Microeconomics vs. Macroeconomics Quiz

Microeconomics vs. Macroeconomics

• Microeconomics studies individual markets, focusing on producer and consumer decisions.
• Macroeconomics studies the entire economy, focusing on economic growth, employment, GDP, and government policies.

The Role of Markets in Resource Allocation

• Resource allocation determines what goods and services are produced, how they're produced, and who receives them.
• This solves the scarcity problem by answering "what," "how," and "for whom" to produce.
• Markets bring together producers and consumers, facilitating exchange.

The Price Mechanism

• Markets allocate resources through price mechanisms, where goods/services are bought/sold at equilibrium.
• This mechanism helps determine production and distribution.

Demand

• Demand is consumers' willingness and ability to buy at a given price.
• Individual demand is from one consumer, market demand is the total.
• The law of demand states that higher prices lead to lower demand (inverse relationship).
• Changes in demand due to price: Extension (higher demand due to lower price); Contraction (lower demand due to higher price).
• Shifts in demand curve indicate changes in factors other than price.
• Factors influencing demand: consumer income, taxes, substitute prices, complementary prices, taste & fashion, advertising.

Supply

• Supply is producers' willingness and ability to supply at a given price.
• The law of supply states that higher prices lead to higher supply (positive relationship).
• Changes in supply due to price: Extension (higher supply due to higher price); Contraction (lower supply due to lower price).
• Shifts in supply curve indicate changes in factors other than price.
• Factors influencing supply: production costs, resource availability, technology, profitability of other products.

Market Price & Equilibrium Price

• Market price is the price at which buyers and sellers agree.
• Equilibrium price is where supply and demand curves intersect, no pressure for change.
• Disequilibrium prices cause pressure to change.

Price Elasticity of Demand (PED)

• PED measures how responsive demand is to price changes.
• PED formula: Percentage change in quantity demanded divided by percentage change in price.
• Types of PED: Elastic (change in quantity > change in price), Inelastic (change in quantity < change in price), Unitary elastic (change in quantity = change in price).
• Factors affecting PED: Number of substitutes, time period, proportion of income spent on good.

Relationship between PED and Revenue

• Producers use PED to set prices.
• For elastic goods, lowering prices increases revenue.
• For inelastic goods, raising prices increases revenue.

Price Elasticity of Supply (PES)

• PES measures how responsive supply is to price changes.
• PES formula: Percentage change in quantity supplied divided by percentage change in price.
• Factors affecting PES: Time of production, resource availability.

Market Economic System

• Characteristics: Private ownership, minimal government intervention, demand-driven production, efficient resource use, supply to those who can pay.
• Advantages: Variety, quick response to consumer wants, high efficiency, easy business start-up.
• Disadvantages: Production of only profitable goods, potential exclusion of low-income, resource misuse, demerit good overproduction, ignored negative externalities, potential monopolies.

Market Failure

• Market failure occurs when the price mechanism fails to allocate resources efficiently.
• Causes: Social costs outweighing benefits, demerit goods overproduction, merit goods underproduction, lack of public goods, resource immobility, monopolies.

Mixed Economic System

• A hybrid system combining market forces and government intervention.
• Characteristics: Public and private sectors, government planning/regulation, market mechanism still present.
• Advantages: Addresses market failures, controls externalities, job creation, financial assistance to businesses.
• Disadvantages: Taxes, increased production costs, potentially lower quality public goods, bureaucratic inefficiencies.

Summary of Key Concepts

• Scarcity necessitates efficient resource allocation.
• Opportunity cost is the value of the next best alternative.
• Key concepts include demand, supply, equilibrium, elasticity, public goods, merit goods, demerit goods, externalities, market failure, and mixed economies.

Additional Notes

• These concepts are interconnected.
• The mixed economic system is prevalent globally.
• Studying market failures explains government intervention's role.