Micro Final Review Chapters 1-5

opportunity cost

the cost of any good, service, or activity is the value of what must be given up to obtain it; the value of the next best thing

utility

the pleasure or satisfaction obtained from consuming a good or service; measured in "utils

marginal analysis

marginal cost of an action should not exceed its marginal benefit

scientific method

used to establish theories, laws, and principles

purposeful simplifications

theories, principles, and models

ceteris paribus

other things equal"; in order to judge the effect one variable has upon another, it is necessary to hold other contributing factors constant

microeconomics

looks at specific economic units; concerned with the individual industry, firm or household and the prices of specific products and resources

macroeconomics

examines the economy as a whole; includes measures of total output, total employment, total income, aggregate expenditures, and the general price level

positive economics

describes the economy as it actually is, avoiding value judgements and attempting to establish scientific statements about economic behavior

normative economics

involves value judgements about what the economy should be like and the desirability of the policy options available

wants

include both necessities and luxuries; they change, especially as new products are introduced

goods and services

satisfy wants

factors of production

also called economic resources; include all natural, human, and manufactured resources used to produce goods and services

resource categories

land or natural resources, labor or human resources, capital or investment goods, entrepreneurial ability

labor or human resources

include physical and mental abilities used in production

capital or investment goods

all manufactured aids to production like tools, equiptment, factories, and transportation

entrepreneurial ability

a kind of human resource that provides 4 functions: a)combines resources needed for production b)makes basic business policy decisions c)innovates new products, production techniques, and organizational forms d) bears the risk of time, effort, and funds

production possibilities tables and curves

used to illustrate and clarify society's economizing problem

consumer goods

directly satisfy wants

capital goods

used to produce consumer goods; indirectly satisfy wants

production possibilities curve

a graphical representation of choices; points represent maximum possible combinations of goods and services; points inside the curve are not using resources effectively; points outside the curve are unattainable

command economy

socialism or communism; public (state) ownership of resources; economic activity is coordinated by public planning

market system

capitalism; private ownership of resources, markets and prices coordinate and direct economic activity, each participant acts in his or her own self-interest, in pure capitalism the government plats a very limited role, in the US version the government pl

private property

private indiviuals and firms own most; enables those to obtain, control, use, and dispose of this property; encourages investment, innovation, exchange of assets, maintenance of property, and economic growth

freedom of enterprise and choice

entrepreneus and businesses have the freedom to obtain and use resources to produce products of their choice, and to sell thses products in the markets of their choice

freedom of choice

owners of property and money reosurces can use resources as they choose; workers can select the training, occupations, and job of their choice; consumers are free to spend their income in a way that best satisifies their wants

self-interest

driving force in market system; as each trues to maximize profits, income, or satisifcation, the economy will benefit if competition is present

competition among buyers and sellers

controlling mechanism; many sellers means that no single producer or seller can control the price or market supply; many buyers means that no single sonsumer or employer can control the price or market demand

market

an instituition or mechanism that brings buyers and sellers into contact

incentive for capital accumulation (investment)

competition, freedom of choice, self-interest, and the potential of profits

specialization

using resources to produce one or a few goods, rather than many goods; allowed through division of labor; saves time involved in shifting from one task to another

money as a medium of exchange

money substitutes for barter, which requires a coincidence of wants

five questions about economic systems

1) what goods and service will be produced 2) how will the goods and service be produced 3) who will get the goods and services 4) how will the system accommodate change 5) how will the system promote progress

What will be produced?

in order to be profitable, businesses must respond to consumers' wants and desires; consumer sovereignty-key to determining the types and quantities of the various products that will be produced; "dollar votes"; consumers decide

How will the goods and services be produced?

market systen encourages and rewads those producers who are achieving least-cost production including using the right mix of labor and capital, locating firms in the optimim location to hold down resource and transportation costs, using available technolo

Who will get the output?

related to how the income is distributed among indiviudals and households, and the tastes and preferences of consumers; goes to those who are willing and able to pay for them

