Microeconomics Study guide (Definitions)

Define Economics:
The studying of the use of scarce ressources to satisfy unlimited wants.

What are the 3 factors of production?

Land(T), Labour(L), Capital(K)

What are factors of production used to produce?

Goods and Services

What is the relationship between scarcity and choice?

It is not possible to satisfy unlimited wants due to scarcity of ressources,
which implies the need for choice.

Define opportunity cost:

The value of the next best alternative that is forgone when one alternative is
chosen. It is the value of what we are missing out when we chose one option
over another.
Example: I have 10$ that I can use to buy a movie ticket (which I want to do)
or buying a book (which I want to do but not as much as watching a movie).
If I chose to watch a movie then the opportunity cost is that I could have
bought a book with my 10$.

How can you illustrate scarcity, choice and opportunity cost?

Using a production possibility boundary

Define a PPB?
Graphing 1 alternative vs another, the area under the slope is attainable but
inefficient because you are not making use of all the resources you have
available at that point. The area over the slope is unattainable since we do
not have the resources to produce above. The slope is the production
possibility boundary where both alternatives are obtainable at their
maximum value at a certain point. However, choosing 1 alternative always
occurs at the cost of another alternative.
On the PPB Curve: Attainable and efficient.
Below the PPB Curve: Attainable but inefficient.
Above the PPB Curve: Unattainable with current resources.
Slope of the PPB: Shows the trade-offs and opportunity costs between the
alternatives.
Define resource allocation:
Determines the quantities of goods that are produced and how the factors of
production are allocated for production.

Define a Self Organizing market economy:

It is a market economy resulting from people acting independently/ driven by
self interest; the collective outcome is coordinated. Supply and demand
drives market economy.
Ex: In the case of smartphones, companies who produce them engage in
competitive marketing without an external body dictating pricing and
production. Higher costs drive technological innovation, and lower costs
involve cutting costs and compromising on quality.

What are the benefits of a self organizing market?

Efficiency: Resources are directed where they are needed
Responsiveness: The market adjusts to changes in consumer preferences
and technological advancements.
Innovation: Continuous competition drives innovation and improvement of
products of services. Ex: What could I do to make my products stand out?

Describe the invisible hand:

Efficient order that emerges spontaneously out of the many independent
decisions made by those who produce, sell and buy goods and services.

What are the disadvantages of a self organizing market?

Self organizing market does not consider the following:
Market failure: Some services like public infrastructure and services is
accessible to all and the use of them by one person does not reduce its
availability to another group. Also, costs or benefits to a third party is not
accounted for in the market, like pollution cased by a factory.
Inequality: A disparity in resources can cause some companies to have a
bigger / unfair advantage. Also, there may be a disparity in accessibility of
goods (disadvantaged, disabled, marginalized)
Short term focus: The market is profit driven and highly volatile due to
shifts in consumer wants which may encourage companies to cut corners
and maximize profits at the detriment of people and the environment.

What happens to a PPB during economic/technological growth?

The PPB curve shifts outward and what used to be previously unattainable
may become attainable. What used to be on the previous PPB is now
inefficient.

What is the role of the government in an economy?

They are mediators that correct for misallocation of resources, addressing
fairness of distribution of consumption, provide solutions to reduce idleness
of resources and promote economic growth. TLDR: Correct market failures,
provide public goods and offset the effects of externalities.

Who are the decision makers in an economy?

Producers, consumers and government

What are the two characteristics of production?

Specialization of labour and division of labour

What is the role of money in an economy?

Reduces barter and facilitates trade

What are the two major causes of globalization?

Reduction of transportation costs and revolution in information technology

What are the 3 pure types of economic systems?

Traditional, command and free market

Short-Run and Long-Run Supply Curve for Housing

Short-Run Supply Curve:
 Inelastic Supply: In the short run, the supply of rental housing is
quite inelastic. This means that the quantity of rental housing available
does not change much even if rent prices are controlled or altered.
 Limited Response: The immediate effects of rent controls are
minimal changes in the quantity of apartments. Some conversions to
condominiums might occur, but overall, the supply remains relatively
fixed.
 Graph Representation: The short-run supply curve (SS
) is depicted as a vertical line, indicating that the quantity supplied (Q1
 ) remains constant despite changes in rent prices.
Long-Run Supply Curve:
 Elastic Supply: Over the long run, the supply of rental housing
becomes highly elastic. This means that the quantity of rental housing
 can change significantly in response to rent controls or other market
conditions.
 Significant Changes: If rent controls reduce the expected rate of
return for landlords, new construction will halt, and existing buildings
may be converted to other uses or left to deteriorate. This leads to a
decrease in the quantity of rental housing available.
 Graph Representation: The long-run supply curve (SL
) is more horizontal, indicating that the quantity supplied can vary greatly
over time. The long-run equilibrium shows a larger housing shortage (Q3Q2)
compared to the short-run shortage (Q1Q2
 ).
Key Points:
1. Short-Run: Inelastic supply, minimal changes in quantity.
2. Long-Run: Elastic supply, significant changes in quantity.
3. Impact of Rent Controls: Short-run effects are moderate, but long-
run effects can lead to a severe housing shortage.
Understanding these differences helps in analyzing the immediate and future
impacts of policies like rent controls on the housing market.

