Econ 1050 Midterm Study Guide: Introductory Microeconomics

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Chapter 1: Introduction to Microeconomics

Scarcity and Incentives

Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. Incentives are rewards or penalties that motivate people to act in certain ways.

Scarcity: The inability to get everything we want.
Incentive: A reward that encourages an action or a penalty that discourages it (e.g., a price drop creates an incentive for people to buy more).

Definitions and Scope

Economics: The social science that studies the choices individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices.
Microeconomics: The study of choices that individuals and businesses make.
Macroeconomics: The study of the performance of the national economy and the global economy.

Goods and Services

Goods and services: Objects that people value and produce to satisfy human wants (goods are physical, services are tasks).

Big Economic Questions

How do choices end up determining what, how, and for whom goods and services are produced?
How do choices made in the pursuit of self-interest also promote the social interest?

Factors of Production

Land: Natural resources (earns rent).
Labour: Work time and effort (earns wages); includes human capital (knowledge and skills).
Capital: Tools, equipment, machines, buildings (earns interest).
Entrepreneurship: Human resource that organizes land, labour, and capital (earns profit).

Self-Interest vs. Social Interest

Self-interest: Choices that are best for the individual.
Social interest: Choices that are best for society as a whole.

Efficiency

Efficiency: When available resources are used to produce goods and services at the lowest possible cost.

Chapter 1 (continued): Economic Models and Graphs

Trade-offs and Opportunity Cost

Trade-off: Giving up one thing to get another (e.g., guns vs. butter).
Opportunity cost: The highest valued alternative that must be given up to get something else.

Marginal Analysis

Margin: Comparing the benefit of something with its cost.
Marginal benefit: The benefit from an increase in activity.
Marginal cost: The opportunity cost of an increase in activity.

Positive vs. Normative Statements

Positive statement: Can be tested and validated (e.g., "Our planet is warming").
Normative statement: Expresses an opinion about what ought to be (e.g., "We should cut down less trees").

Types of Experiments in Economics

Statistical experiment: Looks for correlations (e.g., cigarette smoke vs. lung cancer).
Economic experiment: Puts people in a decision-making situation to observe responses.
Personal, business, and government economic policy: Involve evaluation of marginal cost and benefit.

Graphs in Economics

Scatter diagram: Plots the value of one variable against another to describe relationships.
Types of relationships:
- Positive/direct: variables move in the same direction.
- Negative/indirect: variables move in opposite directions.
- Maximum/minimum: variables have a peak or trough.
- Unrelated: no relationship between variables.
Slope:
Linear equation:

Chapter 2: Production Possibilities and Opportunity Cost

Production Possibilities Frontier (PPF)

The PPF is a curve that shows the maximum attainable combinations of two goods or services that can be produced with available resources and technology.

Attainable vs. unattainable: Points inside or on the PPF are attainable; points outside are unattainable.
Production efficiency: Producing goods and services at the lowest possible cost (points on the PPF).
Allocative efficiency: Producing the mix of goods and services most desired by society at the lowest cost.
Opportunity cost in a PPF: The highest valued alternative forgone (e.g., producing pizza or cola).

Marginal Benefit and Cost

Marginal benefit curve: Shows the relationship between the marginal benefit of a good and the quantity consumed.
Marginal cost: The cost of producing one more unit, calculated using the PPF.
Marginal benefit: The benefit from consuming one more unit, measured by willingness to pay.

Economic Growth and Comparative Advantage

Economic growth: Expansion of production possibilities, often through capital accumulation and technological change.
Comparative advantage: The ability to perform an activity at a lower opportunity cost than others.
Absolute advantage: The ability to produce more of a good with the same resources.

Institutions and Property Rights

Firm: An organization that hires factors of production to produce goods/services.
Market: An arrangement that allows buyers and sellers to get information and do business.
Property rights: Social arrangements governing ownership and use of resources.
Money: A commodity or token generally accepted as payment.

Chapter 3: Demand and Supply

Competitive Market and Price

Competitive market: Many buyers and sellers, no single person can influence the price.
Money price: The price of an object in dollars.
Relative price: The ratio of one price to another.

Demand

Quantity demanded: The amount consumers plan to buy at a given price during a specific time period.
Law of demand: As the price of a good rises, the quantity demanded falls, ceteris paribus.
Substitution effect: As price rises, consumers switch to substitutes.
Income effect: As price rises, real income falls, so people buy less.
Demand curve: Illustrates the relationship between price and quantity demanded.

Determinants of Demand

Prices of related goods:
- Substitutes: Goods used in place of each other (e.g., hot dogs and hamburgers).
- Complements: Goods used together (e.g., fries and ketchup).
Income:
- Normal good: Demand increases as income increases.
- Inferior good: Demand decreases as income increases.
- Neutral good: Demand does not change with income.
Preferences/Tastes: Influenced by weather, information, fashion, etc.
Future income/credit (expectations): Anticipated changes in income affect current demand.
Government intervention: Taxes and subsidies can affect demand.
Population: Size and age structure affect demand for goods and services.

Change in Demand vs. Change in Quantity Demanded

Change in demand: Shift of the demand curve (caused by factors other than price).
Change in quantity demanded: Movement along the demand curve (caused by a change in price).

Supply

Quantity supplied: The amount producers plan to sell at a given price during a specific time period.
Law of supply: As the price of a good rises, the quantity supplied rises, ceteris paribus.
Supply curve: Illustrates the relationship between price and quantity supplied.

Determinants of Supply

Factors of production: Changes in input prices affect supply.
Related goods produced: Substitutes and complements in production affect supply.
Government intervention: Taxes, subsidies, and quotas affect supply.
Future prices (expectation): Expected changes in price affect current supply.
Number of suppliers: More suppliers increase market supply.

Minimum Supply Price

Shows the lowest price at which someone is willing to sell; lowest price equals marginal cost.

Key Formulas and Concepts

Slope of a line:
Linear equation:
Opportunity cost:

Summary Table: Types of Goods

Type of Good	Definition	Example
Normal Good	Demand increases as income increases	Organic food
Inferior Good	Demand decreases as income increases	Instant noodles
Substitute	Can be used in place of another good	Tea and coffee
Complement	Used together with another good	Printers and ink cartridges

Additional info:

Some explanations and examples have been expanded for clarity and completeness.
Key graphs and diagrams (e.g., PPF, demand and supply curves) are referenced but not visually reproduced here.