Micro theory study guide

Micro theory study guide - Microeconomics Theory: Exam #1...

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Microeconomics Theory: Exam #1 Chapter 1 – Introduction Economics: The study of how people and societies deal with scarcity. Microeconomics: Focuses on the economic behavior of individual decision-making units. Scarcity causes society to answer three questions: 1. What is to be produced? a. Opportunity cost: The value of the most highly valued forgone alternative. b. When something is produced, a certain amount of resources are used towards the production. Opportunity cost expresses the cost of producing one thing instead of using those resources for something else. 2. How is it to be produced? a. Given that all resources are scarce, societies must decide which resources to allocate to the production of various commodities. 3. Who gets the output? a. Allocation of resources: How society’s resources are divided among the various outputs, among the different organizations that produce these outputs, and among the members of society. b. Market system: A mode of organization in which resource allocation is determined by the independent decisions and actions of individual consumers and producers. Positive Analysis: Descriptive statements of cause and effect. States how things are, not the value of what happened. Normative Analysis: Statements that embody value judgments. Cannot be backed up by fact, only by opinion and one’s ethics. Circular Flow Model: A representation of how the business and household sectors are linked: the physical flows of commodities and inputs between businesses and households, and the expenditures for commodities and inputs going in the opposite direction. Supply and Demand Demand Demand is influenced by four main factors:
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1. Price: As price goes up, demand goes down. The Law of Demand is the notion that price and quantity of demand are inversely related. 2. Income: Changes in income modify people’s consumption opportunities. a. Normal Good: If an increase in income increases demand. b. Inferior Good: If an increase in income decreases demand. 3. Prices of related goods a. Substitutes: Bread and Crackers – when one good’s price goes up, the demand for the other goes up, while the higher priced good’s demand goes down. b. Complements: Bread and Butter – when one good’s price goes up, the demand for the other goes down. 4. Tastes: The extent to which people “like” a good. The demand for bread varies for people who are skinny compared to those who are fat. Demand Schedule (Curve): The relation between the market price of a good and the quantity demanded of that good during a given time period, other things being the same (4 factors above). Ceteris Paribus: “Other things being the same” Shifting a demand curve: If a demand curve is drawn for bread, it reflects the quantity of bread that people are willing to buy at each price, other things being the same. When the price of muffins increases, there will be a tendency to buy more bread (substitutes), and as a result there will be an outward shift of the demand curve for bread. A change in any variable that influences the demand for a good – except its own price
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This note was uploaded on 02/23/2009 for the course EC 201 taught by Professor Laramie during the Fall '07 term at BC.

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Micro theory study guide - Microeconomics Theory: Exam #1...

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