Intro to Microeconomics Final Exam

The study of how humans make decisions in the face of scarcity.

Human's want for goods, services, and resources exceed what is available in the long-term.

When demand exceeds supply in the short-term.

A simplified representation of how 2 or more variables interact with each other. Does not need to be detailed or useful.

Actions of individual agents in the economy such as households, workers, and businesses.

The economy as a whole.

What one must give up to obtain what he/she desires.

Budget = P1 x Q1 + P2 x Q2
- Set each Q equal to 0 to get the endpoints of the budget constraint.

All possible combinations of consumption that someone can afford given the prices of goods and an individual's income (all under budget constraint and on line)

Differences between production possibility frontier and budget constraint. PPF is from a supply perspective while the budget constraint is from a consumer perspective. The slope of PPF is the opportunity cost.

As production of a good or service increases, the marginal opportunity cost also increases.

When it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Any point along the PPF curve is productively efficient.

The particular mix of goods and services on the production possibilities curve that society most desires. When producers supply the quantity of each product that consumers demand.

When a country can produce a good at a lower opportunity cost than another country.

Describe how the world is (factual).

How the world should be (subjective).

The amount of some good or service consumers are willing AND able to purchase at each price.

Demand represents the curve, Qd represents a specific point.

A number of units someone wants to purchase at a specific price.

Inverse relationship between price and Qd. If the price goes up, Qd goes down. If the price goes down, Qd goes up. This is not always the case.

1. Tastes/Preferences
2. Population changes
3. Price of compliment changes
4. Price of substitute changes
5. Income
6. Expectations

The amount of a good or service that a producer is willing to supply at each price.

If price increases, quantity supplied increases. If price decreases, quantity supplied decreases.

The amount that firms are willing to sell at some specific price.

1. Technological changes
2. Number of sellers
3. Input costs
4. Expectations

When amount consumers want to buy equals the amount that producers want to sell (where demand meets supply; Q, P).

The difference between the amount individuals would have payed vs. what they did pay for the quantity purchased in dollars.

The difference between price the producer receives and the minimally acceptable price up to the total quantity sold in dollars.

Keeps price from falling below a certain level.

Qs > Qd (excess supply/surplus)

Below equilibrium price; prevents future issues.

Prevents prices from being too high, keeps things affordable.

Qd > Qs (shortage/excess demand)

Hopes to prevent price from going too high in the future.

Responsiveness to changes in another variable (i.e. Flexibility, Adaptability)

Measure of consumer responsiveness measured in Qd to price changes (>1 - elastic, (0,1) - inelastic).

1. Time
2. Necessity/Luxury
3. Income
4. Broad/Specific
5. Amount of substitutes

The steeper the demand curve, the more inelastic.

Tells you if the good is normal or inferior (Negative: inferior, Positive: normal, 0-1: necessity, >1: luxury).

Positive: A and B are substitutes, Negative: A and B are compliments, 0: A and B are unrelated.

Price x Qd

Measure of consumer satisfaction.

Satisfaction derived from everything consumed.

Total Utility/Quantity Consumed

Change in total/change in quantity, slope of total utility.

The common pattern that each marginal unit of a good consumed provides less of an addition of utility than the previous unit.

Every point on that curve has equal utility, higher indifference curve = higher utility.

Using economic preferences to help us to vote.

Excludable in use, rival in consumption.

Nonexcludable in use, nonrival in consumption.

Someone using something does not prevent someone else from using it.

Getting benefit without paying the costs (Ex. Public Radio).

Exchanging favors; You vote with me now and I will vote with you next time.

Highest number of buyers and sellers, free entry/exit, standardized product, perfectly elastic supply curves, firm has almost no control over the price (Ex. corn).
1. Long-run economic profit = 0
2. Entry eliminates profit
3. Exit eliminates losses
4. Industries grow/contract, price motivates firm behavior

One large company is in charge of all/most of the market, almost full control over price, generally smaller output. Only has to worry about laws, regulations, and demand curve, not competitors (Ex. Steelers = geographic monopoly).

Differentiated products, substitutes, price differences, price makers, advertisement/marketing. Might start at a loss because of low demand (not well known) and high costs (advertising) (Ex. Pizza places).

Small number of interdependent firms selling identical or differentiated products (Ex. Coke and Pepsi).

Do not change based on level of production (Ex. rent, renter's insurance).

