Microeconomics: Basic Economics Concepts

Interest. Similarly, the payment for land is called rent

Positive. Positive analysis is the use of theories and models to predict the impact of a choice. For example: What will be the impact of an import quota on foreign cars? What will be the impact of an increase in the gasoline excise tax?

Macroeconomics. For instance, microeconomics may look at an individual firm, whereas macro-economics looks at analysis of aggregate issues like Economic growth, Inflation, and Unemployment.

Model. Generally speaking, economics is a set of practical models applied to the study of individual and group choice.

Resources. Goods used to produce other goods, i.e., land, labor, capital, entrepreneurial ability.

Normative. Normative analysis is analysis of "what ought to be" For example: Consider the equity and efficiency trade-off of an increase in the gasoline excise tax versus import restriction on foreign oil.

Microeconomics. The study of the economic behavior of individual decision-making units such as consumers and business firms.

Scarcity. In economics - the shortage that exists when less of something is available than is wanted at a zero price. Virtually all resources are scarce, meaning that there are not enough of them to satisfy all the desires of all people.

Self-interest. Rational self-interest is the term economists use to describe how people make choices. Basic, Concepts, Economic

Scientific method. A manner of analyzing issues that involves five steps: recognition of the problem, assumptions, model building, predictions, tests of model. The first and most important step in the scientific method is to identify what the problem or question is.

Composition. It is the mistaken assumption that what applies in the case of one applies to the case of many.

Causation. The mistaken assumption that because two events seem to occur together, one causes the other.

Automobiles. Resources are goods used to produce other goods, i.e., land, labor, capital, entrepreneurial ability. Automobiles are a product.

Shortage. When a price ceiling is imposed on a product, that means that there is a limit to how much a firm can charge for the product. This limit is normally lower than the equilibrium price which would have been naturally set by the laws of supply and demand. When this occurs, the demand is greater than the supply, and a shortage results:<br /><img src="pastekyhxfw.jpg" /><br />As you can see in the graph above, the price ceiling is set at Pc. Pc intersects with the Supply curve at a much lower quantity than the Demand curve. Also, it is much lower than the equilibrium point.

Prices. And surplus goods are vice - versa.

Profits. The term &quot;profit&quot; is used somewhat more narrowly by economists than the way it is used by the Internal Revenue Service or even by most businessmen and accountants. Adam Smith divided income into three types: profits, wages, and rents. The essential feature of profit is risk: capital is ventured in the hope of a return, and there may be a very great return, or little, or none.

Opportunity costs. More specifically, the highest-valued alternative that must be forgone when a choice is made. For example, the opportunity cost of spending $7 on a movie ticket would be the next best use to which you could have put the money, perhaps purchasing a paperback on economics. Another example--the opportunity cost of spending more money on customer support might be the benefit you could have gotten from spending that on newer office computers.

10 units of food. If you are currently producing 10 units of clothing (point B), and decide to produce at a rate of 20 units of clothing (point C), the food you produce drops from 105 to 95. You are producing an additional 10 units of clothing at the expense of 10 units of food you could have produced. Also note that a combination of 20 units of clothing and 80 units of food is inefficient, because you would be producing less than possible.

35 units of food. At point F, if you increased production of clothing by 10 units, the amount of Food you can produce would drop from 35 units to 0. This chart shows how much food and clothing you can possibly produce, so a combination like 50 Clothing and 50 Food is not possible, because when you produce 50 clothing, 35 food is the max you can produce.

Marginal. For instance, if for every extra car you produce, you must produce three less motorcycles, then the marginal opportunity cost of producing one extra car is three motorcycles. The key thing to remember is, resources (number of workers, raw materials, etc) are scarce--there is a limited number of products you can make. Making more of one product often means making less of another.

Explicit. Opportunity cost consists of implicit costs, which don't involve a money payment or a market transaction, and explicit costs. How much does it cost to go to college for a year? We could add up the direct costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require a money payment.

Combinations. For example, it may demonstrate the relationship between how much cheese vs how much beef a firm produces. The more beef a company produces, the less cheese it's capable of producing. A production possibilities curve shows this relationship between amount of beef produced and amount of cheese produced.

Reduce. The production possibilities curve shows the relationship between one product and another. Here is an example of a production possibilities curve

Unemployed. If you are producing under, instead of on, the production possibilities curve (PPC), then some resources are unemployed or unused, and this is considered inefficient

Outward. Economic growth is an increase in real national income, usually measured as the percentage change in gross national product or gross domestic product per year. As the economy grows, naturally the PPC Curve should shift outward to represent the increased capacity for production.

Inside. A point on the curve depicts a point where the resources are efficiently used. Anything inside, or under, the PPC curve indicates that there are extra resources which are not being put to use

Perfectly Competitive. Only in Perfectly Competitive firms does Price equal Marginal Cost. In monopolistically competitive firms, oligopolies, and monopolies, price is greater than Marginal Cost. Note that Perfect Competition is also referred to as Pure Competition.

Inside. This means that more resources are available than are being used. It is not possible to produce outside of the PPC curve, because the PPC curve indicates maximum use of resources.

Lowest. For instance, Taiwan has a comparative advantage in electronic items.

Increasing. For most PPC curves, the marginal opportunity costs do not stay constant. For example, the marginal opportunity cost of going from 5 units of food to 6 units might be 5 units of clothing. On the other hand, the marginal OC of going from 9 units of food to 10 units might be 8 units of clothing. If the marginal opportunity cost stayed constant, the PPC curve would be a straight line, not a curve

Inelastic. If supply is perfectly inelastic, that means no matter the price, the quantity supplied stays the same. Likewise, if demand is perfectly inelastic, no matter the price, the quantity demanded stays the same.

Comparative. A comparative advantage is the ability to produce a good or service at a lower opportunity cost than someone else. For example, China has a comparative advantage when it comes to making electronics.

Competitive. The goal of antitrust laws, such as the Sherman Act, are to prevent firms from engaging in anticompetitive behavior.

10 tons of rice. The opportunity cost is what you are getting less of as a result of increasing production of something else. Going from point A to B meant producing an extra 20 tons of barley, but it also meant an opportunity cost of 10 tons of rice.

Technological. A technological advance is a scenario that often results in the PPC curve shifting outward. The advance creates more possibilities in the production of the product. It also leads to an increase in supply for the good. In other words, technological advances increase the capacity for production.