General Economic Analysis:

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 Costs:

Terms:
MRP = change in TR/change in resource quantity
MRP of labor = MR (MPlabor) = P (MPlabor)
MRC = change in total resource cost/change in resource quantity = wage
MRP = marginal benefit of resource hiring
MRC = marginal benefit of resource hiring
If MB > MC, do more hiring. If MB < MC, do less hiring. If MB = MC, stop.

Optimum Combination of Resources Example:

Profit Maximization Rule: MRPlabor/Plabor = MRPcapial/Pcapical = 1
Least Cost: MPlabor/Plabor = MPcapital/Pcapital
Elasticity: % change in quantity supplied / % change in price
Inelastic: % quantity supplied does not respond strongly to price changes (E < 1)
Elastic: % quantity supplied responds strongly to price changes (E > 1)
Perfectly Inelastic: % quantity supplied does not respond at all (E = 0; heroin or insulin)
Perfectly Elastic: % quantity supplied responds infinitely (E = infinite)
Unit Elastic: % quantity supplied changes by same % as price (E = 1)
Determinants of Elasticity: # of substitutes (more the substitutes, more elastic), % income, time

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.

Utility Maximization: MUx/Px = MUy/Py

Law Of Diminishing Returns: Short Run Relationships:
- As successive units of variable resources are added to the fixed resources
beyond a certain point, marginal product will decline.
- If more workers are added, output will eventually rise by smaller amounts.
Market Structures:

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)