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micro econ 1000.pdf

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York University
ECON 1000
Sadia Mariam Malik

Microeconomics Study Notes Chapter 2 Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices outputs and income distributions in markets through supply and demandOpportunity cost is the value of a product forgone to produce or obtain another productProduction possibility frontier PPFboundary between unattainable and attainable production possibilitiesshows maximum combinations of outputs given resources and technologyA bowed outward concave PPF has nonhomogeneous resources increasing opportunity cost opportunity cost of goodas quantity producedopportunity cost on PPF of additional X is amount Y forgoneno opportunity cost moving from point inside PPF to point on PPF A linear straight line PPF has homogeneous resources and constant opportunity costs Marginal Cost MC o opportunity cost of producing 1 more unit o increasing marginal costMarginal Benefit MB o benefit from consuming 1 more unit o decreasing marginal benefitAllocative efficiency efficient use of resources where MCMB Preferences and Marginal Benefit o Preferences are a description of a persons likes and dislikes o To describe preferences economists use the concepts of marginal benefit and the marginal benefit curve o The marginal benefit of a good or service is the benefit received from consuming one more unit of it o We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or serviceEfficient Use of Resources o When we cannot produce more of any one good without giving up some other good we have achieved production efficiency and we are producing at a point on the PPF o When we cannot produce more of any one good without giving up some other good that we value more highly we have achieved allocative efficiency and we are producing at the point on the PPF that we prefer above all other points The expansion of production possibilitiesand increase in the standard of livingis called economic growthTwo key factors influence economic growth o Technological change the development of new goods and of better ways of producing goods and services o Capital accumulation the growth of capital resources which includes human capitalThe Cost of Economic Growth o To use resources in research and development and to produce new capital we must decrease our production of consumption goods and services Gains from tradeProductionfrom specialization according to comparative advantage o comparative advantage can produce good at lower opportunity cost o specialized production according to comparative advantage and exchangegains from trade o specialization and exchange allow consumption at points outside PPFo A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else o Absolute advantage When one person is more productive than another person in several or even all activitiesTo demonstrate gains from trade compare o selfsufficiencyeach individual consumes only whatshe produces o specialization and tradeeach individual specializes in producing comparative advantage goodtrades for other goodsSpecialization and trade o each individual can consumeat point outside PPFo solution to paradox thatindividually we would each be poorbut collectively we are welloffMutual advantage to trade between countries o Learningbydoing occurs when a person or nation specializes and by repeatedly producing a particular good or service becomes more productive in that activity and lowers its opportunity cost of producing that good over time Dynamic comparative advantage occurs when a person or nation gains a comparative advantage from learningbydoingChapter 3 Demand and Supply A market is any arrangement that enables buyers and sellers to get information and do business with each otherA competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the priceThe quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period and at a particular price o Market Demand Curve o aggregation of all individual demands o relation between pricePand quantity demandedQ DThe law of demand states o Other things remaining the same the higher the price of a good the smaller is the quantity demanded The law of demand results fromoSubstitution effect oIncome effect o Substitution effectwhen the relative price opportunity cost of a good or service rises people seek substitutes for it so the quantity demanded decreases o Income effectwhen the price of a good or service rises relative to income people cannot afford all the things they previously bought so the quantity demanded decreasesWhen any factor that influences buying plans other than the price of the good changes there is a change in demand for that good Six mainfactors that change demand are1 The prices of related goods 2 Expected future prices3 Income4 Expected future income5 Population 6 PreferencesFor increase in
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