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• Economics studies choices made with limited resources.

3 Rules of Microeconomics

• Ceteris Paribus means keeping variables the same.

• Decisions are made by weighing benefit vs. cost.

• Opportunity cost is the value of the second-best alternative.

• Macroeconomics is a collection of markets while microeconomics focuses on a single market.

• Industries consist of services, and a primary market involves both the industry and the buyer.

• Market structures include: Monopoly (1 seller), Duopoly (2 sellers), and Oligopoly (multiple sellers)

• Monopsony features one buyer.

• Normative statements cannot be tested, whereas positive statements can.

• Nominal price is the face value, while real price considers inflation and time.

Scarcity vs. Choice

• Choices stem from the limits of time and money.
• Scarcity relates to self vs. social interest.

Market Analysis

• Analysis assesses effects on a market and its size and helps evaluate policy effectiveness.

Quantity Demand vs. Demand

• The demand function establishes the relationship between price and quantity demanded versus supplied.
• The supply function establishes the relationship between price and quantity supplied.

Supply Function Equation

• Given Qs = Qs(P)
• Example: Qs = (1/4)P – 5
• If P = 30, then Qs = 2.5, calculated as (1/4)(30) – 5 = 2.5
• The quantity supplied is estimated according to price.
• Note that an upward shift in the supply curve signals a supply decrease

Production

• Supplement: A company swaps production; one good is made instead of another.
• Example: If GM can sell Buicks for more than GMCs, they'll increase Buick supply and decrease GMC supply.
• Complement: One part of production for one good is used for another.
• Example: A meat facility uses scraps from one cut for another.

Quantity Demand Function

• Defined by Qd = Qd (P)
• Access supply occurs if prices are high, deterring purchases.
• Market pressure controls the market price

Extra Supply & Demand Notes

• The supply curve rises when the seller wants to sell more.
• Price is a speculation of the future, however the shift is now.
• As population increases so does demand.
• There is a direct relationship between expected future price and demand.

Income Change

• Inferior vs Normal goods
• Necessities demand will always stay the same
• If demand raises, price and quantity will increase

CPI Index

• Represents 40% of households
• Eggs and tuition example shows eggs today are technically cheaper

Types of Elasticity

• Supply elasticity is EPs.
• Income and Price elasticity is Eld.
• Cross Price/ Own Price elasticity is Exdy.
• Arc elasticity is EPd.

Arc Elasticity

• Measures the sensitivity of one factor to another along the same supply curve.
• The formula is (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (P2-P1)/(1/2)(P2-P1).
• It has no units.
• It is always negative.

Elastic Measurements

• Greater than 1 is elastic.
• Less than 1 is inelastic.
• Infinity is perfectly elastic.
• = 1 is unit elastic.
• =0 is perfectly inelastic.

Perfectly Elastic

• Example Wheat

Perfectly Inelastic

• Example Healthcare

• Raise prices if inelastic, lower if elastic.

• The best option optimizes price relative to elasticity.

• Point Elasticity measures how responsive quantity demanded/supplied is to a price change.

• Expressed as Formula ∆QD/QD//∆P/P = ∆QD/QD * Ρ/ΔΡ

Income Elasticity

• Measures the change in quantity of demand relative to changes in consumer income.
• Formula: (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (I2-I1)/(1/2)(I2-I1)
• Higher incomes result in buying less luxury goods and more inferior goods. Lower incomes result in buying more luxury goods and less inferior goods.

Durable vs Non-Durable Goods

• Durable goods, (appliances), are less elastic in the long run.
• Non-durable goods, (Chipotle lunch, Bounty Paper towels), more elastic in the long run.

Cross-Price Elasticity of Demand

• Measures changes demand for one good when another good's price changes.
• Calculated as (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (P2-P1)/(1/2)(P2-P1)

Price Elasticity of Demand

• Measures changes in quantity demanded relative to that same good's price.
• Calculated as (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (P2-P1)/(1/2)(P2-P1)
• Values greater than 0 suggest a substitute, less than 0 suggests a compliment, and = to 0 suggests neuter.

Price Elasticity of Supply

• Measures the change in quantity supplied relative to that same good's price.
• Calculated as (Q2S-Q1S) / (1/2)(Q2S+Q1S)x100 // (P2-P1)/(1/2)(P2-P1)

Consumer Theory

• Y=C+I+G+(X-M)

Consumer Theory's Two Aspects

• Preferences (likes and dislikes)
• Budget

Assumptions Governing Preference

• Completeness: Rankings

• Transitivity: If you prefer A to B and B to C, then you prefer A to C.

• Non-Satiation: Wanting more

• Convexity: Preferring mixed goods, not just one

• A market basket symbolizes a unit within a household.

• Indifference Curve

• The higher the indifference curve, the better.

• Multiple curves maps indifference.

• Marginal rate of substitution (MRSxy) is the amount of one good a consumer gives up for an additional unit of another.

• The law of diminishing MRS applies.

Budget Constraints

• Px * X + Py * Y = 1

• Where Px is the price of good x and X is the amount of good X.

• Y= (I/PY)-(Px/Py)

• The first part is the Intercept.

• The second part is the slope.

• Points under the budget line are affordable, over the line are not affordable.

• Any combination between an indifference curve and a budget line is a perfect substitute, such as Wegmans vs Poland brand water.

• A corner Soultion is along the sides

• A Perfect Compliment, such as a Right and Left Shoe.

Utility + Consumption

• Utilitarianism seeks the greatest amount of goods for the greatest number of people.
• The problem is you cannot see, measure or quantify utility.
• Utility determines satisfaction with a market basket.
• Example would be Utility + Temperature
• Compare Cardinal vs Ordinal Utility
• Formula is U(C,F) = 2 * C*F

Marginal Utility

• It measures how much more good gives in utility.
• Equation Condition Formula = (MuF/PF)=(MuC/Pc)
• MU ... / P ... is the formula.