Intermediate Micro Test Study Guide

Intermediate Micro Test \#1 Chapter 1 - Economics is the study of choices due to limited resources - **3 Rules of Micro** - Ceterus Paribus -- Keeping Variables the same - Benefit vs. Cost -- How you make decisions - Opportunity cost -- The cost of the 2^nd^ best alternat...

Intermediate Micro Test \#1 Chapter 1 - Economics is the study of choices due to limited resources - **3 Rules of Micro** - Ceterus Paribus -- Keeping Variables the same - Benefit vs. Cost -- How you make decisions - Opportunity cost -- The cost of the 2^nd^ best alternative - **Macro is a collection of markets while Micro is just one market** - Industries are a collection of services, a market is the industry and the buyer - Monopoly 1 , Duopoly 2, Oligopoly is multiple - Monopsony is 1 buyer - Normative is something you cannot test, Positive is something you can - Nominal price is just the face price not considering any external factors, Real price considers inflation and time - Scarcity vs Choice - We make choices because we have limits such as time and money - Goes along with Self vs. Social interest - Market Analysis - Effects on a market and their size - Evaluate policy effectiveness Chapter 2 - Quantity Demand vs. Demand - The **demand function** is a relationship between price and the quantity demanded. - The **supply function** is a relationship between price and quantity supplied - **Supply Function Equation is Qs = Qs (P)** - An example equation is (1/4)P -- 5 , if P is 30 and Qs is 2.5 , the equation is (1/4)(30) -- 5 = 2.5 - Quantity supplied is estimated by price - A shift up in the supply curve is actually a supply decrease and vice versa - **Production supplement** is when a company can swap out making one good for another - An example of this in the real world is General Motors, If they can sell Buick for more than GMCs, what are they going to make more of? Buicks, therefore increase Buick supply and decreasing GMC supply. - **Production complement** is when one part of production for one good is also used for another - An example of this in the real world is when a meat production facility uses the scraps of one cut for another cut of meat product. - **Quantity Demand Function = Qd = Qd (P)** - There will be access supply if prices are high because people will not want to purchase said product/service - This goes along with the concept of market pressure/invisible hand controlling the price of the market - Extra Supply and demand notes - The supply curve moves up because you want to sell more - Price is a speculation of the future but the shift is now - As population increases so does demand - Expected future price = direct to demand - **Income change, Inferior vs Normal goods** - Necessities demand will always stay the same - If demand goes up, so will price and quantity - **CPI Index** - 40% of households - Eggs and tuition example, eggs were technically more expensive back in the day but tuition was not - **Types of Elasticity** - Supply elasticity is EPs - Income and Price elasticity is EId - Cross Price/ Own Price elasticity is Exdy - Arc elasticity is EPd - **Arc elasticity** is how sensitive one factor is to another changing on the same supply curve - The equation 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 - **Graph Examples** Perfectly Elastic ex. Wheat Perfectly Inelastic ex. Healthcare - If inelastic, jack up prices, if elastic put prices down - There is an price relative to elasticity that is the best option - **Point Elasticity** is how responsive quantity demanded/supplied is to a price change along the curve - Formula ΔQD/QD//ΔP/P = ΔQD/QD \* P/ΔP - **Income elasticity** is the change in quantity of demand for a change in the consumers income - Formula = (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (I2-I1)/(1/2)(I2-I1) - Luxury vs Inferior goods come into play here as you will buy less luxurys with lower income and more inferiors goods and vice versa - **Durable vs Non-Durable Goods** - Durable goods are more inelastic in the long run, ex. Appliances, Non-Durable ex. Chipotle lunch, Bounty Paper towels - **Cross-Price Elasticity of Demand** is the change in demand for a certain good when another goods price changes - Formula = (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (P2-P1)/(1/2)(P2-P1) - **Price Elasticity of Demand** is the change in quantity demanded relative to that same goods price - Formula = = (Q2D-Q1D) / (1/2)(Q2D+Q1D)x100 // (P2-P1)/(1/2)(P2-P1) - If its greater than 0 it is a substitute, less than 0 it is a compliment and = to 0 is neuter - **Price Elasticity of Supply** is the change in quantity supplied relative to that same goods price - Formula = = (Q2S-Q1S) / (1/2)(Q2S+Q1S)x100 // (P2-P1)/(1/2)(P2-P1) Chapter 3 : Consumer Theory - Y=C+I+G+(X-M) - **Two aspects of consumer theory** - Preferences aka your likes and dislikes - Budget - **4 assumptions that control preference** - Completeness -- Rankings - Transitivity -- If you prefer A to B and B to C then you must also prefer A to C - Non-Satiation -- Wanting more - Convexity -- Preferring mixed goods, not just one - **A market basket is a unit within a household** - **Indifference Curve** - The higher on the curve the better, multiple curves makes an indifference curve a map - Marginal rate of substitution, MRSxy , is the max amount of a good that consumers are willing to give up to get an additional amount of another good - The law of decreasing MRS applies here - **Budget contraints** - Px \* X + Py \* Y = 1 Px = price of good x , X = Amount of good X - Y= (I/PY)-(Px/Py) , The first part is the Intercept, the second part is the slope - Under the line is affordable , over the line is not affordable - **Any combination between and indifference curve and a budget line is a perfect substitute,** ex. Wegmans vs Poland brand water - **A corner Soultion is along the sides** - **Perfect Compliment** ex. Right and Left Shoe - **Utility + Consumption** - Utilitarianism is the greatest amount of goods for the greatest amount of people - You cannot see utility - Utility determines satisfaction with a market basket - Utility + Temperature example - Cardinal (Theory of the Firm) vs Ordinal (Consumer Theory) Utility - Formula = U(C,F) = 2 \* C \* F - **Marginal Utility** how much one more good gives in utility - Equation Condition Formula = (MuF/PF)=(MuC/Pc) - MU... / P... is the actual formula