Microeconomics Midterms PDF

MICROECONOMICS what you might lose by selecting a certain course of action. MIDTERMS The Practical applications of opportunity...

MICROECONOMICS what you might lose by selecting a certain course of action. MIDTERMS The Practical applications of opportunity cost Economics. the study of how we coordinate our unlimited wants and desires given scarce resources. - career choices Scarcity. A permanent condition. Unless human is - investment decisions existing, scarcity will also exist. - the management Economic Dismal Science. It deals with the reality - household decisions of the world. - environmental policy Coercion (a rationing device). To ensure that people would benefit in scarce resources. - consumption vs savings Economics. the study of how to get people to do - business resources things they would not do so that they act consistently with the interest of others. - education choices Marginal Utility. It refers to the additional - production choices satisfaction that a person receives from consuming Sunk Cost one or more unit of a good. - a cost that has already been incurred and Marginal cost. It is the additional cost incurred when cannot be recovered, regardless of future producing one more unit of a good or service. actions. - Since it is irreversible, a sunk cost should not influence future decisions. Rational decision-making requires ignoring sunk costs, as they cannot be changed by current or future choices. The Practical applications of sunk cost - business projects Marginal Benefit. It is the additional benefit received from consuming or producing one more unit of a good - personal purchases or service. - government spending - educational choices - product development - research and development BRANCHES OF ECONOMICS Opportunity cost Microeconomics Macroeconomics - Refers to the value of the next best alternative Individual choices Whole economy that is foregone when a decision is made. Focus on individual Focus on aggregate - highly relevant to decision-making, as it units indicators reflects the benefits you give up by choosing Market mechanism Economic policies one option over another. It helps evaluate  Resource allocation Economic growth - Relatively free exit and entry Consumer producer Aggregate demand and - Non-price competition behavior supply Oligopoly. A market structure dominated by a few Price determination Economic cycle large firms. These firms have significant control over prices and may avoid competition. - Few seller FUNDAMENTAL APPROACHES. - Interdependence Positive Economics Normative Economics - Price rigidity Explains prescribes - Barriers to entry Objective and fact Subjective and opinion based based - Collusion/cooperation Descriptive prescriptive Monopoly. A market structure where a single firm controls the entire market, with no close substitutes Cause and effect Based on value for its product, allowing it to set prices. relationship judgements - Single seller “What is” “What ought to be” - No close substitutes - Price maker Market structures. refers to the organizational and competitive characteristics of a market, which - High barrier to entry determine how firms operate within that market. It defines how much control businesses have over pricing, the level of competition, the number of firms in the market, and the ease of entry for new businesses. Perfect Competition. A market structure where many small firms sell identical products, and no single firm can influence the market price. - Many sellers and buyers - Identical products (agricultural products) - Price takers - Free entry and exit - Perfect information Monopolistic Competition. A market structure where many firms sell similar but differentiated products. Firms compete on product quality, price, and marketing. - Many sellers - Product differentiation - Some price control FINALS DEMAND AND SUPPLY Determinants of Demand Demand – the total quantity customers are willing Own price and able to purchase. Non price determinants A demand function is a behavior function for consumers. Income of the consumer A supply function is a behavior function for Price of other goods (complements, producers. substitutes) We describe market behavior using these two Tastes and preferences functions. Expectations of future prices Advertising Direct demand – goods and services that satisfy Distribution of income consumer desires. (final product or services). TYPES OF GOODS Derived demand – these are sometimes called intermediate goods (raw materials). Complementary goods – a pair of goods consumed together. As the price of one goes up the demand for Ex. Demand for steel. the other falls. Law of Demand – all other things remaining Ex. Car and petrol UNCHANGED, THE QUANTITY DEMANDED OF A GOODS increases when its price decreases and vice Substitute goods – alternatives to each other. As the versa. price of one goes up the demand for the other also goes up. Price Demand Ex. Pepsi and coke Demand Price Normal goods – are those goods whose demand This relationship can be shown by a demand goes up when the consumers income increases. schedule, demand curve or a demand function. Inferior goods – are those goods whose demand falls when the consumers income increases. Demand Schedule – shows different quantities of a goods that a consumer is willing to buy at various Ex. Auto travel, kerosene. prices. (tabular form) Giffen goods – are those goods whose demand Prices Demand moves in same direction as price. (usually these are 28 20 the needs of people) 16 15 Snob or Veblen goods – are those goods whose 12 5 demand falls when price falls. (usually these are the wants of people) Demand Curve – a curve showing the relationship Demand movement – demand changes based on between the price of a good and the quantity price demanded (graph) Demand shift – demand changes based on non- Demand Function – is a causal relationship between price determinants. dependent variable and various independent variables. Demand shift of the demand curve  Ed = 1: Unitary Elasticity (Proportional change in quantity demanded to price) Supply – the quantity supplied is the number of units that sellers want to sell over a specified period of Price Elasticity of Supply time at a particular price. - Measures how sensitive the quantity supplied Law of Supply – states that all other factors remain of a good is to change in its price. unchanged the supply of good increases as its price - 𝐸𝑠 = %𝑄𝑠 %∆𝑄𝑠 = 𝑄2− 𝑄1 %∆𝑃 𝑃2− 𝑃1 𝑄1+ 𝑄 𝑃1+𝑃 ∆𝑃 increases. This can be shown by a supple schedule, a ( 2 2) ( 2 2) supply or a supply function. Where: Price Supply %∆Qs – Percentage change in quantity Supply Price supplied %∆P - Percentage change in price DETERMINANTS OF A SUPPLY Price Cost of production Es ≥ 1: Elastic supply (Producers respond Technological progress significantly to price changes) Prices of related outputs Ed ≤ 1: Inelastic supply (producers respond Government policy minimally) Equilibrium – perfect balance in supply and demand. Ed = 1: Unitary Elasticity (Proportional change in ELASTICITY OF DEMAND AND SUPPLY quantity supplied to price) Elasticity – measures how much the quantity Factors of Demand Elasticity demanded or supplied of a good change in response - Availability of substitutes to a change in price, income, or other factors. - It helps us understand how consumers and producers react to changes in the market. Price elasticity of Demand - Measures how sensitive the quantity demanded of a good is to a change in its price. %𝑄𝑑 𝑄2− 𝑄1 𝑃2− 𝑃1 𝐸𝑑 = ∆𝑃 %∆𝑄𝑑 = 𝑄1+ 𝑄 %∆𝑃 𝑃1+𝑃 2) ( 2) ( 2 2 Where: Ed – Price of demand %∆Qd – Percentage change in quantity demanded %∆P - Percentage change in price Ed ≥ 1: Elastic demand (consumers are very responsive to price changes) Ed ≤ 1: Inelastic demand (consumers are not very demanded)