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UM / Economics / ECON 211 / in the circular flow diagram firms produce

in the circular flow diagram firms produce

in the circular flow diagram firms produce

Description

School: University of Michigan
Department: Economics
Course: Microeconomics
Professor: David spigelman
Term: Spring 2016
Tags:
Cost: 50
Name: Study guide ECO 211 Prof Spigelman Uiversity of Miami
Description: Here you have a very detailed study guide for the first midterm of this course. Hope it helps!
Uploaded: 01/22/2016
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Economics: is the study of how society mages its scarce resources.


what is Economics?



Scarcity: means that society has limited resources and therefore cannot produce all the goods and services people wish to  have.

Inflation: an increase in the overall level of prices in the economy.

Chapter1: Principles of economics

How people make decisions

1- People face trade-offs

2- The cost of something is what you give up to get it:

a. Opportunity cost: what most be given up to obtain one item.

∙ Monetary component.

∙ Non-monetary component.

3- Rational people think at the margin

a. Rational people: systematically and purposefully do the best they can to achieve their objectives. b. Marginal changes: small incremental adjustments to a plan of action.

∙ Marginal=incremental

∙ Marginal cost: is the change in the total cost that arises when the quantity produced is incremented  by one unit.


How the Minimum Wage Affects the Labor Market?



Don't forget about the age old question of zoology study guide

∙ Marginal benefit: The additional satisfaction or utility that a person receives from consuming an  additional unit of a good or service.

4- People respond to incentive

a. Incentive: something that induces a person to act.

∙ Buyers: consume less.

∙ Sellers: produce more.

b. Public policy:

∙ Change cost or benefits.

∙ Change people’s behavior

How people interact

5- Trade can make everyone better off

a. Trade:  

∙ Allow each person to specialize in the activities he or she does best.

∙ Enjoy a greater variety of goods and services at lower cost.

6- Markets are usually a good way to organize economic activity

a. Communist countries-central planning

b. Government countries- central planners

c. Allocate economy’s scare resources  

∙ What goods and services were produced?


what are the Principles of economics?



∙ How much was produced.

∙ Who produced and consumed these gods and services.

7- Governors can sometimes improve markets outcomes

a. We need government

∙ Enforce rules and maintain institutions.

o Enforce property rights.

b. Promote efficiency.

∙ Avoid market failure

c. Promote equality.

Chapter 2: thinking like an economist

The economist as science

o Economists try to address their subject with a scientist’s objectivity. They devise theories, collect data, and then  analyze these data in an attempt to verify or refute their theories.

o This interplay between theory and observation also occurs in economics. An economist might live in a country  experiencing rapidly increasing prices and be moved by this observation to develop a theory of inflation. The theory  might assert that high inflation arises when the government prints too much money. To test this theory, the  economist could collect and analyze data on prices and money from many different countries. If growth in the  quantity of money were completely unrelated to the rate of price increase, the economist would start to doubt the  validity of this theory of inflation. If money growth and inflation were strongly correlated in international data, as  in fact they are, the economist would become more confident in the theory. Don't forget about the age old question of wade nichols isu

Economic models

▪ The Circular-Flow Diagram

▪ This diagram is a schematic representation of the organization of the economy. Decisions are made  by households and firms. Households and firms interact in the markets for goods and services  (where households are buyers and firms are sellers) and in the markets for the factors of  production (where firms are buyers and households are sellers). The outer set of  We also discuss several other topics like arth 103

arrows shows the flow of dollars, and the inner set of arrows shows the corresponding  

flow of inputs and outputs. 

▪ Households and firms interact in two types of markets: 

▪ In the markets for goods and services, households are buyers, and firms are  If you want to learn more check out scsu printing services

sellers. Households buy the output of goods and services that firms produce.  

▪ In the markets for the factors of production, households are sellers, and firms are  

buyers. In these markets, households provide the inputs that firms use to produce  

goods and services.  

▪ The circular-flow diagram offers a simple way of organizing the economic  

transactions that occur between households and firms in the economy. 

▪ The two loops of the circular-flow diagram are distinct but related. The inner loop  

represents the flows of inputs and outputs. The households sell the use of their labor,  

land, and capital to the firms in the markets for the factors of production. The firms then use these  factors to produce goods and services, which in turn are sold to households in the markets for  goods and services. The outer loop of the diagram represents the corresponding flow of dollars.  The households spend money to buy goods and services from the firms. The firms use some of the  revenue from these sales to pay for the factors of production, such as the wages of their workers.  What’s left is the profit of the firm owners, who themselves are members of households. Don't forget about the age old question of depressant drugs derived from the opium poppy are called

▪ Factor of production: impute in the production process (things that are used to produce). ▪ Capital: physical input to the production process (ex: natural resources). 

▪ Labor: mano de obra, they earn wages. 

