Micro Exam 1 - Study guide for chapters on Exam 1 PDF

Preview

Summary

Study guide for chapters on Exam 1...

Description

MICROECONOMIC PRINCIPLES

CHAPTER 1 ECONOMICS – study of production, consumption, and transfer of wealth. Putting different choices on a scale and choosing the best alternatives given limitations. Making choices with limited resources. MICROECONOMICS – the study of the decision making by individuals, businesses, and industries. MACROECONOMICS – the study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services. SCARCITY – dealing with limited sources. INCENTIVES – the factors that motivate individuals and firms to make decisions in their best interest. POSITIVE QUESTION – a question that can be answered using available information or facts. NORMATIVE QUESTION – a question whose answer is based on societal beliefs on what should or should not take place. OPPORTUNITY COST – the value of the next best alternative, what you give up to do something or purchase something. Doing a tradeoff. SPECIALIZATION – MARGINAL BENEFIT = MARGINAL COST – calculating your possible gains and losses depending on the situation you find yourself in. MARKETS – institutions that bring buyers and sellers together. They are usually efficient because people respond to incentives. ECONOMIC GROWTH, LOW INFLATION, AND UNEMPLOYEMENT – they do not always coincide.

CHAPTER 2 – BASIC QUESTIONS – what to produce? How to produce? Who will get the goods? FACTORS OF PRODUCTION – land, labor, capital, ideas. These are the inputs, when applied to the production method, you will have the output. LAND – physical land or anything that comes from it. LABOR – not specialized labor. CAPITAL – goods that are used to produce other goods. Equipment, machinery, etc. Human capital is skilled labor. IDEAS – smart to come up with innovative products. PRODUCTIVITY – output/input. CETERIS PARIBUS – assumption used in economics (and other disciplines), that other relevant factors or variables are held constant. EFFICIENCY – how well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost? PRODUCTION EFFICIENCY – mix of goods society decides to produce is produced at the lowest possible resource or opportunity cost. ALLOCATIVE EFFICIENCY – the ability to produce goods that society desires. EQUITY – the fairness of various issues and policies. PRODUCTION POSSIBILITY FRONTIER ABSOLUTE ADVANTAGE – when a country can produce more of a good than another country. COMPARITIVE ADVANTAGE – when one country can produce a good at a lower opportunity cost. STAKEHOLDERS IN INTERNATIONAL TRADE -

Import industry labor

-

Export industry labor

-

Import consumers

-

Export consumers

CHAPTER 3 – PRICE SYSTEM – a name given to the market economy because prices provide considerable information to both buyers and sellers. WILLINGNESS-TO-PAY (WTP) – an individual’s valuation of a good or service, equal to the most an individual is willing and able to pay.

DEMAND – the maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors. (ceteris paribus condition). LAW OF DEMAND – holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises.

HORIZONTAL SUMMATION – the process of adding the number of units of the product purchased or supplied at each price to determine market demand or supply. DETERMINANTS OF DEMAND – nonprice factors that affect demand, including tastes and preferences, income, prices of related goods, number of buyers, and expectations. NORMAL GOOD – a good which an increase in income results in rising demand. INFERIOR GOOD – a good for which an increase in income results in declining demand. SUBSTITUTE GOODS – goods consumers will substitute for one another. When the price of one good rises, the demand for the other good increases, and vice versa. COMPLEMENTARY GOODS - goods that are typically consumed together. When the price of a complementary good rises, the demand for the other good declines, and vice versa. CHANGE IN DEMAND - Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve. CHANGE IN QUANTITY DEMANDED – occurs when the price of the product changes, shown as a movement along an existing demand curve.

SUPPLY - the maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition). LAW OF SUPPLY - holding all other relevant factors constant, as price increases, quantity supplied rises and as price declines, quantity supplied falls. SUPPLY CURVE – a graphical illustration of the law of supply, which shows the relationship between the price of a good and the quantity supplied.

DETERMINANTS OF SUPPLY - nonprice factors that affect supply, including production technology, costs of resources, prices of related commodities, expectations, number of sellers, and taxes and subsidies. CHANGE IN SUPPLY - occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve. CHANGE IN QUANTITY SUPPLIED - occurs when the price of the product changes, shown as a movement along an existing supply curve.

EQUILIBRIUM – market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers. EQUILIBRIUM PRICE – the price at which the quantity demanded is just equal to quantity supplied. EQUILIBRIUM QUANTITY – the output that results when quantity demanded is just equal to quantity supplied.

SURPLUS – occurs when the price is above the market equilibrium, and quantity supplied exceeds quantity demanded. SHORTAGE – occurs when the price is below market equilibrium, and quantity demanded exceeds quantity supplied.

*Demand increases – price goes up, quantity goes up *Supply increases – price goes down, quantity goes up

When both shift

CHAPTER 4 – CONSUMER SURPLUS – the difference between what consumers (as individuals or the market) would be willing to pay and the market price. It is equal to the area above market price and below the demand curve. CS = WTP - P PRODUCER SURPLUS - the difference between the market price and the price at which firms are willing to supply the product. It is equal to the area below market price and above the supply curve. (marginal cost). PS = P WTS WILLINGNESS TO PAY = DEMAND WILLINGNESS TO SELL = SUPPLY TOTAL SURPLUS - the sum of consumer surplus and producer surplus, and a measure of the overall net benefit gained from a market transaction. DEADWEIGHT LOSS - the reduction in total surplus that results from the inefficiency of a market not in equilibrium.

MARKET FAILURE – occurs when a free market does not lead to a socially desirable outcome. -

Lack of competition

-

Asymmetric information

-

External benefits or costs

-

Existence of public goods

ASYMMETRIC INFORMATION - occurs when one party to a transaction has significantly better information than another party. LAISSEZ-FAIRE – a market that is allowed to function without any government intervention. PRICE CEILING – a maximum price established by government for a product or service. When the price ceiling is set below equilibrium, a shortage results. (In-state tuition). MISALOOCATION OF RESOURCES – occurs when a good or service is not consumed by the person who values it most, and typically results when a price ceiling creates an artificial shortage in the market. PRICE FLOOR – a minimum price established by government for a product or service. When the price floor is set above equilibrium, a surplus results. – also called support price. (Corn)....