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Microeconomics Chp1
| Term | Definition |
|---|---|
| Economics are... | the study of how people allocate resources in an attempt to satisfy their unlimited wants |
| Resources are... | used to acquire things to satisfy their wants |
| Examples of resources include... | land, labor, and physical capital |
| Wants are... | all things people would consume if they had unlimited income. The basis is decision making |
| Economics helps study | how choices are made when an individual, a business, or a nation faces alternatives |
| Examples of wants on individual scale | You only have $20 and you have to choose whether to get a new body spray or a customized planner |
| Examples of wants on corporate scale | a firm is deciding how to manufacture their energy drinks in order to make maximum profit |
| A market is... | an arrangement between a buyer and seller where money is exchanged for a product or service. Doesn't have to be physical |
| The two types of economic analysis include... | microeconomics and macroeconomics |
| Microeconomics | decisions being made by individuals (households), firms, and government and how these decisions affect specific markets |
| Examples of microeconomics include... | the price of yogurt increasing affecting the sales of granola. Comparing the markets of bloom energy drinks and monster energy drinks. |
| Gov policy in microeconomics affects | a specific market, such as yogurt |
| Macroeconomics | the analyzing of the behavior economy as a whole, looks into changes in employment, general price level, and national income. Aggregates |
| Examples of macroeconomics include... | analyzing the change in unemployment from 2020 to 2026 and calculating GDP |
| Gov policy in macroeconomics affects | the levels of the entire economy. Increasing or decreasing inflation is an example. |
| Models and theories are... | simplified representations of the real world, they allow economists to understand and predict future economic events. They are not realistic and understanding the objective is vital. |
| PPC | Production possibility curve |
| What is a PPC? | shows the possible amount of goods/services available to the economy assuming resources are being used efficiently and fully employed |
| A point on the line or below the line of a PPC is... | possible |
| A point above the PPC is... | impossible |
| A point inside the PPC is... | possible if resources are not being efficiently used and/or all resources are not fully employed. |
| How does PPC illustrate scarcity? | the illustration of a downward slope conveys limited resources. A point above the line represents the lack of resources |
| Scarcity is... | the idea that resources are not infinite. Must reduce the production of one good to free up resources to produce something else |
| How can the PPC curve shift? | Changes in resources allow for varying +/- of goods capable of being produced. Technological innovation allows for more things to be produced. |
| Opportunity Cost | the highest-valued, next best alternative that must be sacrificed to obtain something or to satisfy a want. |
| What is the opportunity cost in this scenario? You choose to sleep an extra hour instead of going to the gym. After the gym you feel mor energized and healthier | Better health and energy |
| Why is the PPC downward sloping? | Something must be given up at each stage, illustrates opportunity cost. Resources are not perfectly adaptable |
| What concept is responsible for the PPC being downward sloping? | Opportunity cost |
| Why is the PPC bowed outward? | resources aren't perfectly adaptable |
| Marginal Benefit | the extra benefit resulting from a small increase in some activity |
| Marginal cost | additional cost resulting from a small increase in some activity |
| Marginal Principle | increase the level of an activity if its marginal benefit exceeds it marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If possible pick the level where marginal benefit and cost = each other |
| Following marginal principle | maximizes profit |
| Fixed costs | costs that do not vary with production level. Be the same dollar amount regardless of how long the shop is open/ the activity |
| Variable costs | costs that vary with production level. They change depend on how long the shop is open |
| example of fixed costs | rent |
| example of variable costs | shampoo and conditioner, wages, utilities |
| explicit costs | costs in the form of actual cash payment. Firm paying wages, electricity bill. Covers both fixed and variable costs |
| implicit cost | the opportunity costs of non-purchased inputs. |
| when applying marginal principal what is ignored? | fixed costs |
| example of implict costs | Time spent to run the business, the value of what else you could be doing with your time is the opportunity cost |
| principle of diminishing returns | Suppose that output is produced with two inputs and that we increase one input while holding the other inputs fixed. Beyond some point, output will increase at a decreasing rate. |
| when output increases at a decreasing rate | diminishing return |
| in the short run at least one factor of production must be... | fixed |
| in the long run all factors of production must be... | changed |
| in the long run are diminishing returns possible? | not possible |
| Trade | allows each person to specialize in the activities he or she does best, whether it is farming, sewing, or home building. |
| By trading with others, people can | acquire a greater variety of goods and services at a lower cost. |
| Markets facilitate | specialization and trade |
| Absolute Advantage | the ability of a person or nation to be more productive than another. Who produces more than the other? |
| Comparative Advantage | The ability of a person/ nation to produce a good at an opportunity cost that is lower than the opportunity cost of another person or nation. Who has lowest opportunity cost? |
| Specialization according to comparative advantage can increase | total production |
| Specialization benefits only occur if people | work in their comparative advantage |
| Circular Flow Model | a visual model of the economy that shows how dollars flow through markets among households and firms. |
| Factor/ Input Markets | where the owners of factors of production sell inputs to firms |
| Product Markets | where firms sell their products to consumers |
| the model of supply and demand captures | the interaction of buyers and sellers in a market |
| when using supply and demand what is assumed? | that the market is perfectly competitive |
| perfectly competitive market | a market in which there are many buyers and sellers so that each has a negligible impact on the market price of the standardized product. |
| examples of perfectly competitive markets? | agricultural markets |
| what markets are not perfectly competitive markets? | running shoes , airlines, and computers |
| Demand | the amount of the product that buyers are willing and able to purchase at a particular price |
| demand curve | shows relationship between quantity demanded and price |
| law of demand | the lower the price the larger the quantity demanded, ceteris paribus |
| downward slope of demand curve illustrates an | inverse relationship |
| ceteris paribus | holding all other variables constant |
| The price is ____ the only thing influencing a persons purchase decisions | not |
| Factors affecting demand by shifting it left or right | change in consumers income, change in price related goods, and consumer expectations of future prices |
| a change in price of a product results in | a movement along the line |
| Normal Good | a good where when a person has more income the demand increases. This results in a rightward shift. Includes brand-name clothing, electronics, and organic food |
| For normal goods, a decrease in consumer income will | decrease demand, shifting it left ward |
| If consumer income increases, and they begin to buy more nike running shoes, what are running shoes? | Normal good |
| Inferior good | a good where an increase in income decreases the demand. Typically a cheaper good |
| If consumer income decreases and they start to buy more off-brand clothing, what are off-brand clothes? | Inferior good |
| Substitutes | two goods where an increase in the price of good #1 increases the demand for good #2 |
| If the price of Diet Dr. Pepper increases then I buy Diet Coke, what is this an example of? | Substitutes |
| Complements | two good where an increase in the price of good #1 decreases the demand for good #2 |
| If the price of hot dogs goes up, then I buy less hot dog buns. What is this an example of? | Complements |
| Supply | the amount of product that sellers are willing and able to sell at a particular price |
| Law of Supply | the higher the price, the larger the quantity supplied, ceteris paribus (acknowledges there's other factors affecting how much firms supply) |
| Where does the supply curve shift when supply increases? | Shifts right |
| What factors increase supply? | Subsidy, advancement in technology, decrease in cost of inputs, and an expectation of lower future products |
| What factors decrease supply? | taxes increase, increase in input costs, and an expectation of higher prices |
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