Study guide for Exam 1
Study guide for Exam 1 ECON 104
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This 11 page Study Guide was uploaded by Morgan Owens on Tuesday January 5, 2016. The Study Guide belongs to ECON 104 at George Mason University taught by Stephen Gillepsie in Summer 2015. Since its upload, it has received 300 views. For similar materials see Macroeconomics in Economcs at George Mason University.
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Date Created: 01/05/16
Macroeconomics Exam 1 Study Guide Chapter 1: 6 principles: 1. People respond to incentives people want what makes the feel good and avoid what makes them feel bad. Biggest incentive is cost. 2. There is no such thing as a free lunch There is always an opportunity cost for everything, it doesn’t have to be a dollar amount. 3. No thing is just one thing There is always at least 2 sides. For example: buyer vs. seller 4. The law of unanticipated influences Any decision you make has a consequence you haven’t thought of yet. Small changes can lead to huge changes later on. 5. The law of unintended consequences There is always going to be a consequence that what not intended. 6. No one is, and no over ever can be, in complete control. Differences between Macro and Micro Micro the study of economics on an individual, group or company level Macro the study of national economics, size of effects are really hard to predict in advanced and measure. * Small differences in models can lead to large differences in appropriate policy Sometimes very small changes in the economic model can lead to large differences in the impact of the policy. Thus different economist using different models can come up with different predictions about what will happen. There are also winner and losers in Macroeconomics *Winners are those who benefit from a change and losers are those who don’t benefit. Ex: large decrease in the price of oil, winners are those who have cars and need gas for your car because price went down. But company in Texas are losers because their income decreased. Economic Models: Economic models: deliberate simplification of reality. Allows us to zero in on factors that are thought to be most important. *It lets us see a forest instead of a million trees. By choice models are not realistic Economist are very criticized because there models aren’t used in real world behavior. The economist models are helpful to understanding the real world but doesn’t necessarily have to mimic the real world. * The predictions we draw from an economic model are always true meaning they are logically true. The importance of the models is if they help us understand real world behavior. Ceteris Paribus: all else things stay the same Models are all going to concern aggregate behavior rather than regular behavior Production possibilities Simplifying model: a model of a society that only produces 2 things Guns Butter 0 500 All production resources go to 200 400 275 300 340 200 380 100 400 0 butter Varity of making guns and butter All production resources go to guns When you transfer the chart to the graph and connect the dots, you then can see all the possible combinations of guns and butter, along with the combinations that are inside and outside the curve. outside the curve They are considered infeasible – unable to produce Inside the line= feasible but inefficient. All the points that fall on the line = feasible and efficiently producing products. Key Economic concepts: Scarcity not all combination are possible, short of supply Opportunity cost what you give up when you chose to make one more unit of something else. Ex: the cost of 1 more gun is less butter Efficiency: points on the production possibility curve where all resources are being used in the most efficient way Points on the outside are infeasible Points on the inside are possible but resources aren’t being used efficiently Normative preferences: Notes: no society ever uses all of their resources efficiently People, factories and other resources would be worn out if they were used on the production curve. Production possibility curves: Always concave because of the Law of Increasing Cost The higher opportunity cost The more you have of 1 good makes it increasingly expensive to produce 1 more unit 1. REVIEW FUNDAMENTALS OF SUPPLY AND DEMAND the law of demand - The quantity demanded of a good is negatively related to its price Why does the law of demand work? * Changes in relative prices * Change in real income Real income: quantity of goods and services consumers can actually buy Nominal income: # of bills you pay, money you actually hold on to. The law of supply The quantity supplied of a good is positively related to its price because people respond to incentives -Slope is upward because of * Changes in relative prices- more attractive relative to other things * Change in real resources- income goes up which allows you to purchase more resources Determinants of demand- what level will the demand be? What changes the shifts in demand? * Tastes- preferences, preferences over other things, Example: “eating red meat causes heart disease which reduces demand” and we assume all else stays the same. * Income- in general when consumers have more money they tend to buy more and