Micro theory study guide mod

Micro theory study guide mod - Microeconomics Theory: Final...

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Microeconomics Theory: Final Opportunity cost: The value of the most highly valued forgone alternative. 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. Supply and Demand Demand 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. A change in any variable that influences the demand for a good – except its own price – shifts the demand curve. A change in a good’s own price induces movement along the demand curve causing a change in quantity demanded. Supply 1. Price: The higher the price of a good, the greater the quantity that firms are willing to supply. Higher prices make it profitable for firms to produce more output.
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2. Price of inputs: Bread is comprised of inputs – labor, flour, mixing bowls, etc. – if the cost of inputs goes up, the amount of bread they can profitably supply goes down. 3. Conditions of production: State of technology. If technological advances are made in bread production, the supply of bread increases. When any variable that influences supply (above) – other than the commodities price – the supply curve shifts. A change in the commodities price induces a movement along the supply curve. Chapter 2 – Consumer Choice Three Assumptions of Consumer Behavior 1. Completeness Assumption: A consumer, when confronted with any two bundles, can tell us which one she prefers, or whether she is indifferent between them. a. If the consumer can tell which one she prefers, it is complete, and a theory of consumer choice can be made. If she is indifferent, it is not complete. 2. Transitivity Assumption: Preferences are such that if bundle X is preferred to bundle Y, and bundle Y is preferred to bundle Z, then X is preferred to Z. 3. Nonsatiation Assumption: More is better. For all quantities of the commodities, the consumer is never satiated. a. “If some is good, more is better.” b. Nonsatiation is less fundamental because at a certain point consumers may become satiated. Indifference Curves
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Micro theory study guide mod - Microeconomics Theory: Final...

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