Microeconomics Test 1 Study Guide and Microeconomics Self-Test Questions

-the study of how households and firms make decisions and how they interact in markets
-small-scale level

-the study of the economy as a whole
-it focuses on inflation, unemployment and economic growth
-large-scale level

Land, Labor, Capital, and Entrepreneurial Ability

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services.

-The value of the next best alternative
-The value of the opportunity given up when choosing another opportunity

-If a behavior is rewarded, more of the behavior will be done
-If a behavior is penalized, less of the behavior will be done

Self-Interest, Marginal Decision Making, Optimization

one's own personal gain

The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action.

Idea that people make choices in order to maximize the total benefit

the additional benefit associated with one more unit of an activity

the additional cost associated with one more unit of an activity

Marginal Benefit should be greater than/equal to Marginal Cost

Where the supply curve and the demand curve intersect

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the ability to produce a good using fewer inputs than another producer

the ability to produce a good at a lower opportunity cost than another producer

Fewer resources are used to produce more

-The price of one good, service, or resource in terms of another
-Trade must be MUTUALLY beneficial

An increase in the production of one good brings about increasing losses of the other good because resources are not suited for all tasks

-The economy consists of two groups, households and firms
-Two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees.

-Price is driven by supply and demand
-Prices are like scissors, it takes both blades (supply and demand), to cut the paper(set prices)

Prices and quantities traded are determined by interactions between buyers and sellers in a market

-If price goes down, demand goes up
-If price goes up, demand goes down

-Effect that a change in price of a good, service, or resource has on the purchasing power of income
-Price down, Purchasing Power up

-Negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time
-Example: Each additional pizza slice you eat gives you less benefit

-The effect that a change in price of one good, service, or resource has on the demand for another
-Example: If Coke costed $5 and Pepsi costed $2, more people would buy Pepsi

The leftward or rightward shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve.

If price changes, a customer's willingness to buy changes

-a good that consumers demand more of when their incomes increase
-Examples: cars, houses, jewelry

-a good that consumers demand less of when their incomes increase
-Examples: ramen, frozen dinners, canned soup

The more popular the item, the further the demand curve will shift right

-Goods, services, or resources that are viewed as replacements for one another
-Examples: Beer and Wine, Margarine and Butter, Tea and Coffee

-Goods, services, or resources that are used or consumed with one another
-Example: Printer and Ink cartridge

-As price goes down, the quantity supplied decreases
-As the price goes up, quantity supplied increases

When a product sells more at a higher price, suppliers will be more likely to produce that product

Taxes, Research Costs, Subsidy, Technology, and Number of Sellers

-Payment made to the government, generally collected from individuals and firms
-A tax on the producer, is like a decrease in supply

-A payment made by the government that doesn't require an exchange of economic activity in return
-Make it LESS costly yo supply goods and services
-INCREASE in supply
-Example: Food Stamps

-Land, Labor, Capital, and Entrepreneurial Activity
-If inputs become cheaper, a higher quantity can be produced
-INCREASE in supply

-Knowledge, Inventions, and Innovations that increase production
-Lower amount of labor and cost to produce
-Production costs less, so prices are lower
-DECREASE in supply

If sellers expect a higher price, then supply decreases. If sellers expect a lower price, then supply increases.

a graph of the relationship between the price of a good and the quantity demanded

a graph of the relationship between the price of a good and the quantity supplied

-Demand: The lower the price, the higher quantity wanted
-Supply: The lower the price, the less that will be produced

Market= Quantity supplied - Quantity demanded
- If negative --> Shortage
- If positive --> Surplus

-Occurs when quantity demanded<quantity supplied and price is above equilibrium
-Encourages sellers to lower their prices to eliminate surplus

Occurs when price is below equilibrium, which leads the price of the good to increase

-if demand is greater than supply, there is upwards pressure on the price
-Example: Price can move from $3 to $4 if the quantity demanded is greater than the quantity supplied

-When there is less supply, prices rise because there is higher demand for product

A legal maximum on the price at which a good, service, or resource can be sold

A legal minimum on the price at which a good, service, or resource can be sold

-When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
-Example: If the price drops from $6 to $3, there could be a shortage in supply due to greater demand

-When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result
-Example: For minimum wage, the quantity demanded of high wages will always be opposite of quantity supplied because suppliers don't want to pay more money to their employees

Taxes

Tax Revenue = Tax amount x Quantity of Units Sold

-As sales tax causes the supply curve to shift inward
-Since sales tax increases the price of goods, it causes the equilibrium price to fall

Characteristic of demand for a good, service, or resource other than its own market price

how governments, individuals, and businesses make decisions when faced with scarcity.

relatively scarce in all countries.

have unlimited economic wants but limited resources.

all decisions or actions have a cost associated with them.

changes in benefits or changes in costs influence people's decisions and their behavior

results from the comparison of marginal benefit and marginal cost.

make decisions based on some desired outcome.

the marginal benefit of the phone is greater than its marginal cost.

a rational decision has been made.

both corn and green beans require a trade off

Opportunity Cost

2 pies

input requirements per unit of output

Lou; Lou has the lower opportunity cost of making a car

if each country specializes in producing the products it is best suited to produce, world output can rise.

Different opportunity costs of the parties involved

results in a more efficient use of resources.

Jan is experiencing increasing opportunity costs.

Goods and services (products) flow from businesses to the goods and services market.

Market supply is the sum of all individual suppliers.

It is a direct relationship.

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The price of the product decreases.

increase, decrease; increase, increase

Equilibrium is a goal that is seldom achieved in the real world.

be lower than the equilibrium price.

be higher than the equilibrium price.

increase the marginal cost for producers.

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