IndietroPrinciples of Microeconomics Exam 1 Key Concepts
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Scarcity means limited resources force people to make choices and trade-offs.
Economics is the study of how people allocate scarce resources to satisfy unlimited wants.
People are rational, respond to incentives, and make optimal decisions at the margin.
Opportunity cost is the value of the next best alternative foregone when making a choice.
What to produce? How to produce? Who receives the goods and services?
Centrally planned economies, market economies, and mixed economies differ by who controls resources and production.
Positive economics describes what is; normative economics prescribes what ought to be.
Microeconomics studies individual markets and decisions; macroeconomics studies the economy as a whole.
The PPF shows combinations of two goods that can be produced efficiently with available resources.
Resources are fixed, technology is constant, and only two goods are produced.
Efficient points lie on the PPF; inefficient points lie inside; unattainable points lie outside.
Constant means opportunity cost stays the same; increasing means opportunity cost rises as more of a good is produced.
Improvements in technology, increases in resources, or better education shift the PPF outward.
Comparative advantage is when a producer has a lower opportunity cost than others.
Absolute advantage means producing more output with the same resources than others.
Trade allows each party to specialize in goods with comparative advantage, increasing total output and consumption.
A free market is where buyers and sellers freely exchange goods and services with minimal government intervention.
The invisible hand describes how individuals pursuing self-interest can lead to positive social outcomes.
Hayek argued that knowledge is decentralized, making central planning inefficient compared to markets.
Private property rights give individuals control over resources, encouraging investment and trade.
The law of demand states that quantity demanded falls as price rises, ceteris paribus.
Demand is the entire relationship between price and quantity; quantity demanded is a specific point on the demand curve.
Price changes cause consumers to substitute cheaper goods and affect their purchasing power (income effect).
Income, tastes, prices of related goods, expectations, and number of buyers shift demand.
The law of supply states that quantity supplied rises as price rises, ceteris paribus.
Supply is the entire relationship between price and quantity; quantity supplied is a specific point on the supply curve.
Input prices, technology, expectations, number of sellers, and taxes/subsidies shift supply.
Equilibrium occurs where quantity demanded equals quantity supplied, setting the market price.
Surplus is excess supply; shortage is excess demand; both push prices toward equilibrium.