Review for BACC1 Basic Microeconomics PDF

REVIEWR FOR BACC1- BASIC MICROECONOMICS Opportunity Cost: The loss of potential gain from other alternatives when one is chosen. Marginal Analysis: Decision-making process that compares additional benefits to additional costs. Production Possibilities Curve (PPC): Bowed outward due to increasi...

REVIEWR FOR BACC1- BASIC MICROECONOMICS Opportunity Cost: The loss of potential gain from other alternatives when one is chosen. Marginal Analysis: Decision-making process that compares additional benefits to additional costs. Production Possibilities Curve (PPC): Bowed outward due to increasing opportunity costs, showing trade-offs in resource allocation. Demand and Price Relationship: If the price of a good decreases, the quantity demanded will increase, assuming other factors remain constant. Consumer Income and Demand: An increase in consumer income increases the demand for a normal good. Underutilization of Resources: When a nation operates inside its production possibilities curve, it indicates inefficient use of resources. Scarcity: Defined as the limited nature of resources versus unlimited human wants, creating the need for allocation decisions. Budget Line: Represents the limit of a person’s income for purchasing different combinations of goods. Law of Demand: As the price of a good decreases, the quantity demanded increases, illustrating the inverse relationship between price and demand. Market Equilibrium: Occurs when quantity demanded equals quantity supplied, preventing shortages or surpluses. Surplus: A situation where quantity supplied exceeds quantity demanded, typically leading to price decreases. Price Elasticity of Demand: If the demand for a product significantly decreases when its price increases, the demand is said to be elastic. Income Effect and Substitution Effect: When prices decrease, consumers feel an increase in purchasing power (income effect), and the cheaper product becomes more attractive (substitution effect). Complementary Goods: When the price of one good increases, the demand for its complementary good decreases. Perfect Competition: A market structure where many firms produce identical products, leading to minimal control over prices by any single firm. Shortage: A situation where quantity demanded exceeds quantity supplied, often causing prices to rise. Opportunity Cost in Decision-Making: When a firm chooses to produce more of one good, it forgoes the opportunity to produce more of another. Price Ceiling: A government-imposed limit on how high a price can be charged, often leading to shortages when set below the equilibrium price. Income Elasticity of Demand: Measures how the quantity demanded of a good changes in response to changes in consumer income. Cross-Price Elasticity of Demand: If the cross-price elasticity between two goods is negative, the goods are considered complements. Price Elasticity of Demand (PED): A measure of the responsiveness of the quantity demanded to changes in price. A PED greater than 1 indicates elastic demand, while a PED less than 1 indicates inelastic demand.  Consumer Expectations: Expectations of future price increases can cause current demand to increase, as consumers try to purchase goods before prices rise. Market Surplus and Government Intervention: Governments may buy excess supply or provide subsidies to address persistent surpluses in the market. Perfectly Competitive Market Efficiency: In the long run, firms in perfect competition produce at the lowest possible cost, where price equals the minimum point on the long-run average cost curve (LAC). Marginal Cost and Revenue: Firms should produce until marginal cost equals marginal revenue to maximize profit. Producing beyond this point leads to a decrease in profit. Specialization: Increases efficiency by allowing workers to focus on specific tasks, reducing the time lost in switching between different activities. Substitute Goods: An increase in the price of one good leads to an increase in demand for its substitute. Private Ownership in Market Systems: Encourages innovation and efficiency by allowing individuals and firms to make decisions on how to use and dispose of resources. Laissez-Faire Capitalism: Supports minimal government intervention, arguing that free markets best promote human welfare and economic efficiency. Command Economic System: Characterized by government ownership of resources and centralized decision-making, contrasting with the decentralized decisions in market systems. Market System: A system where decisions regarding production and consumption are guided by market signals (supply and demand) and competition, allowing for decentralized decision- making. Price Floors: A minimum price set by the government, often leading to surpluses when the price floor is set above the equilibrium price. Substitution Effect: When the price of a good increases, consumers may substitute it with a cheaper alternative, reducing the quantity demanded of the original good. Effects of Consumer Tastes: Changes in consumer preferences (e.g., a shift towards