Microeconomics Midterm Study Notes: Scarcity, Choice, Demand, and Supply

Scarcity and Choice

Key Concepts

Scarcity is a fundamental concept in economics, referring to the limited nature of resources relative to human wants. Because resources are scarce, individuals and societies must make choices about how to allocate them.

• Scarcity: Resources are limited compared to people's wants. Even wealthy societies face scarcity because wants always exceed available resources.

• Choice: Selecting one option means giving up another due to limited resources.

• Cost (Opportunity Cost): The value of what you give up to obtain something else.

• Example: A Canadian family with high income still feels their resources are limited and must decide what to produce and how much to consume.

Additional info: Scarcity leads to the need for prioritization and trade-offs in consumption and production.

Opportunity Cost

Definition and Application

Opportunity cost is the value of the next best alternative forgone when a choice is made. It is central to economic decision-making.

• Definition: Opportunity cost = value of the next best alternative given up.

• Example (City Planner):

  • Budget: $12 million.

  • Road repair: $1 million/km.

  • Bike paths: $0.5 million/km.

  • Unattainable points: combinations outside the budget line.

• Opportunity Cost Ratios:

  • 1 km road repair = 2 km bike paths given up.

  • 1 km bike path = 0.5 km road repair given up.

Additional info: Opportunity cost is present in all economic choices, including education and career decisions.

Production Possibilities Boundary (PPB)

Key Points

The PPB shows the maximum combinations of two goods a country can produce using all resources efficiently.

• Definition: The PPB illustrates trade-offs and opportunity costs in production.

• Scarcity: Points outside the curve are unattainable; points inside are inefficient.

• Choice: Moving along the curve means choosing between goods (e.g., more consumption goods = fewer investment goods).

• Opportunity Cost: The negative slope shows trade-offs.

• Shape of the Curve: Concave (bowed out) due to increasing opportunity cost. Resources are not equally good at producing all goods.

Concepts Illustrated by PPB:

• Scarcity

• Choice

• Opportunity cost

Additional info: Economic growth can shift the PPB outward, making previously unattainable combinations possible.

Four Key Economic Problems

Main Questions

1. What is Produced and How? Scarce resources must be allocated among different goods. Example: choosing between bridges, airplanes, and wheat.

2. What is Consumed and by Whom? Concerns the distribution of goods among people. Governments may step in to change distribution.

3. Why Are Resources Sometimes Idle? Sometimes workers and machines are unused; economy operates inside its PPB.

4. How Are Resources Increased or Used More Efficiently? Policies may help increase resources or use them more efficiently.

Microeconomics vs. Macroeconomics

Definitions and Focus

• Microeconomics: Studies individual markets and decisions. Focuses on prices and quantities of specific products and factors of production.

• Macroeconomics: Studies the economy as a whole. Focuses on economic aggregates (GDP, employment, growth).

Summary Table:

Microeconomics	Macroeconomics
Individual markets, prices, choices	Economy-wide output, jobs, growth
Specific products (cars, wheat)	Total output (GDP)
Factors of production	Employment/unemployment

Economics and Government Policy

Key Points

• Free markets sometimes fail (market failures).

• Government policy can correct failures by reallocating resources.

• Examples: fairness in distribution, reducing unemployment, managing idleness, promoting growth.

Scarcity and Policy – Water Example

Application

• Fresh water is scarce in many regions; essential for human life.

• Population growth increases demand for water.

• Climate change reduces available water in many areas.

• Government policy responses: manage supply, introduce restrictions, infrastructure, or pricing mechanisms.

Quantity Demanded

Definition and Influences

Quantity demanded is the total amount of a good or service that consumers want to buy in a given period.

• Definition: Refers to desired purchases, not necessarily actual purchases.

• Must specify time period; quantity demanded is a flow.

• Influenced by:

  1. Product's own price

  2. Consumers' income

  3. Prices of other products

  4. Consumers' preferences/tastes

  5. Population

  6. Significant changes in weather

• Ceteris paribus: Study the effect of one variable at a time, holding others constant.

