Microeconomics: Consumer and Business Decision Making

Microeconomics

• Microeconomics: Study of how consumers and businesses make economic decisions.
• Demand: Quantity of a good or service that buyers will purchase at various prices during a given period.
  • Law of Demand: Quantity demanded varies inversely with price, ceteris paribus.
• Supply: Quantity of a good or service that sellers will offer for sale at various prices during a given period.
  • Law of Supply: Quantity supplied increases if price increases, and decreases if price falls, ceteris paribus.
• Market Equilibrium: Price at which the quantity demanded equals the quantity supplied.
• Price Elasticity of Demand: Measure of how responsive the quantity demanded is to a change in price.
• Price Elasticity of Supply: Measure of how responsive the quantity supplied is to a change in price.

Consumer Behavior

• Marginal Utility Theory: Consumers maximize satisfaction by equalizing the marginal utility of each product.
• Consumer Equilibrium: State of satisfaction when the marginal utility per dollar is equal for all products.
• Paradox of Value: Demand for necessities is not high enough to ensure prices match those of luxury items.

Market Structures

• Perfect Competition: Rare market structure where many sellers sell identical products, with no barriers to entry.
• Dynamic Pricing: Practice of changing prices in response to changes in demand.
• Monopoly: Market structure where one firm has complete control over supply.

Labor Markets

• Derived Demand: Demand for resources (e.g. labor) that is dependent on direct demand for goods and services.
• Marginal Revenue Product of Labor: Additional revenue generated by adding one more worker.
• Labor Demand Curve: Graphical representation of the relationship between labor demand and wage rate.
• Labor Supply Curve: Graphical representation of the relationship between labor supply and wage rate.

Production and Cost

• Explicit Costs: Costs that appear on a business's accounting statements.
• Implicit Costs: Costs not included in accounting statements, such as owner's time and invested capital.
• Economic Profit: Excess of revenue over economic costs (explicit and implicit costs).

Firms and Markets

• Firm: Privately owned organization engaged in business activities.
• Economies of Scale: Greater efficiency achieved by producing large quantities of output.
• Regulation: Government rules that oversee, standardize, and control markets and industries.

Business Organization

• Sole Proprietorship: Business owned and operated by one person.
• Partnership: Business owned by two or more people.
• Corporation: Business firm recognized as a separate entity, with ownership divided into shares.
• Co-operative: Business owned equally by its members, with a common goal.

Macroeconomics

• Macroeconomics: Study of the overall performance and structure of the economy.
• Inflation: Rate at which the general level of prices for goods and services is rising.
• Gross Domestic Product (GDP): Total value of all goods and services produced within a country's borders in a specific time period.### GDP and Economic Growth
• Expenditure Approach: calculates GDP by summing consumption, investment, government spending, and net exports
• Income Approach: calculates GDP by summing all incomes earned by individuals and businesses
• GDP = C + G + I + (X - M)

GDP Components

• Consumption (C): total spending by households on goods and services
• Investment (I): expenditure on capital goods, such as machinery and buildings
• Government Spending (G): government expenditures on goods and services
• Net Exports (X - M): exports minus imports

Economic Indicators

• GDP per Capita: GDP divided by population, indicating average economic output per person
• Nominal GDP: total value of goods and services produced, not adjusted for inflation
• Real GDP: GDP adjusted for inflation, providing a more accurate measure of economic output

Unemployment

• Unemployment Rate: percentage of labor force that is unemployed and actively seeking employment
• Labor Force: total number of people employed or seeking employment
• Types of Unemployment:
  • Structural Unemployment: skills or location of worker no longer matches labor demand
  • Technological Unemployment: more technology, less need for employers
  • Replacement Unemployment: cheaper labor
  • Geographical Unemployment: affects a region of a country
  • Frictional Unemployment: moving between jobs
  • Cyclical Unemployment: results in reduction of consumer spending
  • Seasonal Unemployment: caused by seasonal variation in jobs
  • Classical Unemployment: wages driven too high

Aggregate Demand and Supply

• Aggregate Demand (AD): total quantity of goods and services demanded by all households, firms, and government
• Aggregate Supply (AS): total quantity of goods and services that producers are willing and able to supply
• Full-Employment Equilibrium: point at which aggregate demand equals aggregate supply, resulting in stable employment levels

Fiscal Policy

• Expansionary Fiscal Policy: increasing government spending or reducing taxes to stimulate economic growth
• Contractionary Fiscal Policy: decreasing government spending or increasing taxes to cool down an overheated economy
• Automatic Stabilizers: features in the economy that automatically counteract economic fluctuations without direct government intervention
• Discretionary Fiscal Policy: deliberate changes in government spending and taxation to achieve economic goals

Money and Banking

• Currency: physical forms of money, such as banknotes and coins
• Money: a medium of exchange widely accepted in transactions, serving as a store of value and unit of account
• Fractional Reserve Banking: system where banks keep only a fraction of deposits as reserves
• Fiat Money: currency without intrinsic value, declared legal tender by a government