ECON 251: Microeconomics
Midterm 1: Study Guide
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.
- 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.
- 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?
If you want to learn more check out What are the process of selecting the jury members?
Don't forget about the age old question of What is the major benefit of written vs oral communication?
∙ 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.