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Microeconomics Exam Review
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This includes the review for Microeconomics including answers and explanations, key vocabulary, and more notes.
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Economics_Exam_1_ReviewChapter 2: The Economic Problem
Production Possibilities and Opportunity Cost
The productions possibilities frontier (PPF) is the boundary between those
combinations of goods and services that can be produced and those that cannot.
y-axis = price x-axis = quantity
The PPF demonstrates scarcity b/c the points outside the frontier are unattainable,
these points describe wants that can’t be satisfied. Inside the PPF is attainable but
inefficient.
Production Efficiency
Production efficiency is achieved if we produce g/s at the lowest possible cost,
occurring at all the points on the PPF.
Production inside the PPF is inefficient because resources are
either unused or misallocated or both.
Unused resources are those that are idle but could be working.
Misallocated resources are those that are assigned to tasks for which they are not
the best match.
Opportunity Cost
The opportunity cost of an action is the highest-valued alternative forgone.
Opportunity cost increases as the quantity produced increases.
Using Resources Efficiently
Allocative efficiency occurs in which g/s are produced at the lowest possible cost
and in the quantities that provide the greatest possible benefit. We cannot produce
more of any good without giving some of another good that we value more highly.
(MC = MB)
The marginal cost of a good is the opportunity cost of producing one more unit of
it. Calculate from the slope of the PPF. MC increases as you go along the curve.
Marginal benefit of a good or service is the benefit received from consuming one
more unit of it. Depends on preferences.
MB curve demonstrates how much ppl are willing to pay for a g/s. This
is unrelated to the demand curve.
MB decreases as the amount consumed increases = principle of decreasing
marginal benefit.
Gains from Trade
Specialization is producing only one good or a few goods.
,Comparative advantage is attained if that person or country can perform the
activity at a lower opportunity cost that anyone else or any other country.
Absolute advantage is attained if that person is more productive than another
person. They have a clear advantage at producing one good or service.
Economic Growth
Economic growth is the expansion of production possibilities, this increases the
standard of living but does not overcome scarcity and avoid opportunity cost.
Technological Change: the development of new goods and of better ways of
producing g/s.
Capital Accumulation: the growth of capital resources, including human capital.
Economic Coordination
Decentralized coordination requires 4 complementary social institutions: - Firms -
Markets - Property rights - Money
1. Firms:
Firms: an economic unit that hires factors of production and organizes them to
produce and sell g/s.
2. Markets:
Markets: any arrangement that enables buyers and sellers to get information and to
do business with each other.
3. Property Rights:
Property Rights: social arrangements that govern the ownership, use, and disposal
of anything that people value. These are enforceable in the courts. Financial
property ex. stocks, bonds, money in the bank, etc.
Intellectual property ex. books, music, computer programs, inventions, etc.
When property rights are enforced, people have the incentive to specialize and
produce the g/s in which they have a comparative advantage. Where people can
steal the production of others, resources are devoted not to production but rather to
protecting possessions.
4. Money:
Money: is a commodity/token that’s generally acceptable as a means of payment.
Chapter 3: Demand and Supply
Demand
Wants are unlimited desires or wishes that people have for goods and services.
The demand includes a willingness and ability to pay to obtain the g/s.
, Quantity demanded of a g/s is the amount that consumers plan to buy during a
specified time period at a specified price.
Law of Demand: Other things remaining the same, price and QD are inversely
related. If price increases QD decreases and vice versa. (Substitution effect and
income effect)
Income effect is relative to the income gained by an individual, if people cannot
afford to buy goods they may turn to inferior goods etc.
Demand Curve and Demand Schedule
Demand is the entire relationship between the price of a g/s and the quantity
demanded of that g/s. Illustrated through the demand curve and schedule.
Quantity demanded is a point on the demand curve demonstrating the QD at a
particular price.
A demand curve illustrates the relationship between the QD of a good and its price
when all other influences on consumers’ planned purchases remain the same.
A demand schedule lists the QDs at each price when all other influences on
consumers’ planned purchases remain the same. This is graphed as the demand
curve.
Willingness and ability to pay is measured by the MB. As the quantity available
increases, the MB of each additional unit decreases. The highest price someone is
willing to pay should be along the demand curve.
Demand Shifters
Prices of related goods
Expected future prices
Income
Expected future income and credit
Population
Preferences
1. Prices of Related Goods:
Substitutes: P of substitute rises, QD of original good increases etc.
Complement goods P of complement rises, QD of original good decreases etc.
2. Expected Future Prices: Future P of good rises, QD now increases because the
opportunity cost of obtaining the good for future use is lower today than in
the future when the price is expected to be higher. Etc.
3. Income: Income of consumers increases, the QD of most goods increases.
Consider inferior and normal goods.
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