MICROECONOMICS - U3 AOS1

• What is economics primarily the study of?

  Human behaviour and decision-making regarding resource allocation
• What does the term "sunk cost" refer to?

  Costs that are in the past and cannot be recovered
• What is marginal thinking in economics?

  It compares the additional value from a little more of something to the additional cost
• What are the basic economic concepts?

  • Relative scarcity
  • Resources (natural, labour, capital)
  • Opportunity cost
• What does relative scarcity mean?

  It refers to the situation where resources are insufficient to satisfy all needs and wants
• What are the types of resources in economics?

  Natural, labour, and capital
• What is opportunity cost?

  The cost of the next best alternative use of resources
• What does the Production Possibility Frontier (PPF) illustrate?

  • Maximum possible output an economy can produce
  • Assumes only two types of output
  • All resources are fully utilized
• What are the three basic economic questions?

  What and how much to produce, how to produce, for whom to produce
• What is economic efficiency?

  • Maximum output from given inputs
  • Maximizes society's wellbeing
• What is allocative efficiency?

  Resources are used to maximize society's satisfaction
• What is productive/technical efficiency?

  Resources produce the maximum amount possible at the lowest cost
• What is dynamic efficiency?

  Resources are reallocated in response to changing economic circumstances
• What is intertemporal efficiency?

  Finding the balance between future and current consumption
• What does resource allocation involve?

  Making decisions about how scarce resources are used or distributed
• What are the conditions for a free and perfectly competitive market?

  • Consumer sovereignty exists
  • Strong competition and absence of market power
  • Low barriers to entry
  • Homogeneous products
  • Perfect market knowledge
  • Rational consumer behavior
• What are the types of market structures from least to most market power?

  1. Perfect competition
  2. Monopolistic competition
  3. Oligopoly
  4. Perfect monopoly
• What is a market?

  An institution where buyers and sellers negotiate prices for goods and services
• What characterizes a market?

  • Number of rival firms
  • Market power of firms
  • Barriers to entry/exit
  • Product differentiation and advertising
  • Level of information among buyers and sellers
• What is a price signal?

  Market prices change, generating signals that influence economic decisions
• What are normal profits?

  Prices set at the lowest level just high enough to justify continued operation
• What are supernormal profits?

  Profits above normal profits, typically made in the short-term
• What defines perfect competition?

  • Many buyers and sellers
  • Identical products
  • Strong competition
• What is monopolistic competition?

  • Few rival producers
  • Each has a monopoly over their product
  • Competes closely with substitutes
• What is an oligopoly?

  • Small number of businesses dominate the market
  • Exercise market power collectively
• How do free and competitive markets promote efficient resource allocation?

  • Competitive markets lead to efficient use of scarce resources
  • Resources directed to areas of highest demand
  • Increases national output and productive capacity
• Why is strong competition important for efficiency?

  It forces firms to cut costs and produce more efficiently
• What is the law of demand?

  The quantity demanded varies inversely with the change in price
• What is the income effect?

  When price increases, a greater percentage of income is required for purchase
• What is the substitution effect?

  Buyers look for cheaper alternatives when prices rise
• How do movements along a demand curve illustrate the law of demand?

  • Rise in price leads to demand contraction
  • Fall in price leads to demand expansion
• What is the law of supply?

  The quantity supplied varies directly with the change in price
• What is the profit motive?

  A higher selling price increases profits, making production more attractive
• How do movements along the supply curve illustrate the law of supply?

  • Rise in price leads to supply expansion
  • Fall in price leads to supply contraction
• What is market equilibrium?

  When quantity demanded equals quantity supplied for a given period
• What happens in a market surplus?

  Supply exceeds demand, leading to excess inventory
• What happens in a market shortage?

  Demand exceeds supply, leading to increased prices
• How do changes in demand affect equilibrium price and quantity?

  • Increase in demand: Higher equilibrium price and quantity
  • Decrease in demand: Lower equilibrium price and quantity
• How do changes in supply affect equilibrium price and quantity?

  • Increase in supply: Lower equilibrium price and quantity
  • Decrease in supply: Higher equilibrium price and lower quantity
• What are non-price factors affecting demand?

  Changes in disposable income, prices of substitutes and complements, preferences, interest rates, demographics, and consumer confidence