Microeconomics

• Economics


  Unlimited wants combined with finite resources
• opportunity cost


  The lost value of the best alternative not chosen
• production possibilities curve (PPC)


  A PPC illustrates every combination of the goods that can be produced using resources fully and offically
• Points on curve

  Attainable and uses resources fully
• Points inside the curve


  Are attainable but don't use resources fully
• Points outside the curve

  Not attainable given current resources
• Law of Increasing Costs


  To produce constant additions of one good we must give up greater and greater amounts of the other good
• Can a PPC change?

  Yes, IF resources change
• Demand side of market


  Consumers
• Supply side of market

  Producers
• Law of Demand


  There is an inverse relationship between price and quantity demanded. As the price goes up, the quantity demanded goes down. As price goes down, the quantity demanded goes up
• Demand Curve


  Identifies the quantity demanded for a good at any price
• What shifts the demand curve/change demand

  Tastes/preferences, budget/consumer income, number of consumers, price expectations, price of related goods
• Substitute Goods


  Goods that can be used in place of one another. Ex: milk+water, pen+pencil, coke+pepsi
• Complementary Goods


  Goods that can be used together in consumption. Ex: phone+phone charger, pen+paper, ice cream+ice cream cone
• Law of Supply


  There is a direct relation between price and quantity supplied. As price increases, quantity supplied increases. As price decreases, quantity demanded decreases
• Supply Curve


  Identifies the quantity supplies of a good at any price
• What will shift the supply curve/change supply?

  Number of producers in the market place, change in technology, cost of production
• Equilibrium Price


  The consumer cost assigned to some product or service such that supply and demand are equal or close to equal
• Price Ceiling


  Maximum price allowed by the government - price is not allowed to rise above the price ceiling. A price ceiling is always imposed below the free market eqm. price
• Intent of price ceiling

  To benefit consumers
• What happens at a price ceiling

  Quantity demanded (Xd) > quantity supplied (Xs) - leads to a shortage until ceiling is lifted
• Price Flooring


  The lowest price allowed by the government - the price can not fall below the price floor. A price floor is always set above the free market eqm. price
• Intent of price flooring

  To benefit producers
• What happens at a price flooring

  Quantity supplies (Xs) > quantity demanded (Xd) - leads to a surplus
• Elasticity


  Always expressed as the percent change in one variable divided by the percent change in another variable (denominator causes the numerator to change)
• Price Elasticity of Demand (Ed)


  Ed = % change in quantity demanded for good x/% change in price of good x
• Ed > 1


  Demand is elastic - the percent change in quantity demanded > percent change in price. Total Revenue follows the quantity demanded since it's bigger
• Ed < 1


  Demand is inelastic - the percent change in quantity demanded < percent change in price. Total Revenue follows price since it's bigger
• Ed = 1


  Unitary elastic = a given percent change in price leads to the same percent change in quantity demanded. No change to TR
• Income Elasticity of Demand


  Ey = % change in quantity demanded / % change in income
• Ey > 0


  Good x is a normal good
• Ey < 0


  Inferior Good
• Cross Price Elasticity of Demand


  Exy = % change in demand for good x/% change in price of good y
• Exy > 0


  Goods X and Y are substitute goods
• Exy < 0


  Goods X and Y are complementary goods.
• Consumer Theory


  Objective of the consumer is to maximize total utility
• Total Utility (TU)

  The total satisfaction resulting from the consumption of a good or service
• Marginal Utility (MU)


  The change in satisfaction received from consuming an additional unit of a good
• Law of Diminishing Marginal Utility


  As we consume more and more of a good, total utility will increase by less and less