What is Economics?
The study of how individuals, firms and societies choose to use the scarce resources that
nature and previous generations have provided.
Why are resources scare?
There are unlimited wants, but
Three Basic Questions
What gets produced? - Resources
How is it produced? - Producers
Who gets what is produced? Households
Resources or Factors of Production
Resources, Inputs, and Factors of Production
Production: The process that transforms
Absolute (AA) and Comparative (CA) Advantage
A producer has an AA over another in the production of a good or service if he can
produce that product using fewer resources (or can produce more of a product using the
same amount of resources)
Basic Decision Making Units
An organization that transforms inputs into outputs.
The primary producing units in the economy.
Entrepreneur: A person who organizes, manages, and assumes the risks of a firm,
taking a new idea or a new product
Determinants of Household Demand
Income and Wealth
Price of other goods
Taste and preference
If Qd=28-8P and Qs=-8+16P
Market in Disequilibrium
If the quantity demanded is not equal to the q
9.15 and 9.20.2011
Consumer Surplus (CS)
The difference between the max amount a person will pay and its current market price.
Producer Surplus (PS)
Difference between current market price and the full cost of production for the firm.
Income Elasticity of Demand
Measures the responsiveness of the quantity demanded of good X to a change in income
Income elasticity of demand = (% change in Qd)/(% change in income)
Tells us what type of good X is normal or inferior
Households possess knowledge of the qualities and prices of everything available
in the market.
Firms have all available information concerning input and output prices.
An industry structure in which th
All firms engage in production and attempt to maximize their profits
Firms: an organization that comes into being when a person or group of people decides to
produce a good or service to meet a perceived demand
Production: the process by whic
Economic profit = Total Revenue Total Economic Costs
Economic Profit = TR (Implicit Costs + Explicit Costs)
Short Run Costs and Output Decisions
o Firms sell goods and services in the output (product) market and buy inputs [factor]
Chapter 7 Micro
Production Process and Profit Maximizing Behavior
A Closer Look at Firm Behavior
Firms engage in production and attempts to maximize their profits
o Firms An organization that comes into being whena person or a group
of people decides to
Market Adjustment to Changes in Demand
Pareto Efficiency = Pareto Optimality
A condition in which no change is possible that will make some members of
society better off without making some other members of society wor