PV = FV

           (1+i)²

N(Q) = B(Q) - C(Q)

MB(Q) = ∆B/∆Q

MC(Q) = ∆C/∆Q

Microeconomics is concerned with decision making of individuals, families, groups, firms and government agencies.

Macroeconomics is concerned with the movement of the economy as a whole - inflation rates, unemployment levels, money supply and interest rates.

what to produce

how to produce it

for whom to produce 

State of an economy where no one can be made better off without making someone worse off

Depends on Productive Efficiency, Allocative Efficiency, Distributional Efficiency

Graph that shows all the combinations of goods and svcs that can be produced if all of society's or a company's or farmer's or individual's resources are used efficiently. 

move to the PPF

move to right point on the PPF

shift PPF out

Comparative Advantage - the ability to produce some good or svc at a lower opportunity cost than other producers

Competitive Advantage - ability to produce some good or svc at a lower absolute cost than other producers 

Completeness (consumers know their preferences)

More is better

Transitivity (If a>b, and b>c, then a>c)

Diminishing marginal rates of substitution

Producers - labor and capital

Consumers - budget 

What is the slope of:

Budget Line 

Indifference Curve

Budget is Px/Py

Indifference Curve is MUx/MUy

Consumer purchases at point where MUx/MUy = Px/Py

change in quantity demanded caused by change in price and is represented by movement along demand curve

change in demand is caused by change in variables other than price and is represented by movement of entire demand curve 

Income, price of related goods, advertising and consumer tastes, population, consumer expectations.

normal good - demand for good increases when income increases and vice versa

inferior good - demand for good decreases when income increases and vice versa

Substitute - goods for which increase in price of one good leads to increase in demand of other good. 

Complementary - goods for which increase in price of one good leads to decrease in demand of other good. 

Differentiate between informative advertising and persuasive advertising

informative - provides info to consumers about existence or quality of a product

persuasive - alters underlying tastes of consumers 

describes how much of a good will be purchased at alternative prices of that good and related goods, alternative income levels, and alternative values of other variables affecting demand

Q^d_x= f(P_x, P_y, M,H)

linear demand function

linear representation of demand function

Q^d_x= α₀+ α_xP_x+ α_yP_y+ α_MM + α_HH

if α_y>0, y is a substitute

if α_y<0, y is a complement

If α_M>0, x is a normal good

If α_M<0, x is an inferior good

Value consumers get from a good but do not have to pay for.

Area above price but below demand curve.

Change in quantity supplied is caused by price and reflects movement along supply curve.

Change in supply is caused by non price variable changes and reflect movement of the supply curve. 

Input prices

Technology/Govt Regulations 

Number of Firms

Substitutes in Production

Taxes

Producer Expectations 

describes how much of a good will be produced at alternative prices of that good, all other variables constant.

Q^s_x= f(P_x,P_r,W,H)

Amount a producer receives above the amount necessary to induce them to produce a good. 

Area above supply curve and below price.

Dollar amount paid to afirm under a price ceiling plus the nonpecuniary price. 

Excise tax shifts supply curve up (to the L)

Ad Valorem tax shifts supply curve counter clockwise - making curve steeper.

Prestige goods

Goods with unknown quality

Current price used as signal for future prices

P = a+bQ

(a is Y intercept, and b is the slope)

Responsivness of one variable to change in another.  Refers to price unless specified.

E = %∆Q/%∆P

E>1 = ELASTIC

E<1 = INELASTIC

E = 1 GOOD IS UNIT ELASTIC

What is effect of price on revenue of elastic good.

Unit Elastic Good.

Inelastic Good.

1) Revenues fall

2) No effect 

3) Revenues rise 

note - total revenues are maximized where demand is unitary elastic

Signaling Function

Rationing Function

doesn't include externalities

doesn't take into account distribution of income

short term thinking with resources 

valuation by future generations

Differentiate:

Own Price Elasticity

Income Elasticity

Cross Price Elasticity

Supply Elasticity

1) Responsiveness of quantity demanded to price change.

2)" to income change

3) " to change in price of another good

4) " quantity produced to change in price

Price elasticity is infinite in absolute value.  If price of good is raised even slightly, none of good is purchased. 

Supplier is a price taker.

Demand curve is horizontal.

Available substitutes

Time (inelastic in short term, more elastic in long term)

Expenditure Share (Goods that make up small part of consumers' budgets more inelastic than those that make up large part of budget)

MR = P [(1+E)/E]

MR+ - demand elastic

MR 0 - unit elastic

MR -  - inelastic

E_QP= %∆Q^d_x/%∆P_y

E_QM= %∆Q^d_x/ %∆M

Short run elasticity measures nearly immediate responsiveness to price change.

Long run elasticity measures response to a price change after economic actors have had time to make adjustments.

Elasticity of demand - higher oil prices, people switch to fuel efficient cars.

Elasticity of supply - trans fat cookies - cookie makers elminated ingredient from cookies.

Bundles of goods consumer can afford

P_xX + P_yY ≤M

Bundles of goods that exhaust a consumer's income.

P_xX + P_yY =M 

Properties of Budget Line:  Slope is -P_x/P_y

Horizontal Intercept = M/P_x

Vertical Intercept = M/P_y

Rate at which one good may be traded for another in the market. 

Slope of the budget line ( -P_x/P_y)

Equilibrium Consumption Bundle Is affordable Bundle that yields greatest satisfaction to the consumer.

For consumer equilibrium, marginal rate of substitution (MRS) = P_x/P_y