How will the system accommodate change?

as tastes, technology, and resource supplies change, prices help signal those changes

How will the system promote progress?

introduction of a popular new producr will be rewarded with increased revenue and profit; new technologies will spread throughout the industry (reduce production cost and product price)

creative destruction

occurs when new producrs and production methods destroy the market positions of firms that are not able or willing to adjust

the "invisible hand

Adam Smith; promotes public interest through a market system where the primary motivation is self-interest; by attempting to maximize profits, forms will also be producing the goods and services most wanted by society

merits of the market system

promote efficiency in the allocation of resources; provide incentives for people to be productive through work effort and acquiring skills; provide a lot of personal freedom in making economic decisions

decision makers in the private economy

households and businesses

household

one or more persons occupying a housing unit; all resources in an economy are owned by households; therefore, all income flows to household as payment for providing resources

business

commercial establishment that seeks profit by selling goods and services

What happens in resource markets?

households sell resources directly or indirectly; businesses buy resources in order to produce goods and services; the flow of payments from businesses for the resources constitutes costs for business and income for resource owners

What happens in product markets?

Households are on the buying side of these markets, purchasing goods and services; businesses are on the selling side, offering products for sale; the flow of consumer expenditures constitutes sales receipts for businesses

demand

a schedule or curve that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period

law of demand

other things being equal, as price increases, the quantity demanded falls

diminishing marginal utility

the decrease in added satisfaction that results as one consumes addition units of a good or service

income effect

a lower price increases the purchasing power of money income, enabling the consumer to buy more at the lower price (or less at a higher price) without having to reduce consumption of other goods

substitution effect

a lower price gives an incentive to substitute the lower-priced good for now relatively higher-priced goods

demand curve

downward slope indicates a lower quantity at the higher price and a higher quantity at the lower price

what can cause an increase in demand

favorable change in consumer tastes, increase in the number of buyers, rising income if the product is a normal good, falling income if the product is an inferior good, increase in the price of a substitute good, decrease in the price of a complementary g

what can cause a decrease in demand

unfavorable change in consumer tastes, decrease in number of buyers, falling income if the product is a normal good, rising income if the product is an inferior good, decrease in the price of a substitute good, increase in the price of a complementary goo

distinction between a change in quantity demanded and a change in demand

change in quantity demanded is caused only by a change in the price of the product and represented by a move along the fixed demand curve from one point to another; change in demand is changed by another determinant (not the price of the product) and repr

supply

a schedule or curve that shows amounts of a product that a producer is willing and able to produce and sell at each specific price in a series of possible prices during a specified time period

law of supply

producers will produce and sell more of their product at a high price than at a low price, meaning there is a direct relationship between price and quantity supplied; given production costs, a higher price means greater profits and thus an incentive to in

supply curve shifts

increase in supply involves a rightward shift, and a decrease in supply involves a leftward shift

determinants of supply

resource prices, technology(more efficient production and lower production costs), taxes and subsidies(tax=cost=decrease; sub=low price of prod=increase), prices of other goods, producer expectations(future prices), number of sellers(greater the market su

distinction between a change in quantity supplied and a change in supply

change in quantity is caused only by a change in the price of the product and represented by a move along the fixed supply curve from one point to another; change in supply is caused by another determinant (not the price of the product) and represented by

equilibrium price

where the quantity supplied equals the quantity demanded; market clearing price

rationing function of prices

the ability of the competitive forces of supply and demand to establish a price where buying and selling decisions are consistent

productive efficiency

the production of any particular good in the least costly way; ma occur without allocative efficiency

allocative efficiency

producing the particular mix of goods and service most highly value by society; requires productive efficiency

price elasticity of demand

the degree of consumer responsiveness or sensitivity to a change in price; if consumers are relatively responsive to price changes, demand is said to be elastic; if consumers are relatively unresponsive to price changes, demand is said to be inelastic

price elasticity coefficient formula

quantitative measure of elasticity; Ed=percentage change in quantity demanded/percentage change in price

midpoint formula

calculates the average elasticity over a range of prices to alleviate that problem; Ed=[(change in Q)/(sum of Q's/2)] divided by [(change in P)/(sum of P's)/2)]

why is the actual elasticity of demand a negative number?