Microeconomics Defined
Microeconomics is the branch of economics that focuses on the behavior and
decision-making of individual economic agents, such as households, firms, and
markets. It studies how these agents allocate their resources and respond to
changes in prices, incomes, and other factors.

Key Components of Microeconomics:

1. Allocation of Resources:
o Microeconomics examines how scarce resources (like labor, capital,
and raw materials) are distributed among various uses and needs. It
looks at how individuals and businesses decide what to produce, how
much to produce, and for whom to produce.
2. Price System:
o The price system is a mechanism where prices serve as signals to
allocate resources. Microeconomics studies how prices are determined
in different markets and how they influence supply and demand. Prices
help in balancing the supply of and demand for goods and services.
3. Causes and Consequences:
o Causes: Microeconomics analyzes the factors that influence the
allocation of resources, including consumer preferences, production
costs, and market competition.
o Consequences: It also explores the outcomes of these decisions, such
as changes in market equilibrium, consumer welfare, and producer
profits.

Examples of Microeconomic Analysis:

1. Consumer Behavior:
o How do individuals make decisions about what to buy and how much
to spend based on their preferences and budget constraints?
2. Firm Behavior:
o How do businesses decide on pricing, production levels, and the
allocation of resources to maximize their profits?
3. Market Structures:
o How do different types of markets (perfect competition, monopoly,
oligopoly) affect the pricing and availability of goods and services?
4. Impact of Policy:
o How do government policies, such as taxes or subsidies, influence the
behavior of consumers and producers?

Summary

In essence, microeconomics is about understanding the mechanisms behind how

individual decisions are made and how these decisions interact within the market to
determine prices, resource allocation, and overall economic outcomes. It provides
insights into the functioning of markets and helps to explain how different factors
influence economic behavior and resource distribution.
Macroeconomics Defined

Macroeconomics is the branch of economics that studies the behavior,

performance, and structure of an economy as a whole. It focuses on understanding
and analyzing economic aggregates and overall economic phenomena rather than
individual markets or sectors.
Key Components of Macroeconomics:

Economic Aggregates:
 Total Output: This includes metrics like Gross Domestic Product (GDP),
which measures the total value of all goods and services produced within a
country over a specific period.
 Employment: This looks at the overall employment levels, unemployment
rates, and labor market dynamics. It studies how many people are employed
versus those who are actively seeking work.
 Economic Growth: This refers to the increase in a country’s output over
time, typically measured by changes in GDP. Economic growth is a key
indicator of economic health and living standards.
Key Objectives:
 Stability: Macroeconomics aims to understand and achieve economic
stability by controlling inflation and minimizing fluctuations in economic
activity.
 Growth: It seeks to promote long-term economic growth to improve living
standards and increase the economy’s productive capacity.
 Full Employment: The goal is to achieve a level of employment where all
who are willing and able to work can find jobs, with minimal involuntary
unemployment.
o Equilibrium: Macroeconomics examines how various factors such as
fiscal policy, monetary policy, and international trade interact to
maintain economic equilibrium.
Areas of Study in Macroeconomics:
1. National Income Accounting:
o Methods for measuring and analyzing national income, GDP, and other
economic indicators to assess the health of an economy.
2. Monetary Policy:
o The role of central banks (e.g., the Federal Reserve) in managing the
money supply, interest rates, and overall monetary conditions to
influence economic activity.
3. Fiscal Policy:
o The use of government spending and taxation to influence economic
growth, stabilize the economy, and achieve public policy goals.
4. Inflation and Deflation:
 o Analyzing the causes and consequences of rising prices (inflation) or
falling prices (deflation) and their impact on the economy.
5. International Trade and Finance:
o Studying how international trade, exchange rates, and global financial
flows affect domestic economies.
Summary
Macroeconomics focuses on the broader economic picture, examining aggregate
indicators such as total output, employment, and growth to understand and address
national and global economic issues. It involves analyzing the interactions between
different sectors and the impact of government policies on the economy as a whole.