Change based on output (Ex. laundry, electricity, water, gas). If you produce nothing, TVC = 0.

TR - explicit costs

TR - explicit costs - implicit costs

Out-of-pocket costs, actual payment.

The opportunity cost of using resources.

As a firm employs more labor, eventually the amount of additional output produced declines (production function increasing at a decreasing rate).

Costs per unit are the same, double input, double output.

Double inputs, more than double the output.

"Too many cooks in the kitchen"; doubling input, might harm your output.

TC/Q = TFC/Q + TVC/Q

Additional cost of producing one more unit of output; slope of total cost curve; change in total cost / change in quantity

ATC = AVC; all costs become variable.

Output level where long-term costs are minimized.

Firm that has to accept whatever the market price is, has no control over the price.

P>ATC

P<ATC

1. Increase in demand
2. Price increases
3. Profit > 0 because price > ATC
4. Production at firm level goes up
5. Market supply curve increases (# of firms goes up)
6. Price goes down
7. Firms are producing at long-run equilibrium
8. Market grew

Barriers to entry are not legal. Some monopolies have control over natural resources (Ex. electricity, water).

Laws prohibit competition (Ex. patents, trademarks)

Always makes sense to do the same thing regardless of what the other person chooses.

What they will both decide to do (outcome with two underlines).

Collusion between oligopoly firms.

Effects that fall on some third-party as a result of a transaction.

Spillover benefits on others as a result of a transaction; marginal private benefit (MPB), marginal external benefit (MEB); MSB = MPB + MEB (Ex. vaccines, innovation). Goal is to encourage more production.

Spillover costs on others as a result of a transaction (Ex. noise, traffic, air pollution, water pollution). Goal is to produce less.

Costs incurred by the firm when a unit of output is produced.

Costs incurred by third-parties outside of the production process when a unit is produced.

MPC + MEC

Where marginal social cost of pollution equals marginal social benefit of pollution, total benefit exceeds total cost by greatest possible amount. Marginal benefit of production decreases as emissions increase. Without government intervention, will continue to pollute until marginal social benefit of pollution is zero.

- Turning points caused by preferences, laws, technological advances.
- Goes back down because high income allows you to buy environmentally friendly products.
- Goes back up because high income allows you to over consume.

Distance between MSC and MPC of the amount we are overproducing.

Tax, quota, liability rule, ordinance

Subsidies, property rights, patents, trademarks, research and development funding, grants

Allows a measure for the value consumers put on a specific feature.

- Mix of government and market structure to deal with environmental issues.
- Government gives out a certain number of permits, then companies can trade for more; there is a much higher fee if you pollute without a permit.

Nonexcludable in use, rival in consumption (Ex. fish stocks).

One person using it impairs/prevents another person from using it.

Can stop someone else from using it.

One party has more information than the other regarding the transaction.

Help to overcome asymmetric information (Ex. warranties, specialists, prices, software).

Low-quality items.

If we can't distinguish between quality, only low-quality market will persist.

Everyone pays the same price.

Price is determined by number of factors (Ex. age, experience, tickets, accidents, type of car).

Lower policy premium

High policy premium

The amount you pay for the policy.

The amount you pay for services before the insurance company starts to pay for you.

Premium is equal to the expected value of the claims.

Group of individuals whose costs are combined to calculate premiums. Allows the cost of the sick to be offset by the healthy.

All probabilities need to add up to 1 and each need to be between 0 and 1.

Might show that there is optimism for better opportunities.

The income one needs to meet basic standard of living.

Measured by the number of individuals that fall below the poverty line in a place at a point in time.

When an individual experiences no net gain for working due, and when an economic system creates difficulties for individuals to acquire enough "capital" to escape poverty. Assistance programs can make this happen if they reduce the amount of support you get based on how much you work; can reduce the incentive to work.

Compares the share of total income in society across groups.

A graph of the cumulative share of income received by all people up to a certain quartile.
- Horizontal Axis: cumulative share of the population from lowest to highest income.
- Vertical Axis: cumulative share of income earned.

45 degrees, 10% of popuation has 10% of income.

A/(A + B)
- If close to 0, more equal income society
- If close to 1, unequal income society
- Measure of statistical dispersion to represent income or wealth inequality.

If you are on left side, revenue will go up with increasing tax rate. If you are on the right side, tax revenue will go down with increasing tax rate.