and serviceswhich buy goods and services from households, which sell factors to market for factors of production xxii.

This marketing is missing government, trade, savings, black market activities and charity work/non-profits m. Production Possibilities Frontier: how much a country can produce xxiii. Assumptions: one country, two goods, resource = labor xxiv. Bowed out PPF due to different resources (L) xxv. Opportunity cost increases with bowed out PPF because it takes more and more to make one more of the good xxvi. Any points along the PPF are efficient, outside the curve are not feasible and inside the curve is inefficient xxvii. Efficiency means we maximize our resources xxviii.

To get more of the good, you have to give up some of the other good xxix. More resources for both goods increase: entire curve shifts out xxx. More resources for just one good increase: curve shifts on one side only xxxi. If the PPF is straight, it’s because there are multiple resources for both goods xxxii. Just stating a fact = positive statement and normative statement = subjective 3) Chapter 3: Absolute and Comparative Advantage n. Absolute advantage is when you make something more efficiently than someone else, so that less is required, which means less opportunity cost xxxiii.

Assumptions: 2 people who can make goods, 2 goods that both people want to consumer, time is the only input, both people want to consume both goods and they’ll only trade if they can produce one good xxxiv. Each person works 8 hrs. per day o. Farmer can produce 8 donuts and 32 cups of coffee; Baker can produce 24 donuts and 48 cups of coffee xxxv. The baker has absolute advantage because he can make more donuts and more coffee than the farmer in 8 hrs. xxxvi. Graphing: use points (8, 0) and (0, 32) for farmer’s PPF and CPF (consumption possibilities frontier).

Use points (24, 0) and (0, 48) for baker’s PPF and CPF p. Trade deal: Farmer will make only coffee (which is all 32 cups of coffee in 8 hrs. ), baker offers farmer 5 donuts for 15 cups of coffee xxxvii. Trade increases variety xxxviii. Farmer ends up with +5 donuts and – 15 cups coffee = 5 donuts and 17 cups coffee q. Comparative advantage is when you have a lower opportunity cost xxxix. The opportunity cost of one donut for the farmer is 4 cups of coffee and for the baker is 2 cups of coffeebaker is comparative advantage in donuts because of lower opportunity cost xl.

The opportunity cost for one cup of coffee for the farmer is ? donut and for the baker is ? donutfarmer has opportunity cost in coffee because of lower opportunity cost r. The price range after the trade deal will lie between opportunity cost of both people, so both are better off xli. 2 cups of coffee ? P ? 4 cups of coffee 4) Chapter 4: Supply and Demand s. Assumptions: one good, one market, market is perfectly competitive (many buyers and sellers, all goals are the same across firms and price takers) t. Demand xlii. Demand curve shows relationship between price and willingness to buy (P and Qd) xliii.

Quantity demanded (Qd) is the amount consumers are willing and able to buy xliv. LAW OF DEMAND: P, Qd = negative correlation xlv. Market demand is the sum of individuals’ demands xlvi. Variables that increase or decrease demand: IP-TEN 1. Income a. I, Qd = Normal good b. I, Qd = Inferior good 2. Price of related goods c. Pa, QDb = Substitutes d. Pa, QDb = Complements 3. Taste and preferences 4. ExpectationsEx: when you except the price of a good to increase later on, you will buy more now when it’s cheaper 5.

Number of buyersMore buyers = higher demand u. Supply xlvii. Supply curve shows relationship between Price and Quantity supplied (P and Qs) xlviii. Quantity supplied is the amount sellers are willing and able to sell xlix. LAW OF SUPPLY: P, Qd = Positive correlation l. Variables that shift supply curve: I-TEN 6. Input price (Ex: wages increase) e. IP, Qs f. IP, Qs 7. Technologyadvancement means Cost, Supply 8. Expectationsexcepting a technological advancement 9. Number of sellers g. # Sellers, Qs h. # Sellers, Qs v.

Consider: market for hybrid cars li. Event: price of gasoline goes updemand is impactedP of gas so people will look for substitutesdemand for hybrids (curve shifts right) lii. Event: technology advance reduces cost of productionsupply impactedsupply because it’s easier and cheaper to produce (curve shifts right)P , Qs liii. Event (i) & (ii): P of gas & technology –>D and S both impactedD, SQ and P is ambiguous (depends on degrees of shifts and how you graph curve shifts) w. Consider: market for bus rides liv.

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