Microeconomics Unit 1 – Basic Concepts

Key Concepts and Questions:

* The existence of limited resources along with unlimited wants results in the need to make choices.

* Opportunity costs and trade-offs can be graphically illustrated by the production possibilities curve.

* All economic systems have to deal with three fundamental questions: what goods and services to produce, how to produce them, and for whom to produce them.

* How and why do specialization and exchange increase total output in a given economy.

* Understanding the forces that determine supply and demand.

* Distinguishing between a movement along a curve and the shift of a curve.

* How are equilibrium price and quantity determined?

* Government policies like: price floors and ceilings, excise taxes, tariffs and quotas distort markets.

* How do consumers make choices?

* How do the income and substitution effects influence the shape of the demand curve?

* Understand the characteristics that determine price elasticity of demand and apply the concept of elasticity to real-world problems.

Terms and Topics:

Ø Allocation distribution

Ø Production specialization

Ø Division of labor

Ø Scarcity

Ø Central economic problem

Ø Production possibilities curve (PPC)

Ø Opportunity cost

Ø Utility

Ø Ceteris paribus

Ø Inputs

Ø Outputs

Ø Factors of production – land, labor, capital, entrepreneurial ability

Ø Economic efficiency

Ø Full employment

Ø Full output

Ø Allocative efficiency

Ø Productive efficiency

Ø Underemployment

Ø Unemployment

Ø Demand schedule

Ø Supply schedule

Ø Supply curve (shape)

Ø Demand curve (shape)

Terms and Topics(continued):

Ø Change in demand

- # of buyers

- Consumer tastes and preferences

- Price of related goods in consumption (substitutes and complements)

- Consumer income

- Expected future demand

- (Inferior vs. superior goods)

Ø Change in supply

- # of sellers

- Costs of production

- Price of related goods in production (substitutes and complements)

- Technology, resource cost, etc.

- Taxes, subsidies

- Expected future prices

Ø Market economy

Ø Command economy

Ø Factor payments

Ø Market period versus short run versus long run

Ø Shortage

Ø Surplus

Ø Equilibrium/disequilibrium

Ø Fixed factor of production

Ø Variable factor of production

Ø Price elasticity of demand

Ø Determinants of elasticity

Ø Elastic demand

Ø Inelastic demand

Ø Unitary elastic demand

Ø Revenue test formula for Ed

Ø Elasticity on a graph

Ø Marginal revenue

Ø Income elasticity of demand

Ø Price elasticity of supply

Ø Standard of living

Ø Adam Smith - Wealth of Nations, "invisible hand", laissez-faire

Ø Karl Marx

Ø John Maynard Keynes

Ø Price controls

Ø Price floor

Ø Price ceiling

Ø Minimum wage

Ø Rent control

Ø Subsidy

Ø Law of diminishing marginal utility