MICROSUM._000 - MICROECONOMICS ECMA04H A very short summary...

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MICROECONOMICS – ECMA04H A very short summary of what we studied in ECMA04 ! Economics is the science that studies decisions about the use of scarce economic resources to produce goods and services. Scarcity of resources compels the making of choices - the basic cost notion is opportunity cost (the benefit foregone in the next best opportunity). Private individuals try to maximize the surplus of individual benefits over costs; they do this by equating marginal benefits (utility or revenue) with marginal costs (the price of the good, or the marginal cost of production). As economists, we judge economic situations according to whether they maximize the Gain to Society (GTS: the sum of consumer surplus and profit, or the sum of consumer and producer surpluses), that is, whether they maximize efficiency. ! Markets are composed of consumers seeking utility and producers seeking to make profits (surplus of revenues over costs); therefore, we analyze markets by looking at the DEMAND side and the SUPPLY side. When the price of the good changes, there is a movement along the demand curve and supply curve to a different quantity demanded and a different quantity supplied. If any of the other variables in the demand function (price of substitutes, price of complements, income, tastes) changes, there is a corresponding shift of the demand curve; if any of the other variables in the supply function changes (price of labour, price of capital goods, price of a substitute in production, price of a complement in production, technology, etc.), then there is a corresponding shift in the supply curve. The responsiveness of quantity demanded to a change in its own price is summarized in the price elasticity of demand E D = -(dQ/dP x P/Q) the responsiveness of quantity supplied to a change in own-price is summarized in the price elasticity of supply E S = dQ/dP x P/Q When there is excess demand in a market, the price will tend to rise to eliminate the excess demand; when there is excess supply, the price will tend to fall to eliminate the excess supply. In this way, price will tend to move towards an equilibrium where excess demand=excess supply=0. ! The importance of demand and supply elasticities is obvious when we look
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This note was uploaded on 06/11/2011 for the course ECMA 04 taught by Professor Cleverland during the Fall '09 term at University of Toronto- Toronto.

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MICROSUM._000 - MICROECONOMICS ECMA04H A very short summary...

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