Microeconomics

Front 1

Economics

Back 1

The study of the allocation and use of scarce resources to satisfy unlimited human wants

Front 2

Resources

Back 2

Resources Four scarce economic resources: (LLCE) Land Labor Capital Entrepreneurship

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Opportunity cost

Back 3

Opportunity Cost What a person sacrifices when choosing one option over another. The opportunity cost of a choice is the value of the best alternative foregone, where a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available.

Hint 3

The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.

Front 4

Marginal analysis

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Action is worth taking when the marginal benefit exceeds the marginal cost .

Hint 4

For example, if you already exercise five times a week and are thinking about adding a sixth day, you would use marginal analysis to determine whether the benefits of the sixth day, such as additional calories burned, endurance gained and muscle built, would be worth the costs of the sixth day, such as giving up sleeping in on Saturdays, having less energy to do your other weekend activities, and increasing your risk of injury.

Front 5

Positive analysis

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Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved

Hint 5

How it is

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Normative analysis

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Normative economic statements are opinion based, so they cannot be proved or disproved.

Hint 6

For example, the statement, "government should provide basic healthcare to all citizens" is a normative economic statement. There is no way to prove whether government "should" provide healthcare; this statement is based on opinions about the role of government in individuals' lives, the importance of healthcare and who should pay for it.

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Markets

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Where goods and services are exchanged. Typically for money.

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Perfectly competitive markets

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Many producers, homogenous products, easy entry/exit into market Low entry and exit barriers - there are no restraints on firms entering or exiting the market Homogeneity of products - buyers can purchase the good from any seller and receive the same good Perfect knowledge about product quality, price, and cost No single buyer or selle r is large enough to influence the market price

Hint 8

Sellers must take the existing market price; if they set a price above the market price, no one will buy their product because potential buyers simply will go to other suppliers. Setting a price below the market price does not make any sense because the firm can sell as much as it wants to at the market price; selling below the market price will just reduce profits.

Front 9

Quantity demanded

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Total amount of goods and services that are demanded at a given point in time.

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Quantity supplied

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Amount of goods or services supplied at a given time

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Market equilibrium

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The price/quantity such that quantity supplied equals quantity demanded. (Balance) The state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.

Front 12

The Law of Demand

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-Price and quantity demand are inversely related (Equilibrium) -Substitution Effect: When the price of goods increases, consumers buy less, because they go buy something else -Real Balances Effect (Income Effect): When a price decreases, consumers buy less because their real purchasing power has gone down (Equilibrium) -Law of Diminishing Marginal Utility: The consumption of each additional unit of a good bring us less and less happiness, and there fore, each additional unit is worth less and less to us.

Hint 12

amples -When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen. -When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.

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Determinants of Demand

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-Taste -Income 1.Normal Good – income increase leads to increased demand 2.Infirior Good – income increase leads to decreased demand -Price of Other Goods 1.Subsititues – price of sub decreases, demand increases 2. Complements – price of compliment increases, demand decreases IE. Price of DVD’s goes up, demand of DVD players goes down -Population -Expected Future Price a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices. b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.