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Microeconomics A branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources.

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Presentation on theme: "Microeconomics A branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources."— Presentation transcript:

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2 Microeconomics A branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources.

3 Microeconomics Vocabulary: Due Monday 12/7 Scarcity Factors of Production Capital Goods Human Capital Financial Capital Trade-off Opportunity Cost Marginal Cost Marginal Benefit Cost-Benefit Analysis Natural Resources Finished Goods Fixed Cost Variable Cost Gross Profit Diminishing Marginal Benefit

4 Scarcity The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs.

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6 ScarcityHow should we allocate resources? Economics: Study of how resources are allocated. Government Private Entities

7 Factors of Production 1.Land (Natural Resources) 2.Labor 3.Capital Financial Capital Capital Goods Human Capital http://www.investopedia.com/terms/f/factors-production.asp

8 Factors of Production: Land Natural resources which are taken from land and/or the physical land on which production occurs.

9 Factors of Production: Labor Workers who use tools to manipulate natural resources and produce finished goods.

10 Factors of Production: Financial Capital Money which is used to fund businesses: buy natural resources, buy capital assets, pay workers, pay taxes.

11 Factors of Production: Capital Goods Tools which allow workers to manipulate natural resources more efficiently.

12 Factors of Production: Human Capital Ideas and innovations on how to more efficiently manipulate factors of production.

13 Factors of Production Finished Goods Finished goods are goods that are a result of production and are sold for profit. Finished goods are relative. To a hammer company hammers are finished goods, but to a carpenter a hammer is a capital good.

14 Trade-off Having to choose between 2+ options in a scarce environment. It’s Sunday night, you have a paper due Monday morning which you haven’t finished yet. Your friends are going out to the movies and won’t be back until late. If you go to the movie you may not finish your paper well…or at all. If you finish your paper you will miss the movie with your friends. What do you do? Whenever you gain something…something else is always lost.

15 Opportunity Cost Whenever you gain something…something else is always lost. Economic Efficiency = Gaining more value than lost. Opportunity Cost is the cost of what you did not do. Compare this cost to the cost of what you did do in order to determine economic efficiency.

16 Opportunity Cost Examples It’s Saturday night and you are offered a babysitting gig on Saturday night from 12-6pm, paying $10/hr. At the same time your neighbor offers to let your mow his lawn from 1-4 pm, for $15/hr. Is this a trade off? What is your opportunity cost if you decide to babysit? What is your opportunity cost if you decide to mow the lawn?

17 Costs and Revenues Suppose you are in the business of producing cars. How would you know how many to produce?

18 Fixed Costs Costs, or expenses, that are the same no matter how many units of a good are produced. Ex: Mortgage payments, rent, property taxes.

19 Variable Costs Expenses that change with the number of items produced. Ex: Wages, raw materials, electricity.

20 Total Costs Fixed Cost + Variable Cost = Total Cost

21 Types of Revenue Total revenue Marginal revenue Gross Profit

22 Total Revenue Number of units sold multiplied by the average price per unit. 42 units sold at $2 each, total revenue is $84.

23 Marginal Revenue Change in total revenue from selling one more unit of output.

24 Income Statement Costs of Goods Sold: Cost of goods sold (COGS) are the direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. Operating Expenses: A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that management must contend with is determining how low operating expenses can be reduced without significantly affecting the firm's ability to compete with its competitors.

25 Gross Profit Total Revenue – Costs of Goods Sold = Gross Profit

26 Net Income An entity's income minus operating expenses and taxes for an accounting period.

27 Marginal Cost Additional cost of producing one additional unit of output.

28 Marginal Benefit Additional revenue or satisfaction received when one more unit is produced.

29 Cost-Benefit Analysis Diminishing marginal benefit: when the cost of producing one more unit is greater than the benefit.


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