▪ Production possibilities frontier 

▪ The production possibilities frontier shows the combinations of output—in this  We also discuss several other topics like psyc 311 class notes

case, cars and computers—that the economy can possibly produce. The economy can  

produce any combination on or inside the frontier. Points outside the frontier are not  

feasible given the economy’s resources. The slope of the production possibilities  

frontier measures the opportunity cost of a car in terms of computers. This  

opportunity cost varies, depending on how much of the two goods the economy is  

producing. 

▪ Because resources are scarce, not every conceivable outcome is feasible. For  

example, no matter how resources are allocated between the two industries, the  

economy cannot produce the amount of cars and computers represented by point C.

Given the technology available for manufacturing cars and computers, the economy does not have enough of the  factors of production to support that level of output.  

▪ With the resources it has, the economy can produce at any point on or inside the production possibilities frontier,  but it cannot produce at points outside the frontier. 

▪ An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. ▪ Points on (rather than inside) the production possibilities frontier represent efficient levels of production. When  the economy is producing at such a point, say point A, there is no way to produce more of one good without  producing less of the other.  

▪ Point D represents an inefficient outcome 

▪ C: outside the production frontier (impossible). 

▪ Once we have reached an efficient point on the frontier, the only way of producing more of one good is to produce  less of the other. 

▪ Dimishing marginal/incremental returns: is the decrease in the marginal (incremental) output of a production  process as the amount of a single factor of production is incrementally increased, while the amounts of all other  factors of production stay constant. 

▪ The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other  good.

▪ The opportunity cost of a car is high, and the frontier is steep.

▪ The production possibilities frontier shows the trade-off between the outputs of  different goods at a given time, but the trade-off can change over time

▪ A Shift in the Production Possibilities Frontier 

▪ A technological advance in the computer industry enables the economy to  produce more computers for any given number of cars. As a result, the production  possibilities frontier shifts outward. If the economy moves from point A to point G, then  the production of both cars and computers increases. 

▪ PD: education can be considered a shift because can make people become more  productive. 

▪ Increase in labor, education, technology, increase of capital, financing. 

▪ This figure illustrates what happens when an economy grows. Society can move  production from a point on the old frontier to a point on the new frontier. Which point it  chooses depends on its preferences for the two goods. In this example, society moves from point A to point G,  enjoying more computers (2300 instead of 2200) and more cars (650 instead of 600). 

▪ The production possibilities frontier simplifies a complex economy to highlight some basic but powerful ideas:  scarcity, efficiency, trade-offs, opportunity cost, and economic growth.

Chapter 3: Interdependence and the Gains from Trade 

▪ Comparative advantage: 

o Main insight: country should specialize industries and economic activities that take advantage of their  relatives factor endowments. Through specialization and trade they are able to achieve gains and or higher  standards of living. 

o Countries should think about their endowment. 

▪ Ex: country with fertile land should focus on agriculture. 

o Autarky: absence of trade. 

o Countries with sleeper slope (closest to vertical y) has comparative advantage in y-axis slope. ▪ Absolute advantage:  

o Who can produce more, it is independent from the size of the country. 

o The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute  advantage in producing that good. 

o Sleeper slope advantage in X or Y axis 

o Ex: seminolia has absolute advantage in manufactured products, but Hurricania has absolute advantage in  corn. 

▪ Opportunity cost: the opportunity cost opportunity cost whatever must be given up to obtain some item of some  item is what we give up to get that item 

Ex: Swampland vs Gatorland 

▪ Production possibilities frontier 

o Neither has absolute vale advantage in pizza. (z) 

o Gatorland has absolute adv. in hamburgers. 

o Swampland has comparative adv. in pizza. 

o Gatorland has comparative adv. in hamburgers. 

Chapter 4:

▪ The terms supply and demand refer to the behavior of people as they interact with one another in competitive  markets.

▪ A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the  demand for the product, and the sellers as a group determine the supply of the product.

▪ Economists use the term competitive market to describe a market in which there are so many buyers and so many  sellers that each has a negligible impact on the market price.

▪ Demand: behavior of consumers

o The Demand Curve: The Relationship between Price and Quantity Demanded

o Quantity demanded: of any good is the amount of the good that buyers are willing and able to purchase. o Law of demand: relationship between price and quantity demanded.

▪ When the price of a good rises, the quantity demanded of the good falls.

▪ When the price falls, the quantity demanded rises.

o Shifts in the Demand Curve 

▪ Any change that raises the quantity that buyers wish to  

purchase at any given price shifts the demand curve to the  

right. 

▪ Any change that lowers the quantity that buyers wish to  

purchase at any given price shifts the demand curve to the  

left. 

▪ Normal good: a good tan when the income goes up the  

demand increases. And when the income falls the demand  

for a good falls. 

▪ Inferior good: when the income goes up, the demand decreases, and when the income goes down,  the demand increases. 

o Demand curve: 

▪ Supply: behavior of sellers.

o Quantity supplied: is the amount that sellers are willing and able to sell.

o Law of supply: relationship between price and quantity supplied.

▪ When the price of a good rises, the quantity supplied of the good also rises.

