Microeconomics and life
What is economics?
The study of how people allocate scarce resources.
What is the PPF? What does it represent?
A downward sloping line or curve that shows the maximum combinations of two goods that can be produced by either a person or a country in a given period of time using the available resources and technology.
What are the characteristics of a perfectly competitive market?
Standardized good, full information, no transaction costs, participants are price takers.
What does elasticity measure?
How much one variable responds to a change in another variable.
What are the other terms for maximum willingness to pay and minimum willingness to sell?
Maximum willingness to pay = reservation price
Minimum willingness to sell = reserve price
What is microeconomics?
The study of how individuals/firms manage resources. In contrast, macroeconomics is the study of the economy on a regional, national, international scale.
Why is the PPF downward sloping?
Because there is a trade-off. In order to produce more of one good, one must produce less of the other.
What is the law of demand?
Ceteris paribus, the lower (higher) the price, the higher (smaller) the quantity demanded. If price falls (goes up), the benefit of the good/service remains the same, but the opportunity cost falls (goes up).
Which values correspond to elastic, inelastic, and unit elastic?
Less than 1: inelastic
Greater than 1: elastic
Equal to 1: unit elastic
What is total/social surplus?
Measure of the combined benefits everyone receives from the exchange of goods or services.
What is opportunity cost?
The value of what you have to give up in order to get something i.e., the value of the next best alternative.
What do points inside, outside, and on the PPF represent?
Inside: possible but not efficient. Some resources are underutilized.
Outside the PPF: not currently possible.
On the PPF: possible and efficient. All resources are fully utilized.
What are the non-price determinants of supply?
Price of related goods, technology, price of inputs, expectations, and number of producers.
Why is price elasticity of supply greater in the long run than in the short run?
Because firms can build new factories, and new firms may be able to enter the market.
What is deadweight loss?
Loss of total surplus when the quantity of a good is bought and sold below the market equilibrium quantity.
What is the difference between positive and normative analysis?
Positive statements make factual claims about how the world actually works.
Normative statements make claims about how the world should be.
What is the difference between absolute advantage and comparative advantage?
Absolute advantage: a producer can generate more output than others with a given amount of resources.
Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer.
When is there a movement along the supply/demand curve versus a shift in the curve?
A shift is caused by a change in a non-price determinant. This results in an increase/decrease in supply or demand.
A movement is caused by a change in price. This results in an increase/decrease in the quantity supplied or demanded.
What are the determinants of price elasticity of demand?
Availability of substitutes, relative need versus cost, time to adapt to price changes, scope of the market.
From which party to which party is surplus transferred when price is lowered?
From sellers to buyers.
What is the difference between correlation and causation?
Correlation is a consistently observed relationship between two events.
Causation is a relationship between two events in which one brings about the other.
True or false: in order for a person or country to have a comparative advantage in producing one good, they necessarily must also have an absolute advantage in producing that good.
False. Everyone has a comparative advantage at something, whether or not they have an absolute advantage at anything.
True or false: when both supply and demand shift and the magnitudes of both shifts are unknown, neither the effects on price nor quantity are known.
False. When both supply and demand shift and the magnitudes of change are unknown, the effect on either price or quantity is known but not both.
Why do we use the midpoint method to calculate elasticity?
When you use the midpoint method, it doesn't matter which number you use as the start value versus the end value. You get the same result either way because the midpoint value is the average of the start and end values.
True or false: increasing the price from the market equilibrium decreases total surplus.
True.