Microeconomics Exam 1 Cheat Sheet

Microeconomics Exam 1 ● Economics is the study of incentives - Ch 1 ● Positive and Normative Statements - Ch 21 ○ P=Testable and can be disproven ○ N=Valuable judgement (should) ● Power of Trade and Comparative Advantage - Ch 2 ○ Absolute advantage - better at producing over someone; determines wages, who can do it better ○ Comparative advantage - opportunity cost; trade ■ If one country has comparative advantage in one good, then the other country has the comparative advantage in other good ■ Nations must export goods with comparative advantage ■ Arbitrage: buy low, sell high ■ Specialization: allows for much more knowledge ● Supply and Demand - Ch 3 ○ Revenue = (P)(Q) ○ Demand Curve (Q=f(P)) ■ Reflects behavior of consumers in market ■ Downward sloping \ ■ Demand curve captures value ■ Consumer surplus: area above the price that consumers have to pay and below the demand curve (Area= ½(b)(h)) ■ Change in quantity demanded: change in price of good, movement along demand curve (change in price) ■ Change in demand: entire demand curve moves, driven by other factors: ● Income ○ Normal good: if increase in income, then the demand curve shifts to the right or up (an increase in demand) ○ Inferior good: if increase in income, then the demand curve falls because the quantity demanded falls ● Population ● Expectation ○ Expectation on Demand: buyers will postpone purchases if they think prices will fall and will accelerate their purchases if they think prices will rise ● Taste ● Price of complement and substitute ○ Complements: if Qx falls when Py increases (and vice versa), then X and Y are complements ○ Substitutes: if Qx increases when Py increases (and vice versa), then X and Y are substitutes ○ Supply Curve (Q=f(P)) ■ Reflects behavior of producers in market ■ Upward sloping / ■ Supply curve captures cost (measures marginal cost of producing each unit) ■ Producer surplus: area below the price the seller receives (price) and above the supply curve ● Subtract amounts from market price - .5 BH + rectangle ■ Quantity supplied: amount of a good that sellers will produce and bring to market at any given price ● Higher price, greater quantity supplied ■ Total sales or expenditures (revenue) = PS (producer surplus) + A ■ Change in quantity supplied: change of price, moving along supply curve ■ Change in supply: ● Technological innovations ○ Increase in supply means curve moves up and right ● Taxes ○ Increase in taxes; decrease in supply (curve shifts up (left)) ○ Increase in supply (curve shifts down (right)) Expectations ● ○ High prices expected next week (curve shifts up (left)) ● Entry/exit of producers ○ New producers enter the market (curve shifts out and up (right)) ● Change in opportunity cost ● Market Equilibrium - Ch 4 ○ Equilibrium: No tendency to change unless an outside force acts on system (“Equi” = equal, “Libra” = balance) ■ If the system is in equilibrium, then there is no tendency for P or Q to change. ■ If the system is not in equilibrium, there is a tendency for P and Q to move toward equilibrium values. ○ Equilibrium Price: (P*) ○ Equilibrium Quantity: (Q*) ■ Equilibrium is where supply and demand meet ○ Excess supply or surplus: sellers want to sell more than buyers want to buy QS>QD ○ Excess demand or shortage: buyers want to buy more than sellers want to sell QSQ : Q is over-produced and consumed (value of wasted resources) ○ Q 1 Demand is Elastic - P & R move opposite ○ e.g. Ed = -2.0 ● |Ed | < 1 Demand is Inelastic - P & R move together ○ e. g. Ed = -0.2 ● |Ed | = 1 Demand is Unit Elastic - P moves, but R stays the same ■ Revenues: ● If you lower price and demand is elastic, then revenues rise ● If you lower price and demand is inelastic, then revenues fall ■ Determinants of Elasticity of Demand: E d = - (% Δ Q)/(% ΔP) Less Elastic Fewer substitutes (gas, Mizzou, etc.) ○ More elastic More substitutes (cereal, soda, etc.) Necessities Luxuries Short run (less time to adjust) Long run (more time to adjust--buy bikes instead of deal w/ gas price) Small part of budget (salt) & Category of Product (food) Large part (house) of budget & Specific Brands (lettuce, honeycrisps) Elasticity of Supply: E S = + (% Δ Q)/(% ΔP) ■ Determinants of Elasticity of Supply Less Elastic Difficult to increase production at constant unit cost ○ ○ ○ ○ More elastic Easy to increase production at constant unit cost Global supply (no Adidas in USA? Hard to find/less subs) Local supply (no Adidas in Chicago? Easy to find/more subs) Short run (less time) Long run (more time) Large share of market for inputs Small share of market for inputs Income Elasticity of Demand: (% Δ Q)/(% ΔI) ; I is income ■ Normal good: positive number elasticity ; inferior good: negative number elasticity Cross Price Elasticity: (% Δ QX)/(% ΔPY) ; x and y are two different goods ■ Complements: negative number elasticity ; substitutes: positive number elasticity Perfectly inelastic S or D → E = 0; Perfectly elastic S or D è E → ∞ (infinity) -- Supply curve is vertical if perfectly elastic Using Elasticities for Prediction: ■ % Δ P from shift in demand = % Δ D / (|ED|+ ES ) ■ % Δ P from shift in supply = - % Δ S / (|ED|+ ES )