FinalMiniReview - Mini Review Not Comprehensive I...

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Mini Review- Not Comprehensive I. MICROECONOMICS Opportunity Cost Opportunity cost is the best alternative that we give up when we make a choice. For example, the opportunity cost of going to college is the income you would have earned if you took a job instead. Absolute and Comparative Advantage One has absolute advantage if he/she can produce a good cheaper than another person. One has comparative advantage if he/she can produce a good more efficiently than another good (i.e. at lower opportunity cost) than another person. The principle of comparative advantage states that two people can gain from trade even when one has an absolute advantage over the other as long as they each specialize in the goods that they have a comparative advantage in. Production Possibility Frontier The PPF is a graphical device that shows all the combinations of goods that can be produced if all of society’s resources are used efficiently. The slope of the tangent line at any point on the PPF is defined as the MRT (marginal rate of transformation). The MRT represents the opportunity cost of producing one more good in terms of the other. The PPF is usually bowed outward due to the Law of Increasing Opportunity Cost. If we are already producing a lot of one good then it becomes harder and harder to produce more of that good (opportunity cost increases) because we would need to divert resources away from other uses and employ resources that may not be best suited for the task. Supply and Demand Equilibrium market price and quantity is determined by the intersection of demand and supply. The demand curve shows the quantity that consumers want to buy at different prices. The Law of Downward Sloping Demand states that when prices fall, quantity demanded increases. The supply cure gives the quantity that firms provide at each price and is generally equal to their marginal cost curve.
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Consumer and Producer Surplus Consumer surplus is the benefit to the consumer in excess of the amount paid. Graphically, it is the area under the demand curve and above the price. Producer surplus is the revenue to the firm in excess of their marginal costs. Graphically, it is the area above the supply curve and under the price. Deadweight loss is the loss in consumer and producer surplus that occurs when market output is not at the optimal level due to taxes, regulations, externalities, etc. Elasticity Demand is inelastic when the demand curve is relatively steep. This implies that a large change in price is needed to induce a small change in quantity. For example, a diabetic’s demand for insulin is extremely inelastic. Supply is considered inelastic when the supply curve is steep.
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FinalMiniReview - Mini Review Not Comprehensive I...

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