we assume all else stays the same. * Prices of other goods (complements and substitutes) - Substitutes- buying a different good in place of the original good you intended to buy Complements- goods that go hand in hand with each Example: price of steak goes up which means people are going to buy less steak which means people are going to buy less steak sauce * Expectations (of future prices and income) - if you expect your income to go up you’re more likely to spend more today, prices today influence your actions in the future. Example: You expect the price of steak is going to rise so you buy some now, you expect the price to fall next week which means you purchase chicken today and steak next week. * Number of buyers- all else being equal, the more customers out there to purchase the greater the demand. Points move along demand curve when price changes-> if anything else changes, factors that we are holding constant change, demand curve shifts Determinants of supply: * Factor costs- how much manufactures have to pay for things like: supplies, factory, transportation costs If these rise that’ll effect the quantity the steak producers are willing to offer at any given price - Outward shift when new companies start producing the same goods. * Technology- new changes or advances in technology will shift the supply curve. * Profitability of alternative pursuits- changes of price for what else you could use your factory for, more profit to produce something else * Expectations- what manufactures except to make of their profits * Number of sellers: how many sellers are selling the same thing Movement along supply curve means there was a change in price (change in supply), a change in anything else means a change in the (quantity supplied) UNDERSTAND CONCEPT OF EQUILIBRIUM Intersection of demand and supply curves determines equilibrium price and equilibrium quantity Equilibrium means "at rest"- market equilibrium At this price, every consumer that wants to buy that good at that price is able to do so, also every seller who wants to sell their goods at that price is able to do so. - No dissatisfaction that would lead to a change, stays just where it is - At equilibrium, plans of buyers just match plans of sellers - Markets reach equilibrium by changes in the price High price= surplus (they will run a sale and lower the price) When price falls we have movement on both sides of the market, people are more willing to buy, and some sellers aren’t willing to sell so QD lowers. Excess supplied is beginning to shirk. As long as price is above equilibrium there will be surplus and dissatisfaction. If price is below, consumers want to buy at price and can’t find anyone to sell it to them which means price will changes, upward pressure on QS, so QD increased and QD decreases and moves to equilibrium no excess of D or S. comes to rest Steps in finding the changes on the graph. Step 1.will this affect the demand curve or supply curve 2. Is it going to cause the shift outward or inward, willing to sell/buy more or less? 3. Draw it on the graph WORK WITH MARKET SUPPLY AND DEMAND Shifts in supply and demand - When one curve shifts, you can predict what is going to happen to the equilibrium price and quantity. - This means that we can predict what is going to happen from any change that affects the equilibrium price and quantity. - When both curves shift, you can predict what is going to happen to one value but not both. Market for medical services Show the effect of insurance paying most of the marginal cost of medical services Politicians have been talking a lot about reforming health care. They cite two main problems: 1. Health care costs too much- cost too much and price is rising 2. Too many people don't have health insurance- too many Americans are NOT insured What they don't say is that fixing one of these problems will make the other one worse. * Health insurance lowers the marginal cost of medical services, and so increases the quantity demand. * Increasing the quantity of medical services provided increases their cost. Price ceiling Disequilibrium can persist only if the adjustment mechanism is blocked - The government can do this - “in this market this is the highest legal price, you cannot charge a above this price” Price Ceiling = price not allowed to go above some level Show graphic analysis - result is a shortage of the good Consumers want to purchase QD, but suppliers can only produce QS Why doesn't the shortage make the price rise? * The government says it is illegal to charge more than the ceiling price, and they arrest you if you do Example: rent control Quantity demanded is higher than quantity supplied Problems: * How do you ration the available rental units? * Queues form- lines form, the queues are an actual cost to the Tennent. They can be picky, discriminate Larger key deposit, larger deposit for pets or small children * pay extra in terms of waiting time * Rental units are allow to deteriorate – only have to be worth the ceiling price * Discrimination is possible Leads to further government action * Rent control encourages condominium conversion * to remove rental units from control * Govt. response is limits on condo conversion
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