healthier products) can shift the demand curve for related products (e.g., fast food) either leftward or rightward. Rational Self-Interest: The economic assumption that individuals make decisions to maximize their own satisfaction or utility, without necessarily being selfish. Law of Supply and Demand: Prices tend to rise when demand exceeds supply and fall when supply exceeds demand, helping markets reach equilibrium. Intellectual Property Rights: In a capitalist system, these rights encourage innovation by protecting the creators' works from being copied or distributed without permission. Scarcity and Choice: Because resources are limited and human wants are unlimited, individuals and societies must make choices about how to allocate resources efficiently. Impact of Consumer Income on Demand: An increase in consumer income typically leads to higher demand for normal goods and lower demand for inferior goods. Government Spending and Opportunity Cost: When a government allocates more resources to defense, the opportunity cost may be reduced spending on other services, such as education or healthcare. Marginal Analysis in Firms: Firms use marginal analysis to determine the optimal production level by comparing the additional benefits of producing one more unit to the additional costs.  Perfect Competition in the Long Run: Firms in perfectly competitive markets tend to make zero economic profits in the long run as new firms enter the market and drive prices down to the level of average costs. Elasticity and Total Revenue: In cases where demand is elastic, a decrease in price will increase total revenue because the percentage increase in quantity demanded is greater than the percentage decrease in price. Budget Line and Trade-offs: A budget line shows the trade-offs between different goods a consumer can buy given their income and the prices of goods. Economic System with Decentralized Decision-Making: In systems where individuals and firms make decisions based on market forces rather than central planning, resources are allocated more efficiently according to consumer demand. Shifts in the Demand Curve: A demand curve shifts rightward with increased demand (e.g., due to higher income or changing preferences) and shifts leftward with decreased demand (e.g., due to lower income or a shift to substitute goods). Price Elasticity of Supply: Measures how responsive the quantity supplied is to changes in price. If supply is elastic, producers can increase output quickly when prices rise. Production Possibilities Frontier (PPF): Demonstrates the trade-offs between two goods. A point inside the curve shows underutilization, while a point on the curve shows efficient use of resources. A shift outward signifies economic growth. Complementary Goods: When the price of one good increases, the demand for its complement decreases (e.g., if car prices rise, demand for gasoline may fall). Market Shortage: Occurs when the quantity demanded exceeds the quantity supplied, typically causing prices to rise until equilibrium is restored. Monopoly and Market Power: In monopolistic markets, a single firm controls the market, allowing it to set higher prices due to the lack of competition. Substitutes and Consumer Choice: When the price of a substitute good rises, consumers are more likely to switch to a cheaper alternative, increasing demand for the substitute. Consumer Expectations of Price Changes: If consumers expect future price increases, current demand will rise as people try to buy the product before the price goes up. Government's Role in Market Failures: Governments may intervene in cases of market failures (e.g., public goods, externalities) to ensure efficient resource allocation and correct imbalances. Price Ceilings and Shortages: When a price ceiling is set below the equilibrium price, it can create a shortage, as more people demand the product at the lower price, but suppliers are unwilling to sell at that price. Income Elasticity: A measure of how the demand for a good changes in response to changes in consumer income. Normal goods have positive income elasticity, while inferior goods have negative income elasticity. Equilibrium Price: The price at which the quantity demanded by consumers equals the quantity supplied by producers, ensuring there is no surplus or shortage. Market Entry and Exit in Perfect Competition: In the long run, firms enter or exit the market based on profitability, ensuring that only the most efficient firms survive, driving prices to the level of average costs. Price Floors: These are minimum prices set by the government. If set above the equilibrium price, they can result in surpluses, where the quantity supplied exceeds the quantity demanded.  Scarcity and Resource Allocation: Due to limited resources, individuals and societies must make choices about how to allocate resources effectively, prioritizing certain goods and services over others. Role of Incentives in Economics: Incentives (financial or otherwise) play a crucial role in influencing consumer and producer behavior, affecting their decisions in the market.