Examination questions for discipline Microeconomics

1. Definition of Microeconomics

Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments.

2. Two Big Economic Questions

How do choices wind up determining what, how, and for whom goods and services are produced?

Goods and services are the objects that people value and produce to satisfy human wants. Goods and services are produced using the productive resources called factors of production. These are land (the “gifts of nature”, natural resources), labor (the work time and work effort people devote to production), capital (the tools, instruments, machines, buildings, and other constructions now used to produce goods and services), and entrepreneurship (the human resource that organizes labor, land, and capital).

3. Economic Way of Thinking

The economic way of thinking places scarcity and its implication, choice, at center stage. There are 6 key ideas:

1. A choice is a trade-off

The answers to the “What goods and services will be produced?”, “How will goods and services get produced?”, and “For whom are goods and services produced?” all involve tradeoffs. “What?”-Tradeoffs arise when people choose how to spend their incomes, when governments choose how to spend their tax revenues, and when businesses choose what to produce. “How?”-Tradeoffs arise when businesses choose among alternative production technologies. “For whom?”-Tradeoffs arise when choices change the distribution of buying power across individuals.

2. People make rational choices by comparing benefits and costs

3. Benefit is what you gain from something

4. Cost is what you must give up to get something

5. Most choices are “how-much” choices made at the margin

6. Choices respond to incentives

4. Opportunity Cost

The opportunity cost of an activity is the highest valued alternative that we give up to get something. For example, the opportunity costs of attending college include goods and services forgone from paying for tuition and textbooks, and the goods and services forgone because the student does not have the income from a full-time job.

5. Economics as Social Science and Policy Tool

Economics as a social science have two types of statement: positive –“what is” which can be tested by checking it against facts and normative – “what ought to be” which cannot be tested. An economic model describes some aspect of the economic world that includes only those features needed for the purpose at hand. Testing an economic model can be difficult, so economists use the following to copy with the problem:

Natural experiment: A situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal or similar.

Statistical Investigation: A statistical investigation might look for the correlation of two variables, to see if there is some tendency for the two variables to move in a predictable and related way (e.g. cigarette smoking and lung cancer).

Economic Experiment: Putting people in a decision-making situation and varying the

influence of one factor at a time to see how they respond.

6. Production Possibilities Frontier

A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently. . граница производственных возможностей (линия на графике, отделяющая множество наборов двух благ, которые может произвести хозяйство, организация или индивид из имеющихся ресурсов, от наборов, которые произвести невозможно; на осях отложены количества двух товаров)

PPFs are normally drawn as bulging upwards ("concave") from the origin but can also be represented as bulging downward or linear (straight), depending on a number of factors. A PPF can be used to represent a number of economic concepts, such as scarcity of resources (i.e., thefundamental economic problem all societies face), opportunity cost (or marginal rate of transformation), productive efficiency, allocative efficiency, and economies of scale. In addition, an outward shift of the PPF results from growth of the availability of inputs such as physical capital or labour, or technological progress in our knowledge of how to transform inputs into outputs.