Econ micro

  1. economics
    the study of the efficient allocation of limited resources for unlimited wants
  2. 4 factors of production (resources)l
    • land
    • labor
    • capital - man-made products used to produce something else more efficiently 
    • entrepreneurial skills - creating and managing human and other resources to provide desired goods or services at a profit
  3. scarcity
    limited resources
  4. model
    a simplified description of reality -- should only include important factors, predict future events precisely and can be validated
  5. direct/positive relationship
    when an increase in the independent variable also increases the dependent variable (or decrease/decrease) (if x↑, y↑) or (if x↓, y↓)
  6. indirect/negative relationship
    when an increase in the independent variable decreases the dependent variable (or decrease/increase) (if x↑, y↓) or (if x↓, y↑)
  7. ceteris paribus assumption
    when a certain variable changes, "all other variables remain unchanged" ... "all things being equal"
  8. positive economics/statement
    a statement of fact; can be verified... statements with "is", "was", "will be".   without opinions or value judgements
  9. normative economics/statement
    a statement of opinion or value judgements. "high" "low" "good" "bad" "better" "worse" etc
  10. 4 pitfalls in economic thinking
    • the fallacy of composition; what is good for one person is good for everyone
    • the post hoc fallacy; because event A precedes event B, event B must have been caused by event A. "after this, therefore because of this"
    • cause and cure; proposing a cure for a problem without proper testing. [supply will create its own demand]
    • predicting human behavior; inability to test in a lab
  11. laissez-faire
    "let it be"
  12. the "Invisible Hand"
    the market system leads all individuals, in search of their own self-interests, to produce the greatest benefit for society as a whole.  --Adam Smith
  13. 2 required conditions for the invisible hand to work:
    • clearly defined property rights [provides certainty about future]
    • economic freedom to produce or consume what people wish [benefit those around them; cooperation and communication by means of market prices]
  14. opportunity cost (O.C.)
    the cost of the best alternative foregone or sacrificed   ...   [when an economy produces one product, it has to proportionately limit or forego production of another product]
  15. the production possibilities curve (PPC)
    • represents the maximum combination of any two goods a country can produce given today's limited resources.
    • the curve illustrates the boundary of production
    • ceteris paribus assumed
  16. region outside of PPC (production possibilities curve)
    • unattainable
    • there are neither sufficient resources nor enough know-how to operate
  17. region inside of PPC (production possibilities curve)
    • inefficient
    • unemployment of resources exists
  18. actions for government to take in a recession
    • raise gov't spending --> more jobs
    • lower taxes --> more disposable income
    • raise money supply --> interest rates drop
  19. to determine the time it will take to double, triple, or quadruple an investment or standard of living based on an interest rate...
    • doubling: 72/x; where x = % (not decimal)
    • tripling: 114/x
    • quadrupling: 144/x
  20. Pareto Efficiency
    allocation of resources is efficient only when one can make those involved in one activity better off without making those involved in another activity worse off.
  21. the amount of a product or service that a person is willing or able to buy, at a particular price, over a specified period of time
    quantity demanded
  22. as P goes up what happens to Qd?
    P↑ ⇒ Qd↓ (or vice versa)
  23. substitution effect
    how the price of one product or service will effect the demand for another similar product [red OR green grapes, Starbucks OR Coffee Bean]
  24. real income effect
    • consumers' purchasing power increases as prices for regularly bought goods decreases.
    • If you always buy x at $10 and its price is reduced to $3 you are effectively $7 richer. This is an increase in real income.
    • This will also raise the demand for x.
  25. the law of diminishing marginal utility
    the more of a product that is consumed, the less satisfaction (utility) the consumer will derive
  26. Law of Demand
    • there is an inverse relationship between the price level of a good and its quantity demanded, ceteris paribus.
    • P↑ ⇒ Qd↓
    • P↓ ⇒ Qd↑
  27. 5 factors of shifting demand curve:
    • income:
    • normal good--> positive relationship I↑ -->D↑
    • inferior good--> negative relationship I↓ --> D↑
    • taste/preference: 
    • positive-->D↑
    • negative-->D↓

    • population:
    • increase-->D↑
    • decrease-->D↓
    • price expectation:
    • expectation ↑, D↑, P↑... price fulfilling prophecy 
    • prices of other (related) goods:
    • substitute good.... good A OR good B [Pepsi P↑-->Qd↓-->Coke D↑]
    • complementary good... good A AND good B [coffee P↑-->Qd↓-->half&half D↓]
  28. When quantity supplied exceeds quantity demanded
  29. When quantity demanded exceeds quantity supplied
  30. When Qd = Qs
    Equilibrium price
  31. Opportunity cost formula
    • Δx/Δy = x sacrificed for one unit of y
    • * the OC of one unit that you seek goes in denominator
  32. Factors that shift supply curve
    • Number of producers
    • technology/capital goods
    • cost of production
    • government policies 
    • Prices of related goods substitute: [rice to wheat; Pr↑-->Qr↑-->Sw↓] complementary: [chickens to organs; Pc↑-->Qc↑-->So↑]
  33. Elasticity of demand, % and mid point formulas
    Image Upload 1

    Image Upload 2
  34. Price elasticity of demand
    Buyers' response to a change in price
  35. Price elasticity of supply
    Producers' response to a change in price
  36. Image Upload 3
    • Elastic
    • a 1% change in price will lead to a more than 1% change in quantity demanded. 
    • *remember: inverse relationship, a 1% increase in price will lead to a more than 1% decrease in Qd.
  37. Image Upload 4
    • Unit elastic
    • 1:1 ratio
    • if seller increases price by 1%, there will be exactly a 1% decrease in Qd, or vice versa
  38. Image Upload 5
    • Inelastic
    • a 1% change in price will lead to a less than 1% change in Qd
    • * remember inverse relationship
  39. Factors determining price elasticity of demand
    • number of substitutes
    • necessity or luxury?
    • level of income
    • price of product relative to income
    • length of period of adjustment
  40. income elasticity of demand
    • measures the buyer's responsiveness to change in income as the demand curve shifts to the right or left
    • Image Upload 6
  41. income elasticity: meaning of + and >1, +and <1, and -
    • + = normal goods. *direct relationship b/t I and Qd
    • +>1=luxury
    • +<1=necessity
    • -=inferior goods. *indirect relationship b/t I and Qd
  42. Cross elasticity of demand (Image Upload 7)
    Measures the percentage change in demand of one good to the percentage change in price of another related good.
  43. If cross elasticity of demand is positive or negative or zero...
    • When positive (direct), the goods are substitutes [gasoline and hybrid cars]
    • when negative (indirect), the goods are complements [electricity and air conditioners]
    • when Image Upload 8 is zero the goods are independent, or unrelated [books and homes]
Card Set
Econ micro
Econ micro