Microeconomics

Chapter 1
Economics
A social science
The study of how humans use their scarce resources to best
satisfy there needs
Human reaction to scarcity
Factors of Production/Inputs/Resources
1. Land
Natural resources (things that exists with or without
humans)
Name for price: Rent
2. Labor
Human effort
o Physical or Mental
Name for price: Wages
3. Capital
Man-made things that are productive (NOT MONEY)
o Ex. Screwdrivers, hammers, textbooks, computers
Name for price: Interest
4. Entrepreneurship
Ability to combine the other 3 to make products
Name for price: Pi (Greek Letter) to show profit
Opportunity Cost: When doing something, its the next best option or
options over said period of time
Economic Questions
1. What are we going to produce?
2. How are we going to produce it (labor and capital intensive)
3. Who are we doing it for? (Where do they go?)
Economic Systems
1. Command
An individual or small group is making decisions for a
society and commanding them to do it
2. Traditional
The beliefs, habits, and customs of a society determine the
products
3. Market
Consumers dictate the products made

Adam Smiths Wealth of Nations (1776)

Invisible Hand Theory
o Individuals left to make their own decisions will,
inadvertently, choose decisions to do whats best for society
Model
Simplification of reality
Microeconomics vs. Macroeconomics
Microeconomics
o The study of how households and firms make choices, how
they interact in markets, and how the government attempts
to influence their choices
Macroeconomics
o The study of the economy as a whole, including topics such
as inflation, unemployment, and economic growth.
Chapter 2
Efficiency vs. Equity
Equity: equal, fairness
Efficiency is a positive concept (measurable)
Production Possibility Frontier (PPCurve)
Used to look at country wide economics
Only looks at two products (simplification)
Assumes resources are fixed and not changing
When showing on graph, one axis shows amount of one product,
the other shows the other product
Helps show how to distribute resources to make both products
When measuring opportunity cost, use previous opportunity cost
and calculate the difference when words like first, the second,
the third because those words imply the previous has already
been made and the cost has been assumed upon those

Shifts in the graph over shorter periods of time can be due to

war, loss of resources, increase in work force, advances in
technology
Takes more opportunity cost to make the 3rd item A compared
to the 2nd item A because you are taking resources from item
B that are more specialized and suited for item B

If we produce too many consumer goods, our capital goods will

deteriorate quicker than we replace them and the curve will shift
left and vise versa
The market dictates the shift of the curve. If consumers purchase
more consumer products, the market will produce more
consumer products and vise versa

Absolute Advantage
The ability for a party to produce a product or service more
efficiently

Comparative Advantage
Compares two people trading items and their opportunity costs,
states that whoever has the lower opportunity cost should make
a given product
Circular Flow Model

Chapter 3
Demand
Relationship stating the price of products and how much
consumers are willing and able to purchase
o An inverse function (product price increases, the ability
and willingness to purchase the product decreases)
Supply
Direct relationship
o The higher the demand, the firm is more likely to supply
more to make more profit

(Market Model)
Chapter 4
Surplus: Qs > Qd
Shortage: Qd > Qs
Equilibrium: Qs = Qd
Just S and Just D are representations of the slope of each line. Qs and
Qd stand for Quantity Supplied and Quantity Demanded, respectively.
Changes in Demand
1. Change in consumer incomes
Changes in demand depends on the type of product
o Inferior {inverse relation}
o Normal {same relation}
2. Change in the price of related products
Substitute (Moves the same way)
Complement (moves opposite way)
3. Change in consumer tastes or preference
4. Change in expectations of product price (ignore on graph)
5. Change in number of buyers
Changes in Supply
1. Change in input prices
2. Change in opportunity cost
3. Change in technology (more of thinking than capital)
Can only cause an increase in supply
4. Change in expectations of product price (ignore on graph)
5. Change in the number of sellers

Consumer Surplus
The difference between the total amount that consumers are
willing and able to pay for a good or service (indicated by the
demand curve) and the total amount that they actually do pay
(i.e. the market price)
Producer Surplus
The amount that producers benefit by selling at a market price
that is higher than the least that they would be willing to sell for;
this is roughly equal to profit
Shortage
A situation where demand for a product or service exceeds the
available supply. Possible causes of a shortage include
miscalculation of demand by a company producing a good or
service or government policies
Tax

Splits the total price into two different prices

1st Party: offer to sell

2nd Party: offer to buy
3rd Party: someone not involved, but effected
Negative extranalities
Regulation (speed Limit)
Pigovian Tax

o A special tax that is often levied on companies that pollute

the environment or create excess social costs, called
negative externalities, through business practices. In a true
market economy, a Pigovian tax is the most efficient and
effective way to correct negative externalities
Tradable permits

Chapter 9
Maximum profit = where the marginal revenue is equal to the
marginal cost