Scarcity: happens when a good or service is not available; if a certain good or service is scarce
but it is wanted, the demand is high because the supply is low.
Marginal Analysis: how costs and benefits affect decisions in the economy
Specialization: process of limiting focus and narrowing in on one’s area of knowledge or skill;
this increases efficiency, saves time, increases accuracy of production, and reduces cost of
production but also creates independence, monopoly, and may cause unemployment.
Comparative Advantage Example: comparative advantage is when a producer would do better
if it were to specialize in a certain good or service over another producer (absolute advantage is
the ability of a producer to produce more of a good or service in the least amount of time).
Allocative Efficiency: production of goods and services most wanted by society (P = MC)
Productive Efficiency: productive of goods and services in least costly way (P = min ATC)
Consumer and Producer Surplus and Shortage:
Consumer Surplus/Shortage: buyer’s willingness to pay minus the amount the buyer actually has
to pay. Consumer surplus/shortage measures the benefit to the buyer by participating in a market.
Consumer and Producer Surplus and Shortage Example:
Changes in Demand/Supply vs. Changes in Quantity Demanded/Quantity Supplied:
Marginal Rules: If MB > MC, do more. If MB < MC, do less. If MB = MC, stop.
Profit Maximizing: employer should hire labor where MRPlabor = MRC = wage
Short Run: plant capacity will be FIXED, but variable costs (labor, materials) can be added to
increase production if price increases. Supply will mostly be inelastic.
Long Run: plant capacity is VARIABLE; period long enough to adjust plant capacity and
variable resources. Price rises bring large output increases — market is elastic in the long run.
Law of Diminishing Marginal Utility: utility is the want-satisfying power. Total utility is the
total amount of utility a person derives from consuming a certain quantity. Marginal utility is the
EXTRA satisfaction a person derives from consuming some quantity.
Perfect Competition:
Monopoly:
Monopolistic Competition:
Oligopoly:
Externalities:
Positive externality - (good) too little supply
Negative externality - (bad) too much supply
Correct positive through subsidies
Correct negative through taxes or legislation
Taxes:
Progressive - income increases, tax rate increases (ex. Income tax)
Regressive - income increases, tax rate decreases (ex. Sales tax but no real regressive tax)
Proportional - constant tax rate regardless of income (ex. Property tax)