Microeconomics Unit 1 Test. Chapters 1-4

The science of making decisions. Choices people make with scarce (limited) resources provided by previous generations, when added up, translate into societal change.

The exchange of goods that pertains to households, individuals and small units/firms. Concerned with "household income."

People coordinating their desires and wants

1.) What, and how much, to produce
2.) How to produce it
3.) For whom to produce it

A "dismal science."

-Weighing the costs and benefits of a decision that arise from a decision.
-An Example of a marginal cost would be adding another passenger ($0) to flight that would still cost the same if there were fewer passengers. Although airlines don't retain the full profit for marked down tickets, it is still profitable to get extra passengers on board, regardless of the ticket price.

The next best value that you forgo with your time or money. For example, the opportunity cost of doing your laundry on a Friday night would be at the forgoing of a party. You could also spend your time studying or sleeping.

An efficient market is a market where virtually no profit opportunities exist. In other words there is "No Free Lunch" because someone else has most likely eaten it.

Any good deals that arise in a market. For example, if you have found a twenty dollar bill on the ground, you have come across a profit opportunity that very well could have been snatched up by someone else.

Looking at the economy as a whole. It is concerned with "national income"

This is an attempt to undestand behavior and the operation of the economics system without making judgements about whether the outcomes are good or bad. Strives to understand how things work like, "What determines the wages of unskilled workers?"

Normative Economics looks at taking a course of action and is very critical when determining the shoulds and shoudn'ts, the subjective goods and bads.

-food, services, necessities
-Time, leisure vs labor.

-14th century philosopher (William of Ockham)
Using a hypothesis with the fewest assumptions and cutting away extra detail.
-For example, if you want to see the streets of San Francisco, you only need the road maps and not to topography or rivers.

A measure that changes from time to time.
Ex the price of milk

(Generally) A mathematical expression used too show the presumed relationship between two variables.

-The analysis of the relationship between a variable to another without changing the other variables

-Simplifies reality just a bit.

Example: If gasoline prices raise by 10% how will the miles a household will drive be affected, assuming there are no other changes like the addition of another child, a recent car accident or new distance to drive to work.

Assuming there is causation between two events when they are merely casually coordinated.
Example: If I walk under a ladder and simultaneously stub my toe, the bad luck from the ladder must cause my toe to become stubbed.

To conclude that what is true for one part is automatically true for a whole.

Example: If many cattle ranchers graze on the same field, they cannot all let out all their cattle at once because the field will become over-grazed and barren. Instead they must settle for the limited profit that they make with the cattle that they do let out to graze.

The collection and use of data to test Economic theories.

Example: seeing if the prices of rare baseball cards altered the way auctions ran by sports memorabilia dealers at shows.

These criteria are used to judge economic outcomes.

1.) Efficiency-
Allocative efficiency is a system that allocates its resources to produce what goods people want for the lowest possible cost.
Example inefficient economy: If a society is mostly vegetarian and there is a high production of meat, the good production is inefficient.
Ex 2: If corn production is better suited in Ohio and wheat production in Kansas, but each state is growing the wrong crop, it is considered inefficient.
Efficiency Example: When a company produces a good with left over resources that can be used to make something else or finds a way to maximize the labor and energy inputs to maximize their outputs through various technologies or manufacturing strategies.

2.) Equity-
Fairness can range from receiving equal distribution of income and wealth, alleviating poverty.
Example: Should the jobless and homeless be included in welfare programs?

3.) Growth-
Economic growth or, an increase in the total output of an economy through the introduction of new technologies and/or development of production methods.
Example: New farming tools such as tractors made the United states agricultural economy grow.
Word of caution: Investors who invest in other countries forgo domestic investment and slow domestic economic growth.

4.) Stability-
A condition in which a.) national output is growing, b.) low inflation occurs, c.) and there is a full employment of resources.

Things that are produced and then used in the production of other goods and services.
Examples: Buildings, equipment, desks, chairs, software, roads, bridges, and highways

Time, talents of human beings, and things like minerals and wood.

The basic (scarce) resources available to a society.

Land: A space to produce
Labor: People/machines to do the production
Capital: Equipment that provides more goods/services

Example: an airline has a runway (land), pilots (labor), and planes (capital) to get the job done.

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.

Goods and services of value available to households.

This is a combination of goods and services that can be produced by a society in relation to one another.

Feasible output lies on the inside of the ppf while unfeasible output lies outside of it.

The maximum possible output of mixed goods and service that a society can supply efficiently.

A producer has an absolute advantage over another producer if he/she/they can 1.) Produce a good using fewer resources 2.) Produce more of that good using the same resources.

A producer has an absoulute advantage over another producer if he/she/they can produce a product at a lower opportunity cost (Quantity of the other good given up per 1 unit of the good we are concerned with).

Specializing is when an individual focuses on the task that they provide the most output at. In the case for Bill and Colleen, Bill specialized in gathering 8 food bushels per day, while Colleen specialized in chopping 10 logs per day. Specialization gives individuals to trade with one another and obtain more resources of each variety than if they were trying to produce each variety on their own. Trading is almost always a better deal.

