Microeconomics Overview

Microeconomics Notes

• Scarcity: Society's resources are limited
• Economics: The study of how society manages scarce resources
• Decisions: How individuals decide what to buy, how much to work, save, and spend
• Firms: How firms decide how much to produce and hire workers
• Tradeoffs: All decisions involve tradeoffs
  • Examples: Spending time at a party vs. studying; more money vs. leisure time
• Efficiency: When society gets the most from its scarce resources
• Equality: When prosperity is distributed uniformly among members of society
• Tradeoff: Achieving greater equality often leads to reduced incentive to work and produce, thus potentially shrinking the size of the economic pie.
• Opportunity Cost: The cost of something is what you give up to get it. It is the relevant cost for decision-making
  • Example: The cost of going to college for a year is tuition, fees, and other costs but also includes what you would do instead, like work and earn money.
• Rational People: People act systematically and purposefully to achieve objectives with marginal changes or adjustments
  • Example: A manager will evaluate incremental adjustments to output.
• Incentives: Something that induces a person to act, like a reward or punishment. Rational individuals respond to incentives.

Chapter 2

• Model: A simplified representation of reality
• Circular-Flow Diagram: A visual model illustrating how dollars flow through markets between households and firms
  • Markets:
    • Goods & services
    • Factors of production
  • Households: Individuals that buy goods and services, and provide labor, land, capital, and entrepreneurship.
  • Firms: Individuals that buy factors of production, and produce goods and services.
• Production Possibilities Frontier (PPF): A graph showcasing possible combinations of two goods that an economy can produce, given resources and technology.
• Tradeoffs: Moving along the PPF involves shifting resources
• Bow-shaped PPF: Occurs when the opportunity cost of producing one good increases as more of it is produced.
• Straight-line PPF: Occurs when the opportunity cost of producing one good remains constant.
• Efficiency: Points on the PPF itself represent efficient production levels where it is impossible to produce more of one good without producing less of the other.

Chapter 3

• Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.
• Absolute Advantage:The ability to produce a good using fewer inputs than another producer.
• Specialization: Individuals and countries should specialize in producing goods and services for which they have a comparative advantage, leading to gains from trade.

Chapter 4

• Demand: The quantity demanded (QD) of a good is the amount that buyers are willing and able to purchase at a given price
• Demand Curve: Shows the relationship between price and quantity demanded.
• Law of Demand: Inverse relationship between price and quantity demanded. (Higher prices lower quantity demanded)
• Demand Curve Shifters: Factors other than price that shift the entire demand curve (e.g. tastes, income, expectations, prices of related goods, number of buyers)
  • Normal Good: Demand increases with income.
  • Inferior Good: Demand decreases with income.

Chapter 4 (Supply)

• Supply: The quantity supplied (QS) of a good is the amount that sellers are willing and able to sell at a given price.
• Supply Curve: Shows the relationship between price and quantity supplied.
• Law of Supply: Positive relationship between price and quantity supplied (Higher prices lead to higher quantity supplied).
• Supply Curve Shifters: Factors other than price that shift the entire supply curve (e.g. input prices, technology, expectations of future prices, number of sellers).

Chapter Summary

• Equilibrium: The point where the supply and demand curves intersect
• Surplus: When quantity supplied is greater than quantity demanded
• Shortage: When quantity demanded is greater than quantity supplied
• Changes in Supply and Demand: Shifts in the curves versus movement along the curve