Microeconomics Flashcards
Microeconomics is
The study of how individuals, households, and firms make decisions about using limited resources.
Economic resources include:
Human resources (workers and managers) and Nonhuman resources (land, technology,minerals, oil, etc)
Microeconomists assume
that people and firms are rational and seek to maximize benefits
Trade-offs:
Choosing one thing requires giving up another
Scarcity:
The existence of limited resources
When an individual or group makes a decision
Their opportunity cost is equal to the value of the foregone options
Economic Units:
People, Households, and Firms
Marginal Benefits:
Small, incremental benefits
The law of demand:
When the price of a good increases, demand for it decreases, and vice versa.
Demand schedule:
Lists the quantity demanded of a product or service at various prices.
Market demand schedule:
A demand schedule that encompasses the entire market’s demand for a good or service at various price points.
Market demand curve:
Shows the market demand schedule
When demand curves shift left
Market demand has decreased
When demand curves shift right
Market demand has increased
Utility:
The satisfaction gained from consuming a food or service.
A consumer’s total utility can be
positive or negative
Utils:
Theoretical units used to measure satisfaction
Marginal utility:
Utility gained from consuming one more unit of a good
Substitute goods:
When the increased price of one good increases the demand for the price of another as the customer cannot afford this good and looks for a cheaper substitute
Complementary goods:
When the increase in price of one good decreases demand for another such as flashlights and their batteries
Price Elasticity of Demand (PED):
The percentage change in the quantity demanded of a good or service divided by the percentage change in the price
Used by Sellers to determine the potential loss of customers if prices are raised
PED is a measure of how demand for a good changes in relation to a change in price. If a good is elastic:
Demand changes greatly in response to price changes & PED > 1
PED is a measure of how demand for a good changes in relation to a change in price. If a good is unit elastic:
then the percentage change in quantity demanded is equal to that in price & PED = 1
PED is a measure of how demand for a good changes in relation to a change in price. If a good is inelastic:
Demand changes slightly in response to price changes & PED < 1
Cross-price elasticity:
is a measure of the effect a price change for one substitute good can have on the demand for another.
Profit =
Total revenue - total cost
Total cost =
fixed costs + variable costs
Fixed costs:
Costs that do not change as the quantity produced changes
Variable costs:
Costs that change as the quantity produced changes
Production function:
The relationship between the quantity of inputs and the quantity of outputs
Marginal product:
The increase in output resulting from adding one more unit of input
Diminishing marginal product:
When marginal product begins to decrease for each new unit of input
Marginal profit:
Profit earned on each subsequent unit sold
Marginal profit =
Marginal revenue - marginal cost
Marginal cost:
The cost of producing one additional unit of a good
Marginal revenue:
The revenue generated by each unit sold
Average revenue:
Total revenue / total number of units sold
Profit maximisation:
The quantity produced at which marginal revenue equals marginal cost
If marginal revenue > marginal cost then
increase production
if marginal revenue < marginal cost then
decrease production
Price elasticity of supply:
PES is the relationship between the supply of a good or service and how that supply or good is affected by price.
PES is inelastic if a price change has little effect on the quantity supplied of a good. It is elastic if a price change has a large effect on the quantity supplied
For some goods such as cars and apartments
the market is inelastic in the short run, but elastic in the long run
For others such as aquarium fish that become endangered
the market supply is elastic in the short run, but inelastic in the long run
The supply elasticity curve:
graphs PES value from price point to price point
Market price:
The price at which a good or service is offered in the marketplace
Law of supply:
When the market price for a good increases, the quantity that suppliers produce and sell increases, and vice versa
Supply schedule:
Lists the quantity of a product supplied at various price points
Supply curve:
Plots the supply schedule
Market supply:
The summation of all of the individual supplies of a good or a service
Market supply curve:
Shows how the total quantity supplied of a good changes as its price changes
When the supply curve shifts left
Market supply decreases
When the supply curve shifts right
Market supply increases
Market equilibrium:
The point at which the market supply is equal to the market demand.
When the amount of goods supplied is equal to the quantity demanded.
Equilibrium price:
The price where equilibrium occurs
Equilibrium quantity:
The quantity where equilibrium occurs
Equilibrium point:
The point at which the equilibrium price is equal to the equilibrium quantity
Price acts as a
motivator
When there is a low price for goods or services,
consumers buy more and sellers supply less
When there is a high price for goods or services,
consumers buy less and sellers supply more
Law of supply and demand:
The price of any good will naturally adjust until market equilibrium is reached
If supply > demand
There is a surplus, Prices will drop until equilibrium is reached
If supply < demand
There is a shortage, Prices will rise until equilibrium is met
Supply = Demand
Equilibrium has been reached
To recognise events that alter equilibrium:
- Identify a shift in the DC and/or SC
- Determine if the curve(s) shift left or right
- Use a graph to see how the shifts change the Equilibrium point