▪ When the price falls, the quantity supplied falls as well.

o Supply schedule: is a table that shows the quantity supplied at each price.

o Supply curve: relates the price and quantity supplied.  

▪ The supply curve slopes upward because, other things being equal, a higher price means a greater  quantity supplied.

o Shifts in the supply curves:

▪ Any change that raises the quantity that sellers wish to  

produce at any given price shifts the supply curve to the  

right.  

▪ Any change that lowers the quantity that sellers wish to  

produce at any given price shifts the supply curve to the left. 

o Supply curves 

▪ Supply and demand together:

o This point is called the market’s equilibrium: a situation in which  

the market price has reached the level at which quantity supplied equals quantity demanded.  o Equilibrium price: the price that balances quantity supplied and  

quantity demanded.

o Equilibrium quantity: the quantity supplied and the quantity  

demanded at the equilibrium price.

o Equilibrium:

▪ The equilibrium is found where the supply and demand  

curves intersect. At the equilibrium price, the quantity  

supplied equals the quantity demanded.

Chapter 5

▪ Elasticity demand

o Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to a change in one  of its determinants.

o Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change  in the price of that good, computed as the percentage change in quantity demanded divided by the  percentage change in Price.

▪ The price elasticity of demand determines whether the demand curve is steep or flat. Note that all  percentage changes are calculated using the midpoint method.

o Midpoint method:  

o o

Chapter 6: Control on princes

∙ A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling  is below the equilibrium price, then the price ceiling is binding, and the quantity demanded exceeds the quantity  supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers. 

∙ A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price  floor is above the equilibrium price, then the price floor is binding, and the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers’ demands for the good or service must in some way  be rationed among sellers. 

∙ When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market  shrinks the size of the market. 

∙ A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the  market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense,  buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not  depend on whether the tax is levied on buyers or sellers. 

∙ The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the  side of the market that is less elastic because that side of the market cannot respond as easily to the tax by  changing the quantity bought or sold.

∙ price ceilingprice ceiling a legal maximum on the price at which a good can be sold price ceiling a legal maximum  on the price at which a good can be sold 

∙ price floorprice floor a legal minimum on the price at which a good can be sold price floor a legal minimum on the  price at which a good can be sold 

∙ tax incidencetax incidence the manner in which the burden of a tax is shared among participants in a market tax  incidence the manner in which the burden of a tax is shared among participants in a market

∙ A Market with a Price Ceiling 

o When de ceiling is below the equilibrium, it causes shortages. 

o If we set a ceilig above the equilibrium, it has no effect in the market.  

A Market with a Price Floor 

∙ If it is below the equilibrium has no effects on the markets. 

∙ If it is above the equilibrium can cause unemployment.  

∙ Just as the shortages resulting from price ceilings can lead to undesirable rationing mechanisms, so can the  surpluses resulting from price floors. The sellers who appeal to the personal biases of the buyers, perhaps due to  racial or familial ties, may be better able to sell their goods than those who do not. By contrast, in a free market,  the price serves as the rationing mechanism, and sellers can sell all they want at the equilibrium price.

How the Minimum Wage Affects the Labor Market 

Panel (a) shows a labor market in which the wage adjusts to balance labor supply and labor demand. Panel (b) shows the  impact of a binding minimum wage. Because the minimum wage is a price floor, it causes a surplus: The quantity of labor  supplied exceeds the quantity demanded. The result is unemployment.

Panel (b) of Figure 5 shows the labor market with a minimum wage. If the minimum wage is above the equilibrium level,  as it is here, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, the  minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find  jobs.

In addition to altering the quantity of labor demanded, the minimum wage alters the quantity supplied. Because the  minimum wage raises the wage that teenagers can earn, it increases the number of teenagers who choose to look for  jobs. Studies have found that a higher minimum wage influences which teenagers are employed. When the minimum  wage rises, some teenagers who are still attending high school choose to drop out and take jobs. These new dropouts  displace other teenagers who had already dropped out of school and who now become unemployed. 

Taxes

∙ Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new  equilibrium.

∙ Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers  receive less.

∙ A Tax on Sellers

∙ When a tax is levied on sellers, the supply curve shifts up.  

∙ The equilibrium quantity falls.  

∙ The price that buyers pay rises.  

∙ The price that sellers receive (after paying the tax) falls. 

∙ Even though the tax is levied on sellers, buyers and sellers share the burden of the tax. 

∙ Because the tax on sellers raises the cost of producing and selling ice cream, it reduces the quantity supplied at  every price. The supply curve shifts to the left (or, equivalently, upward). 

PD: no matter who you tax (seller or buyer), it will be the same price, and same slope.

∙ The burden of the incidents of a specific tax does not depend on who you tax, it depends only on the relative  elasticity of supply and demand and furthermore who ever (consumer or producer) has the more inelastic supply  will bear the greater share of the burden of the greater tax.

∙ If the government wants to raise taxes in specific product to raise revenue and minimize the distortion of  resources it has to tax products that are inelastic.

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