Basic Microeconomics Concepts 1

What is Economics?

• Economics is the study of Efficiency.

Scarcity

• A limited set of resources that must meet an unlimited set of wants and needs.

Opportunity Costs

• The loss of potential gain from other alternatives when one alternative is chosen.

Economic Efficiency

• Minimizing and inefficiency while making choices.

These are the most important values in the study of Economics.

3 Types of Economic Systems

• Traditional Economic Systems: The economic roles that people fill are the same roles that their ancestors filled.
• Command Economic Systems: The Government is the primary decision-maker.
• Market Economic Systems: The economic systems where buyers & sellers, and demand & supply exist.

Production Possibilities Curves (PPC)

• The PPC is always bowed outward.
• The PPC shows us what combinations of goods we can produce when we are using our resources efficiently.

Production Possibilities Curves

• Point B, C, D, and E: Represent the most efficient choices.
• Point G: Represents an inefficient choice.
• Point H: Represents an unattainable choice.

To reach either Point H or G, there should be some changes in supply.

Here are 5 ways to make a change in supply :

1. Cost of production (Ex. Cost of materials).
2. Technological changes (Ex. Development in technology).
3. A number of sellers (Ex. If the number of sellers increased, there would be more suppliers exist).
4. Future expectations about prices.
5. Goods using the same resources.

Comparative Advantage

• The concept that in international trade, even if a country’s goods absolutely fall behind to those of the other country, they can maintain a relative advantage in light of the opportunity cost of production.

Demand

Demand Curve

Demand

• Willingness to buy

Demand Curves

• Always Downward

The factor that shifts the Market Demand Curve:

1. A change in income (*Income Effect)
2. A change in tastes or preferences
3. A change in the price of other goods (*Complements and Substitutes)
4. A change in the expected future price of a good
5. A change in consumer information

Income Effect

• The income effect is where a shift in the demand curve happens as the consumer’s income changes.

Normal Goods Vs. Inferior Goods

• A normal good is a good you consume more and more as your income growth
• An inferior good is a good you consume less as your income growth (Relative relationships between Income and Consume)

Substitution Effect

• The substitution effect is where a shift in the demand curve happens as prices of other goods change.

Complement Vs. Substitute

• Complements are goods that are used together; when a change in demand happens to one good, then other will goes the same.
• Substitutes are goods that can be replaced by other goods. It has an inverse relationship to other goods.

Supply

Supply Curve

Supply

• Willingness to sell

Supply Curves

• Always upward

The factor that shifts the Market Supply Curve

1. Cost of production (Ex. Cost of materials).
2. Technological changes (Ex. Development in technology).
3. A number of sellers (Ex. If the number of sellers increased, there would be more suppliers exist).
4. Future expectations about prices.
5. Goods using the same resources.

Law of Increasing Costs

The law of increasing costs indicates that the opportunity cost of producing a good rise as more the good is being produced. This results because of the limited amount of resources. As we produce more goods of A, resources for product B will not be very sufficient; thus, increasing the opportunity cost. Thus, in the end, as we produce more goods, the opportunity cost of producing it will rise.

Market Equilibrium

Market Equilibrium Graph (Photo by Economics Help)

• Market Equilibrium is the price point where both buyers and sellers perfectly satisfied with the price of a good.