Microeconomics Midterm Study Guide PDF

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Mariano Baez...

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Know what the science of microeconomics focuses on - Microeconomics is the study of individuals and business decision - Analyzes local business, local markets, consumer behavior - Analyzes market activity: perfect competition, monopoly, oligopoly Understand the concept of marginal analysis and how it can be applied in a scenario - In this sense, marginal analysis focuses on examining the results of small changes as the effects cascade across the business as a whole. - A bakery determines potential benefits of increase of production Know Principles of individual choice 1. Choices are necessary because resources are scarce 2. Decisions are subject to economic opportunity cost 3. Individuals make marginal decisions 4. People tend to respond to incentives 5. In a market economy there are gains from trade 6. In a well established market where people respond to incentives markets move towards an equilibrium outcome 7. Resources should be used efficiently to achieve society’s goals 8. When all trades are beneficial, markets move towards efficient outcome 9. Gov. intervention can improve society when market is not efficient 10. One person spending is another’s income 11. Overall spending sometimes gets out of line with the economy's production capacities Review the effects of specialization and trade - 2 countries are better off when they each specialize in what they are good at and then trade - the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage Review comparative advantage and how it can lead to trade…. How can two individuals gain from trade - Comparative advantage is the basis for mutual gain Trade off between equity and efficiency - Equity concerned with how resources are distributed throughout society - Efficiency - Resources allocated optimally - No one is better off without making someone down - What’s efficient may not always be equitable or fair - What’s fair is not always efficient Law of demand - as prices increase quantity demanded falls

Law of supply - as prices increase, quantity supply increases Review the concept of self interest - refers to actions that elicit personal benefit. Adam Smith, the father of modern economics, explains that the best economic benefit for all can usually be accomplished when individuals act in their self-interest Why market failure occurs - Market failure occurs when the price mechanism fails to account for all of the costs and benefits necessary to provide and consume a good. The market will fail by not supplying the socially optimal amount of the good. When the supply and demand do not produce quantities of the good where price reflects the marginal benefit of consumption The Production Possibilities Frontier - Illustrates the trade-offs in a simple economy that produces two goods - Illustrates the maximum quantity of one good that can be produced for any given production of the other good - Efficient, inefficient, unobtainable Know why economics models are important - Help understand real life situations - Simplified representation of reality in the economy - Help formulate economic policy Opportunity costs and Trade offs - Roses -> denominator (computer/roses) - Computers -> denominator (roses/computer) Review comparative advantage and absolute advantage and why sometimes an individual can still benefit in trade even though it has absolute advantage - Absolute advantage can do better than other countries - Comparative advantage if opp. Cost of producing good/service is lower for an individual/country than for other people

Review the circular flow model

Know the difference between normative/positive - Positive is objective - Normative is subjective Know what it means by a movement along the supply and demand curve - A movement along demand curve is a change in quantity demanded of a good that is the result of a change in that good’s PRICE While a SHIFT is when - A change in the quantity supplied at any given price

Normal vs inferior - Normal is demand increases when income increases - Inferior is demand decreases when income increases Understand quantity demanded and quantity supplied when price changes - An increase in demand increases both equilibrium price and eq. Quantity - An increase in supply reduces equil. Price and increases eq. quantity

Know what shifts demand - Change in price of related goods or services - Change in income - Change in tastes - Change in expectations - Change in the # of consumers Know what shifts supply A shift is a change in the quantity supplied of a good at any given price - Changes in input prices - Changes in prices - Changes in technology - Changes in expectations - Changes in # of producers - Natural disasters - war Be able to identify the equilibrium price and quantity transacted - Demand = supply - Every buyer finds a seller and vice versa Shortage vs. Scarcity Scarcity- not enough resources available to use in the way we would like, implies finite limits • Shortage- consumers want more than producers are willing to supply at a given price Know when a shortage exist and surplus - Surplus exists when the quantity supplied exceeds the quantity demanded - Shortage exists when quantity demanded exceeds quantity supplied Understand a consumer willingness to pay most a consumer will spend on one unit of a good or service. Some economic

researchers see willingness to pay as the reservation price – the limit on the price of a product or service Be able to interpret and calculate consumer surplus, producer surplus, and total surplus - ½ (b) (h)

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Total surplus is both CS and PS combined

What happens when price changes to total surplus Market Failure - inefficiency What is market efficiency The effects of price ceilings, price floors, inefficiencies - Price ceilings lead to inefficient allocation to consumers, wasted resources, inefficiently low quality, incentive for black markets - Price floors lead to inefficient allocation of sales among sellers, inefficiently high quality goods, Minimum wage effect; from class lecture What are price controls - legal restrictions on how high prices can be Deadweight loss - Loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium Understand what is a quota, be able to calculate quota rent, and inefficiency (deadweight loss) - upper limit on the quantity of a good that can be transacted - Total amount of the good that can be legally transacted is the quota limit - How to find quota rent - new price minus old price per unit. Then multiply new import numbers. How can minimum wage create illegal hiring practices - covered in class - (hint effects of a price floor) - Temptation to break the law by selling below the legal price Understand how government can interfere in society to stimulate the economy - review chp 1 principles Understand the role of technology and economic growth How changes in price and increase in the # of individuals affect the demand curve...