MICROECONOMICS FINAL
Microeconomics
The study of individual choice under scarcity and its implications for the behavior of prices
and quantities in individual markets.
Macroeconomics
The study of the performance of national economies, and of the policies that governments
use to try to improve that performance.
1. Choices are necessary because resources are scarce.
Resource: anything that can be used to produce something else.
Scarce: in short supply; a resource is scarce when there is not enough of the resource
available to satisfy all the various ways a society wants to use it.
2. The true cost of something is its opportunity cost.
Opportunity cost: what you must give up in order to get something.
3. “How much” is a trade-off and is a decision at the margin.
Trade-off: comparison of the costs and the benefits of doing something.
There is a reciprocal relationship between costs and benefits.
Not incurring a cost is the same as getting a benefit.
By the same token, not getting a benefit is the same as incurring a cost.
Economic Surplus is the benefit of taking any action minus its cost
The goal of economic decision makers is to maximize their economic surplus.
Marginal decision: decision made at the margin of an activity about whether to do a bit
more or a bit less of that activity.
Marginal analysis: the study of marginal decisions.
Incentive: anything that offers rewards to people who change their behavior.
4. People usually respond to incentives, exploiting opportunities to make themselves
better off.
5. There are gains from trade.
Specialization: the situation in which each person specializes in the task that he or
she is good at performing.
,6. Markets move toward equilibrium.
Equilibrium: an economic situation in which no individual would be better off doing
something different.
7. Resources should be used efficiently to achieve society’s goals.
Efficient: taking all opportunities to make some people better off without making other
people worse off.
Equity: a condition in which everyone gets his or her “fair share.”
(There are many definitions of equity.)
EQUITY AND EFFICIENCY ARE OFTEN AT ODDS.
8. Markets usually lead to efficiency.
People normally take opportunities for mutual gain.
9. When markets don’t achieve efficiency,
government intervention can improve society’s welfare.
Sometimes markets fail and need correction.
10. One person’s spending is another person’s income.
11. Overall spending sometimes gets out of line with the economy’s productive
capacity.
12. Government policies can change spending.
,A competitive market has many buyers and sellers of the same good or service, none of
whom can influence the price.
The supply and demand model is a model of how a competitive market behaves.
Demand represents the behavior of buyers.
A demand curve shows the quantity demanded at various prices.
The quantity demanded: the quantity that buyers are willing (and able) to purchase at a
particular price.
The Law of demand: a higher price for a good or service leads people to demand a smaller
quantity.
, Important demand shifters:
1. Changes in the prices of related goods or services (substitutes – a decrease in Pa
leads to a decrease in demand of b - and complements – a decrease in Pa leads to
an increase in demand of b).
2. Changes in income and nature of goods (normal – an increase in income leads to
an increase in demand-, and inferior – an increase in income leads to a decrease in
demand).
3. Changes in tastes. Tastes and preferences are subjective and vary among
consumers.
4. Changes in expectations. Buyers adjust current spending in anticipation of the
direction of future prices in order to obtain the lowest
possible price.
5. Changes in the number of consumers. The number of
buyers of a particular good also changes its demand.
Microeconomics
The study of individual choice under scarcity and its implications for the behavior of prices
and quantities in individual markets.
Macroeconomics
The study of the performance of national economies, and of the policies that governments
use to try to improve that performance.
1. Choices are necessary because resources are scarce.
Resource: anything that can be used to produce something else.
Scarce: in short supply; a resource is scarce when there is not enough of the resource
available to satisfy all the various ways a society wants to use it.
2. The true cost of something is its opportunity cost.
Opportunity cost: what you must give up in order to get something.
3. “How much” is a trade-off and is a decision at the margin.
Trade-off: comparison of the costs and the benefits of doing something.
There is a reciprocal relationship between costs and benefits.
Not incurring a cost is the same as getting a benefit.
By the same token, not getting a benefit is the same as incurring a cost.
Economic Surplus is the benefit of taking any action minus its cost
The goal of economic decision makers is to maximize their economic surplus.
Marginal decision: decision made at the margin of an activity about whether to do a bit
more or a bit less of that activity.
Marginal analysis: the study of marginal decisions.
Incentive: anything that offers rewards to people who change their behavior.
4. People usually respond to incentives, exploiting opportunities to make themselves
better off.
5. There are gains from trade.
Specialization: the situation in which each person specializes in the task that he or
she is good at performing.
,6. Markets move toward equilibrium.
Equilibrium: an economic situation in which no individual would be better off doing
something different.
7. Resources should be used efficiently to achieve society’s goals.
Efficient: taking all opportunities to make some people better off without making other
people worse off.
Equity: a condition in which everyone gets his or her “fair share.”
(There are many definitions of equity.)
EQUITY AND EFFICIENCY ARE OFTEN AT ODDS.
8. Markets usually lead to efficiency.
People normally take opportunities for mutual gain.
9. When markets don’t achieve efficiency,
government intervention can improve society’s welfare.
Sometimes markets fail and need correction.
10. One person’s spending is another person’s income.
11. Overall spending sometimes gets out of line with the economy’s productive
capacity.
12. Government policies can change spending.
,A competitive market has many buyers and sellers of the same good or service, none of
whom can influence the price.
The supply and demand model is a model of how a competitive market behaves.
Demand represents the behavior of buyers.
A demand curve shows the quantity demanded at various prices.
The quantity demanded: the quantity that buyers are willing (and able) to purchase at a
particular price.
The Law of demand: a higher price for a good or service leads people to demand a smaller
quantity.
, Important demand shifters:
1. Changes in the prices of related goods or services (substitutes – a decrease in Pa
leads to a decrease in demand of b - and complements – a decrease in Pa leads to
an increase in demand of b).
2. Changes in income and nature of goods (normal – an increase in income leads to
an increase in demand-, and inferior – an increase in income leads to a decrease in
demand).
3. Changes in tastes. Tastes and preferences are subjective and vary among
consumers.
4. Changes in expectations. Buyers adjust current spending in anticipation of the
direction of future prices in order to obtain the lowest
possible price.
5. Changes in the number of consumers. The number of
buyers of a particular good also changes its demand.