Stocks vs. Flows

Definitions and Examples

• Flow variable: Measured per unit of time (e.g., eggs sold per week, income per month).

• Stock variable: Measured at a point in time (e.g., eggs in warehouse, money in bank).

• Analogy: Water in tub = stock; water flowing from tap = flow.

Quantity Demanded and Price

Law of Demand

The law of demand states that there is a negative relationship between price and quantity demanded, ceteris paribus.

• Higher price → lower quantity demanded

• Lower price → higher quantity demanded

Why it happens:

• Products satisfy desires/needs, often with substitutes available.

• As price rises, product becomes more expensive relative to substitutes; consumers switch to other products or buy less.

• As price falls, product becomes cheaper relative to substitutes; consumers buy more of it.

Example: Meat becomes expensive → people buy less meat or switch to substitutes. Tomatoes become cheaper → people buy more tomatoes instead of other vegetables.

Demand Curve

Graphical Representation

• Demand curve: Graph of the demand schedule; downward-sloping.

• Point on curve: Quantity demanded at a specific price.

• Whole curve: Relationship between quantity demanded and all possible prices.

Shifts in Demand

Main Causes

• Consumers' income: Normal goods → demand rises with income; inferior goods → demand falls as income rises.

• Prices of other goods: Substitutes → price of substitute rises → demand for product rises. Complements → price of complement falls → demand for product rises.

• Consumers' preferences: More popular → demand increases; less popular → demand falls.

• Population: More people → demand increases.

• Significant changes in weather: Example: Cold → higher demand for heating; Heat → higher demand for AC.

Movement vs. Shift: Movement along demand curve is caused by a change in the product's price; shift is caused by a non-price factor.

Quantity Supplied

Definition and Influences

Quantity supplied is the amount producers want to sell of a good or service in a given time period.

• It is a flow (so much per unit of time).

• Not necessarily the same as the amount actually sold (quantity sold).

Key Points:

• If producing a product becomes more profitable → producers supply more.

• Influenced by:

  1. Product's own price

  2. Prices of inputs

  3. Technology

  4. Government taxes/subsidies

  5. Prices of other products

  6. Significant changes in weather

  7. Number of suppliers

• Ceteris paribus: Analyze the effect of one variable at a time, holding others constant.

Quantity Supplied and Price

Law of Supply

• Relationship: Price ↑ → Quantity Supplied ↑; Price ↓ → Quantity Supplied ↓

• This is a positive (direct) relationship, ceteris paribus.

• Reason: Higher prices make production more profitable, so firms supply more. Lower prices make production less profitable, so firms supply less.

Supply Schedules and Supply Curves

Graphical Representation

• Supply schedule: Table showing quantity supplied at different prices, ceteris paribus.

• Supply curve: Graph of the supply schedule; upward-sloping because higher price = higher quantity supplied.

• Point vs. curve: A single point = quantity supplied at a given price. The curve = entire relationship between price and quantity supplied.

Shifts in the Supply Curve

Main Causes

• Prices of Inputs: Higher input prices → supply ↓ (shift left). Lower input prices → supply ↑ (shift right).

• Technology: Improvements reduce costs → supply ↑ (shift right).

• Government Taxes/Subsidies: Taxes → supply ↓; subsidies → supply ↑.

• Prices of Other Products: Substitutes in production: Price of other product ↑ → supply of this product ↓. Complements in production: Price of complementary product ↑ → supply of this product ↑.

• Significant Changes in Weather: Natural events can ↑ or ↓ supply (common in agriculture and some industries).

• Number of Suppliers: More firms → supply ↑; fewer firms → supply ↓.

Movements Along vs. Shifts of the Supply Curve: Change in quantity supplied = movement along supply curve due to a price change. Change in supply = shift of supply curve due to a non-price factor.

Formulas

Opportunity Cost

• $\text{Opportunity Cost of Good A} = \frac{\text{Units of Good B given up}}{\text{Units of Good A gained}}$

Law of Demand

• $Q_d = f(P)$, where $Q_d$ is quantity demanded and $P$ is price.

Law of Supply

• $Q_s = f(P)$, where $Q_s$ is quantity supplied and $P$ is price.