Micro

• Factors of Production


  • Land
  • Labor
  • Capital
  • Enterprise
• Circular flow of income model


  Depicts the circular flow of income and expenditure between households and firms in an economy
• PPC Curves


  • Shows the maximum COMBINATION of goods or services that can be produced by an economy in a given time period, if all resources in the economy are used fully and effectively
• Actual Growth


  Occurs when previously unemployed factors of production are brought into use
• Potential Growth


  Occurs when the quantity or quality of factors of production within an economy is increased
• Demand

  The willingness and ability to purchase a quantity of a good or service at a certain price over a given time period
• Law of Demand


  As the price of a product falls the quantity demand of the product will usually increase, Ceteris Paribus
• Movement


  Change in price
• Shift


  Change in demand (Non-Price determinants)
• Supply


  The quantity of a good or service that producers are willing and able to produce and sell at different prices
• What shifts the supply curve?


  • Increase in tax
  • Decrease in minimum wages
  • Improvement in technology
  • Hurricanes
• Consumer surplus


  Happens when the price consumers pay for a product or service is less than the price they're willing to pay
• Producer surplus


  The total amount that a producer benefits from producing and selling a quantity of a good at the market price
• Community Surplus


  Consumer + Producer surplus
• Absolute Advantage


  A country has an absolute advantage in the production of a good if it can produce more using the same resources
• Comparative Advantage


  A country has an absolute advantage in the production of a good if it can produce at the lowest opportunity cost
• PPC for Absolute advantage


  • Germany: 10 Beer, 20 Teslas

  India: 2 Beer, 16 Teslas
• Comparative Advantage


  Germany: Lowest opportunity cost in producing Beer

  India: Lowest opportunity cost in producing Teslas
• Price ceiling


  A price imposed by the government and set below the equilibrium price. Price cannot rise above this price.
• Purpose of price ceiling

  To protect consumers and ensure that firms don't abuse their market power
• Price ceiling


  Causes a shortage of supply
• Solutions to price ceiling shortage

  Government can give subsidies to producers

  Government can provide the good themselves
• Real world example of price ceiling


  • NYC rent prices capped at $400
• Price floor


  A price set by a government or other authority above the market equilibrium price of a good or service
• Purpose of price floor

  Producers are better off as a result of the binding price floor if the higher price makes up for the lower quantity sold
• Price floor


  Causes a shortage in demand
• Solutions to price floor shortage


  Government can lower taxes for consumers to increase disposable income
• Real world example of price floor


  • Joe Biden Minimum wage $15
• Price elasticity of demand


  Measures the responsiveness of demand to a change in price
• Computing the Price Elasticity of Demand


  PED = (% change of the quantity demanded) / (% change in Price)

  PED = (qd2-qd1) / Qd1 / (p2-p1) / p1
• Inelastic Demand


  Percentage change in price is greater than percentage change in quantity demanded. Not sensitive to a change in price. Price elasticity of demand is less than one.
• Elastic Demand

  Percentage change in quantity demanded is greater than percentage change in price. VERY sensitive to a change in price. Price elasticity of demand is greater than one.
• What will the demand curve look like for different PED values

  • PED<1: inelastic

  PED>1: elastic

  PED=1: unit elasticity

  PED=0: perfectly inelastic

  PED=infinity: Perfectly elastic demand
• Total Revenue


  The amount paid by buyers and received by sellers of a good. Computed as the price of the good times the quantity sold.
• Determinants of PED


  • S: Substitutes

  1. Proportion of income
  2. Luxury or necessity
  3. Addictive or not
  4. Time to respond
• Income Elasticity of Demand (YED)

  The responsiveness of demand to a change in income
• Calculating YED


  YED = (Percentage change in quantity demanded of the product) / (Percentage change in income of the consumer)
• Calculating YED for different products

  • Holidays: YED = 1 (Proportional change)

  Gym membership: YED = 0 (No change)

  Locally produced clothes: YED = -1 (Inverse change)
• Change in income


  Affects demand for different products differently based on their YED
• Engel Curve


  Depicts the relationship between consumer income and expenditure on a particular good or service