Microeconomics Final

Front 1

Scarcity Principle

Back 1

Although we have boundless needs and wants, the resources available to us are limited. Often, having one good means less of another.

Front 2

Total Cost

Back 2

= Implicit + Explicit Costs

Explicit: Tangible costs like $

Implicit: Intangible costs like time

Front 3

Opportunity Cost

Back 3

Cost including value of highest valued alternative that must be given up

Front 4

Cost - Benefit Principle

Back 4

A person/group should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra cost

Front 5

Diminishing Marginal Benefit

Back 5

Every successive unit gives you less value/pleasure. The benefit of eating a 2nd slice of pizza is not a good as eating the 1st.

Front 6

Marginal Benefit

Back 6

(MB)

The amount of benefit you receive by creating one more unit. Additional units are only worth so little to you after you already have what is needed. The slope of a total benefit curve (or the derivative). The greater the slope , the greater the marginal benefit of the product.

Front 7

Value at which you cease consumption

Back 7

MB equal to MC

Consume no further, as long as MB is greater than or equal to MC consumption benefits you

Front 8

Production Possibilities Frontier (PPF)

Back 8

Closely associated with comparative advantage. Deals with who should produce a certain object and trade with someone else because it is mutually beneficial for both parties to produce what is least costly to them and trade.

Front 9

Income's Effect on Supply/Demand

Back 9

As price goes down/the income of the consumer goes up, the greater the purchase power of the consumer leading to rise in quantity demanded

Front 10

Substitution's Effect on Supply/Demand

Back 10

As price goes up/competitive replacements for a product are offered, the consumer purchases more substitutes for that product and quantity demanded decreases

Front 11

Equilibrium

Back 11

The supplier has no more product that he is looking to sell and the consumer is not looking to buy any more

Front 12

Substitute

Back 12

A good that can replace another

Front 13

Compliment

Back 13

A good that goes well with another (ex. cream cheese and bagels)

Front 14

Rising Income's Effect on Normal Goods

Back 14

Income increases = Demand for normal goods increases

Front 15

Rising Income's Effect on Inferior Goods

Back 15

Income increases = Demand for inferior goods decreases

As purchase power increases you will buy the superior product.

Front 16

Demand Shifters (Consumer)

Back 16

1. Substitutes / Compliments

2. Income

3. Performance of the product (consumer's happiness with it)

4. Number of buyers

5. Expectation of future price (as it decreases, demand increases)

Front 17

Demand Shifters (Producer)

Back 17

1. The price or availability of ingredients or inputs

2. Taxes (taxes increase, production cost increases = higher reservation price of the product for the producer

3. Technology (as tech. increases/improves, production of the goods is more effective)

4. Number of suppliers

Front 18

Inputs

Back 18

Ingredients or resources like payroll of employees, actual ingredients, or bills that go into creating a product

Front 19

Elasticity

Back 19

Observes how consumers react to changes in prices and availability of substitutes. The more consumers react to price change the more elastic the good is.

Front 20

Determinants of Elasticity

Back 20

1. Availability of substitutes (if you need surgery, your demands are highly inelastic, there are no more effective substitutes to it)

2. Budget Share (smaller goods like salt are inelastic because you couldn't care less but a new car is elastic because its a big share of your budget)

3. Time (the more time a consumer has to work with, the more elastic the good will be because they can wait for a substitute or change in price)

Front 21

Elasticity Equation

Back 21

Ed = (price/quantity) x (1/slope)

- Slope = change in Price/change in Quantity

Ed = %change of demand / %change of price

X is less than 1, Inelastic

x is equal to 1, Unit Elasticity (equilibrium)

x is greater than 1, Elastic

Front 22

Income Elasticity Equation

Back 22

= %change in demand / %change in income

X is greater than 0 for normal goods

X is less than 0 for inferior goods

Front 23

Determinants for Elasticity of Supply

Back 23

1. Flexibility/Mobility of Inputs (how specialized inputs like equipment and labor force are for the product)

2. Time (the longer a person has to work with the more elastic the product because they can wait for substitutes or a drop in input prices)

Front 24

Competitive Markets

Back 24

Markets where the product is exactly the same across all producers (ex. crops like corn), there are a large number of suppliers, there is easy entry and exit in/out of the market (ex. hot dog vendors), and there are well informed supplies and consumers.

Market determines price for suppliers.

Front 25

Accounting Profit

Back 25

= Total Revenue - Explicit Costs

Front 26

Economic Profit

Back 26

= Total Revenue - Total Cost (implicit/explicit)

Front 27

Short Run

Back 27

One or more inputs is fixed

Front 28

Long Run

Back 28

All inputs are variables and firms can exit/enter the market

Front 29

Consumer Surplus

Back 29

= Reservation Price - Actual Price

.5(base x height)

Front 30

Producer Surplus

Back 30

= Actual Price - Reservation Price

.5(base x height)

Front 31

Reservation Price

Back 31

Max price that a consumer will pay for a good the lowest a producer is willing to sell the product for

Front 32

External Cost

Back 32

A cost of an activity that falls on ppl other than those who pursue the activity (ex. pollution)

Front 33

External Benefit

Back 33

A benefit received by ppl other than those who originally pursued the action that caused it

Front 34

Social Benefit or Cost

Back 34

= Private benefit or cost + External benefit or cost

Front 35

Coase Theroem

Back 35

When the parties affected by externalities can negotiate "costlessly" w/ one another, an efficient outcome results no matter how the law assigns responsibility for the charges

Front 36

Socially Beneficial

Back 36

When MB = MC, Equilibrium

Front 37

Oligopoly

Back 37

Small number of firms running a single market like a monopoly

Front 38

Dominant Strategy

Back 38

Regardless of whatever other firms do to effect price, what is your firm's best response to their production?

Front 39

Nash Equilibrium

Back 39

A combination of strategies such that no players have an incentive to change their strategy given the strategies of their opponents

Front 40

Search Models

Back 40

Consumers must decide how much time/$/effort to exert in acquiring info about product characteristics like quality, price, etc.