Intro to Microeconomics

Scarcity: How do individuals and firms make decisions given that we live in a world of scarcity
(scarce resources).
Efficiency: All the trades that can make both the consumers, and producers better off are made.
Inefficiency: All the trades that can make both the consumers, and producers better off are made
(government intervention).
Allocation: Who gets the goods
Positive Economics (definition): An approach to economics that seeks to understand behavior
and operation of systems without making judgments. It describes what exists and how it works.
Normative Economics (definition): An approach to economics that analyzes outcomes of
economics behavior, evaluates them as good or bad, and may prescribe courses of action.
Descriptive Economics: The compilation of dada that describe phenomena and facts.
Economic Theory: A statement or set of related statements about cause and effect, action and
reaction.
Model: A formal statement of a theory, usually a mathematical statement of presumed
relationship between two or more variables.
Variable: A measure that can change from time to time or from observation to observation.
Ockhams razor: the principle that irrevelant detal should be cut away
Ceteris Paribus: A device used to analyze the relationship between two variables while the values
of other varialbes are held unchanged.
Post hoc, ergo propter hoc: If event A happens before event B, it is not necessarily true that A
caused B.
Fallacy of Composition: What is true for a part is necessarily true for the whole.
Equity: Fairness
Economic Growth: The increase in total output of an economy.
Stability; A condition in which national output is growing steadily, with low inflation and full
employment of resources.
Capital: Things that are themselves produced and that are then used in the production of other
goods and services.
Factors of production: The inputs into the process of production.
Production: The process that transforms scarce resources into useful goods and services.
Resources: Anything provided by nature or previous generations that ccan be used directily or
indirectly to satisfy human wants.
Outputs: Usable products
Opportunity cost: The best alternative that we give up, or forgo, when we make a choice or
decision.
Theory of Comparative Advantage (Ricardo): Ricardos theory that specialization and free trade
will benefit all trading parties, even those that may be absolutely more efficient producers.
Absolute Advantage: Produce a product using fewer resources
Comparative Advantage: Produce a product at a lower opportunity cost
Consumer goods: Goods produced for present consumption.
Investment: the process of using resources to produce new capital.
PPPF: A graph that shows all the combinations of goods and services that can be produced if all
of societys resources are used efficiently.
MRT: The slope of the PPF
Economic Growth: Occurs when a society acquires new resources or when it learns to produce
more using existing resources
Command Economy: An economy in which a central government either directly or indirectly
sets output targets, incomes, and prices.
Laissez-Faire Economy: An economy in which individual people and firms pursue their own
self-interests without any central direction or regulation.
Market: The institution through which buyers and sellers interact and engage in exchange.
Consumer Sovereignty: The idea that consumers ultimately dictate what will be produced (or not
produced) by choosing what to purchase (and what not to purchase).
Constrained optimization: Given scarce resources how do individuals and firms trade-off
different alternatives to make themselves as well off as possible.
Example: Buying a 4
th
edition or 5
th
edition of a text book, Tradeoff: Price,
information in the textbook.
Consumers maximize utility subject to budget constraints
Producers maximize profit, subject to consumer demand and input cost
Fundamental Questions of Economics:
1. What goods and services get produced
2. How do you produce those goods and services Controlled by Prices
3. Who gets those goods and services
Theoretical Economics: Building testable models
Empirical Economics: Testing the models
Positive Question: Why did something happen
Normative Question: Should that something be allowed to happen
Ex: Some guy auctioned his kidneys on Ebay and the final price was $5 Million, Ebay then shut
down the auction and stated that you werent allowed to sell body parts
Supply- How much of something is available
Demand- How much does someone wants that something
Supply and Demand are twin forces meaning that one has an effect on another.