because of the inverse relationship between price and quantity demanded; ignore the minus sign and use absolute value of both percentage changes

elastic demand

if a specific percentage change in price results in a larger percentage change in quantity demanded (E>1)

inelastic demand

if a specific percentage change in price results in a smaller percentage change in quantity demanded (E<1)

unit elastic

if the percentage changes in price and quantity demanded are equal (E=1)

perfectly inelastic

if a price change causes absolutely no change in quantity demanded (E=0); perfectly vertical demand curve

perfectly elastic

if any increase in price causes the quantity demanded to fall to zero, or if any decrease in price causes the quantity demanded to increase from zero to as many as can be produced (E=infinity); perfectly horizontal demand curve

total revenue

easiest way to judge whether demand is elastic or inelastic; total revenue=price x quantity sold

elastic demand and TR test

if a decrease in price results in a rise of total revenue, or if an increase in price results in a decline in TR; moving in opposite direction

inelastic demand and TR test

if a decrease in price results in a fall in TR, or an increase in prices results in a rise in TR; move in same direction

unit elasticity and TR test

if TR does not change when the price changes

determinants of price elasticity of demand

substitutability (the more substitutes, the more elastic the demand); the proportion of price relative to income (larger the expenditure the more elastic the demand b/c buyers notice the change in price more); whether the product is a luxury or necessity

price elasticity of supply

Es=percentage change in quantity supplied/percentage change in price

market period elasticity of supply

inelastic

short-run supply elasticity

more elastic than market period; depends on the ability of producers to respond to price change

long-run supply elasticity

most elastic; more adjustments can be made over time and quantity can be changed more relative to a small change in price

cross elasticity of demand

the effect of a change in a product's price on the quantity demanded for another product; Exy=percentage change in quantity of X/percentage change in price of Y

positive cross elasticity

X and Y are substitutes

negative cross elasticity

X and Y are compliments

zero cross elasticity

X and Y are unrelated, independent products

income elasticity of demand

the change in quantity demanded that results from a change in consumer incomes; Ei=percentage change in quantity demanded/percentage change in income

positive income elasticity

normal or superior good

negative income elasticity

inferior good

market failure

occurs when the competitive market system produces the "wrong" amounts of certain goods or services fails to provide any at all

demand-side market failure

happen when demand curves do not reflect consumers' full willingness to pay for a good or service

supply-side market failure

occur when supply curves do not reflect the full cost of producing a good or service

consumer surplus

the difference between the maximum price a consumer is willing to pay for a product and the actual price; reflects the extra utility gained from paying a lower price than what is required to obtain the good

consumer surplus measurement

measured by calculating the difference between the maximum willingness to pay and the actual price for each consumer, and then summing those differences; area under the demand curve and above the equilibrium price; (1/2 base times height)

producer surplus

the differences between the actual price a producer receives and the minimum acceptable price

producer surplus measurement

calculating the difference between the minimum acceptable price and the actual price for each unit sold, and then summing those differences; area above the supply curve and below the equilibrium price

efficiency

attained at equilibrium where the combined consumer and producer surplus is maximized

allocative efficiency occurs where

a)marginal benefit=marginal cost b)maximum willingness to pay=minimum acceptable price c)combined consumer and producer surplus is at a maximum

efficiency (deadweight) losses

underproduction reduces both consumer and producer surplus and efficiency is lost; overproduction causes inefficiency because at quantities greater than the equilibrium quantity

private goods

produced and sold in competitive markets and have 1)rivalry in consumption 2)excludability

public goods

goods that are nonrival and nonexcludable

externalities

occcur when some of the benefits or costs of production are not fully reflected in market demand or supply schedules

negative externalities

supply-side market failures

positive externalities

demand-side market failures