ECON 251: Microeconomics

Production possibility frontier refers to what?

Midterm 1: Study Guide

∙ Concepts: 

I. Chapter 1:

- Economics: a social science that studies the choices we make as we cope with  scarcity and the incentives that influence and reconcile our choices.

- Scarcity: available resources are limited.

II. Chapter 2:

- Opportunity cost (Economic cost): value of the best alternative.

- Marginal benefit: additional benefits from one more unit.

- Marginal cost: additional costs of one more unit.

- Production possibility frontier: graph of maximum output that can be produced. - Production efficiency: producing a combination of goods at lowest cost. - Allocative efficiency: using resources when they are most highly valued. III. Chapter 3:

- Demand: maximum quantity a consumer is willing and able to purchase at various  prices.

- Law of demand: price & quantity demanded are inversely related.

Production efficiency refers to what?

- Normal goods: goods where demand rises when income rises, and falls when income  falls.

- Inferior goods: goods where demand rises when income falls, and falls when income  rises.

- Substitute in consumption: goods used in place of one another.

- Complements in consumption: goods that are used together.  

- Supply: maximum quantity a seller is willing and able to sell at various prices. - Law of supply: price and quantity supplied are positively (directly) related. - Substitute in production: good can be produced using the same resources. - Complement in production: goods produced together (by-products).

IV. Chapter 4:

- Elasticity: a measure of responsiveness.

- Price elasticity of demand: responsiveness of consumers to changes in price. - Income elasticity: responsiveness of consumers to changes in income.

- Cross-price elasticity: responsiveness of consumers to change in price of a different  good.

Allocative efficiency refers to what?

- Price elasticity of supply: responsiveness of sellers to changes in price. - Production efficiency: produced at lowest cost.

V. Chapter 5:

- Allocative efficiency: using resources where they are most highly valued. - Consumer surplus: value consumers receive above the price paid. We also discuss several other topics like what is parasympathetic nervous system

- Producer surplus: value producers receive above the marginal cost.\

- Deadweight loss: decrease in total surplus resulting from an efficient level of  production.

- Symmetry principle: people in similar situations should be treated similarly. - Utilitarianism: achieve the greatest happiness for the greatest number. - Maximin principle: make the poorest person as well off as possible.

VI. Chapter 6:

- Price ceiling: maximum price at which a good can be legally sold.

- Price floor: minimum price at which a good can be legally sold.

- Excise tax: per unit tax.

- Pc: price consumers pay after a tax.

- Ps: price sellers receive after a tax. If you want to learn more check out What is Liberal Idealism?'

- Tax incidence: division of the burden of a tax between buyers and sellers. - Subsidies: negative tax

- Quotas: upper limit on quantity of a good that legally can be sold.

∙ Increase in demand ???? D shifts to the right We also discuss several other topics like What are the four components of the marketing mix?

∙ Decrease in demand ???? D shifts to the left

∙ Finding the equilibrium point:  

Set D = S ???? solve for Q or P ???? plug in Q or P in one of the original equations to find the  other variable.  

Q* is the equilibrium quantity, and P* is the equilibrium price.

∙ If Qs > Qd ???? surplus ???? ↓P ******* If Qd > Qs ???? shortage ???? ↑P

∙ Calculating the price elasticity of demand Ed:

Ed = | %∆Qd ÷ %∆P | Note: %∆Qd = (∆Qd ÷ avg Qd) × 100 If Ed > 1 ???? D is elastic ### if Ed < 1 ???? D is inelastic ### if Ed = 1 ???? D is unit elastic Note: the same process goes for the price elasticity of supply Es

∙ Revenue = P × Qd 

∙ If MB = MC ???? allocative efficiency

∙ Consumer Surplus (CS) = ∑(MB – price) = area below D and above P (a triangle) ∙ Producer Surplus (PS) = ∑(price - MC) = area below P and above S (a triangle) ∙ Total surplus = CS + PS

∙ At equilibrium, total surplus is maximized

∙ Deadweight loss = 0.5 × (P2 – P1) × (Q2 – Q1)

∙ Price ceiling has to be set below the equilibrium price to have an effect. ∙ Price floor has to be set above the equilibrium price to have an effect. ∙ Rule: whoever is less elastic bears more of the burden of a tax

∙ If there is a perfect inelasticity of demand (Ed = 0):

Pc– tax = Ps ???? consumer bear the entire burden ???? no DWL because ∆Q = 0 ∙ If there is a perfect elasticity of demand (Ed = ∞) ???? sellers bear the entire burden ∙ If there is a perfect elasticity of supply (Es = ∞) ???? consumers bear the entire burden. Don't forget about the age old question of What are the two energy pathways?
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∙ If there is a perfect inelasticity of supply (Es = 0):

sellers bear the entire burden ???? no DWL because ∆Q = 0

∙ Pc + subsidy = Ps 

∙ Quota has to be set below the equilibrium quantity in order to have an effect.