Anything that is produced for present consumption. For example toothpaste, pencils, diapers, and headphones are consumer goods.

Ration between the change in capital goods (positive number) to the change in consumer goods (negative number).

As the production of one resource increases, the opportunity cost of another resource increases.

Unemployment is a production inefficiency for the entire society. Workers are willing to work, but don't have the jobs or means to do so.

A misallocation of labor, poor management, or waste of goods.

The point in the middle of the production of two resources.

Poor countries who have low capital to start with suffer because they must spend most of their money on consumer goods to keep their country afloat.

The basic economic structures such as state enterprises and central planning are all headed by the government.

Example: The soviet Union

Translates loosely to "allow them to do."
This implies a complete lack of government in the oversight of economy. Firms pursue their own interests while buyers and sellers interact with one another freely. The sum of these interactions determines the market

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

For example: If nobody is willing to buy Darth Vador Popsicles anymore, then they will fall out of production.

The ability and freedom granted to individuals who want to start their own private businesses. A well-run new business will produce a good where demand is likely to be high and will likely not drop in the future. This Free Enterprise ultimately encourages competition and a production of a wide range of goods.

Individuals have purchasing power for goods relative to their a.) Income, or amount that households earn each year, and b.) Wealth, the amount that households have accumulated out of past income through savings or inheritance.

This is the determination of price per unit of good that reflects society's willing to pay factor as well as the wage rates for positions in a free market economy.

An economy that exists not only off of individual choice in consumption, but also off of a moderate amount of government oversight.

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Example: The Chicago symphony Orchestra transforms individual musicianship inputs into an output of song.

A person who organizes, manages, and assumes the risks of a firm taking a new idea or a new product and turning it into a successful business.

Units of people living together, individuals, fifteen people sharing a house, or anyone in particular who are the consumers of goods.

The markets in which goods and services are exchanges. Firms supply and households demand.

Firms must buy inputs in order to supply to households.
Example: Ford firms must determine how many cars that they want to produce and buy all the parts, including steel, tires, and other forms of human labor accordingly.

A Labor Market- is households that supply their labor and skill sets in exchange for pay.
A capital market- is a market in which households supply money to help companies buy capital goods.
A Land market is a market in which households rent or lease plots of land for firms to use.

Input=factors of production.

The price of the product in question
The income available to the household
The household's accumulated wealth
The Price of other products available to the household
The household's tastes and preferences
The household's expectations about future income, wealth, and prices

The # of units of a product that a household would buy given that it could buy all that it wanted in a current market.
-Implies that the quantity and supply and quantity demand can be vulnerable.

Market price most directly affects the quantity demanded, while other factors like health reports on soda pop primarily affect the demand in general.

With all other factors unchanged, as the price of a good increases, the quantity demanded will inevitably decrease in response.

How much of a product a person or household is willing to purchase in a given time period.
If the price of gasoline increases from $3 to $5 dollars, then you may decrease your demand to driving fewer miles per week.

Quantity of a given product purchased in a select time period on the horizontal, x axis plotted against the price on the vertical, y axis.

Income and wealth determine the purchase of normal and inferior goods.

A normal good is a good for which demand goes up when a household's income goes up, and goes down when income goes down. For example buying steak dinners.

An inferior good is a good for which demand goes down when the income of a household rises and goes up when the income of a household decreases. For example buying Ramen dinners.

Make sure to know which way the demand curve shifts for both goods.

Goods that can replace other goods when the price of one increases, the demand for the other increases.

Example: Hamburgers and hot dogs

Demand curve: Plot the quantities of goods against one another.

Goods that "go together"; a decrease in the price of one good results in one an increase of demand for the other.

Example: Ground beef and hamburgers

Explained: If for example, the price of hamburger buns goes down, then the demand for hamburger ground beef will go up. This will consequently cause the cumulative price of one burger to go up and eventually the quantity demanded will go down again.

The change that takes place in a demand curve corresponding to a new relationship of a good and price of that good. The shift is brought about by a change in the original conditions.

The sum of all the quantities of a good or service demanded per period by all the households. Also known as Horizontal aggregation.

As the market price of a good rises, the quantity of supply will likewise rise in a positive manor.

Marginal cost is introduced into the equation when trying to produce more supply.

Example: Think electricity plant example.

1.) The price of the good or service
2.) The cost of producing the product, depending on the price of required inputs and the technologies available that can be used to produce the product.
3.) The prices of related products

As the price of a good or service changes, the quantity supplied changes MOVES along the supply curve.
Changing prices of related goods tend to make the supply curve SHIFT.

If the price of cream went up, the the production of cheese may shift to the left.

A balance of economic forces or incentives

The condition that exists when demand quantity and supply quantity are the same. This is called a "stable" or "clearing" of the market.

When there is:
a.) Excess demand (shortage)
b.) Excess supply (surplus)

Note that curves shift from D1 to D2 and S1 to S2 by calculating the change of D and the change of S