BASIC MICROECONOMICS
 Money
Production possibilities Frontier –Boundary
between those combinations of goods and
services that can be produced and that cannot.
Opportunity Cost- the loss of potential gain
from other alternatives when one alternative is
chosen.
Marginal Cost-cost added by producing one
additional unit of a product or service.
Preferences- Person’s like and dislikes
Marginal Benefit- Benefit received from
consuming one more unit of it.
Marginal benefit curve- Relationship between
the marginal Benefit from a good and the
quantity of the good consumed.
Allocative efficiency- When we cannot produce
more or any good without giving up some other
good that we value more highly.
Specialization- Concentrating on the production
of only one good or few goods.
Comparative advantage- capacity of a person
in an activity if he can perform the activity at a
lower opportunity cost
Dynamic Comparative Advantage-comparative
advantage that an entity or country possesses
as a result of having specialized in a particular
activity, as a result by learning by doing having
become the producer with the lowest
opportunity cost.
Learning by doing-repeatedly producing a
particular good or services where people
become more productive.
Four Complementary Social Institutions
 Firms
 Markets
 Property Rights
Capital Accumulation-Growth of capital
resources including human capital.
Economic Growth- Increase in the standard of
living.
Economic Coordination
 Firms Coordinates a large amount of
economic activity but there’s a limit to
efficient size of firm
 Markets coordinates the economic
choices of people and firms
 Money makes trading in markets more
efficient
Characteristics of Using Resources Efficiently
 Marginal Cost of A good Is the
opportunity cost of producing one more
unit.
 Marginal Benefit from a good is the
maximum amount of another good
that a person is willing to forgo to
obtain more of the first good.
 Marginal benefit of a good decrease as
the amount of good available increases.
 Resources are used efficiently when the
marginal cost of each good is equal to
its marginal benefit.
Gains from trade- are the net benefits to
economic agents from being allowed an
increase in voluntary trading with each other.
Trade-off involves a sacrifice that must be made to
get a certain product or experience.
The questions of TRADE OFF
 What tradeoffs
 How Tradeoffs
 For whom Tradeoffs
ELASTICITY
Elasticity- is a measure of the responsiveness of
the quantity demanded of a good to a change in
its price, other things remaining the same.
Price Elasticity of demand- is a units free
measure of responsiveness of the quantity
demanded of a good to a change in its price
when all other influences on buyers plans
remain the same
PED= Percentage change in quantity demanded
Percentage change in price
Perfectly Inelastic Demand-When the quantity
demanded remains constant when the price
changes, then the price elasticity of demand is
zero.
Unit Elastic Demand- If the percentage change
in the quantity demanded equals the
percentage change in price, then the price
elasticity equals 1.
Perfect Elastic Demand- If the quantity changes
by an infinitely large percentage in response to
a tiny price change then the price elasticity of
demand is infinity.
Cross Elasticity Of Demand- is a measure of
responsiveness of the demand for a good to a
change in the price of substitute or
complement, other things remaining the same.
Income Elasticity of Demand-measure of the
responsiveness of the demand for a good or
service to a change in income, other things
remain the same
Elasticity of Supply-measures the
responsiveness of the quantity supplied to a
change in price of a good when all other
influences on selling plans remains the same.
EOS- Percentage change in quantity supplied
Percentage change in price
Factors that influence the Elasticity of Supply
 Resource Substitution Possibilities
 Time Frame for the supply decision
Time frames of Supply
 Momentary Supply
 Long Run supply
 Short Run Supply
Characteristics of Price Elasticity of Demand
 The larger the magnitude of the price
elasticity of demand the greater the
responsiveness of the quantity
demanded to a given change in price.
 Price elasticity of demand depends on
how easily one good serves as substitute
for another, the proportion of income
spent on the good and the length of time
elapsed since the price change
 If demand is elastic a decrease in price
leads to an increase in total revenue.
Characteristics of Elasticity of Supply
 Elasticity of supply is usually positive
and ranges between zero and infinity
 Elasticity of supply measures the
responsiveness of the quantity supplied
of a good to change in its price
Total Revenue depends on the elasticity of
demand in the following ways
 If demand is elastic a 1 percent price
cut increases the quantity sold by more
than 1 percent total revenue increases
 If demand is inelastic a 1 percent price
cut increases the quantity sold by less
than 1 percent and total revenue
decreases.
 If unit elastic a 1 percent price cut
increases the quantity sold by 1 percent
and so total revenue does not change