Study guide ECO 211 Prof Spigelman Uiversity of Miami
Study guide ECO 211 Prof Spigelman Uiversity of Miami ECO 211
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This 9 page Study Guide was uploaded by Dannit Cohen on Thursday January 21, 2016. The Study Guide belongs to ECO 211 at University of Michigan taught by David Spigelman in Fall 2015. Since its upload, it has received 467 views. For similar materials see Econ Principles and Problems in Economcs at University of Michigan.
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Date Created: 01/21/16
Economics: is the study of how society mages its scarce resources. 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 Marginalcost:isthechangeinthetotalcostthatariseswhenthequantityproducedisincremented by one unit. 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? 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 experiencingrapidlyincreasingpricesandbemovedbythisobservationtodevelopatheoryofinflation.Thetheory 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 ofmoneywerecompletelyunrelatedto therateofpriceincrease,theeconomistwouldstartto doubtthe 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. Economic models The Circular-Flow Diagram Thisdiagramisaschematicrepresentationoftheorganizationoftheeconomy.Decisionsaremade 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 arrows shows the flowof 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 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 capitalto the firms in themarkets forthefactorsofproduction. The firms then usethese 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 someof 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. 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 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). Oncewe have reachedanefficient pointonthefrontier, theonlywayofproducing moreofonegood 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 relativesfactorendowments.Throughspecializationandtradethey areableto achievegainsandorhigher 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. Opportunitycost:theopportunitycostopportunitycostwhatevermustbegivenuptoobtainsomeitemofsome 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 competitivemarket 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. Inferiorgood:whentheincomegoesup,thedemanddecreases,andwhentheincomegoesdown, 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 produceatanygivenpriceshiftsthesupplycurvetotheleft. 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: theprice thatbalances 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 Priceelasticityofdemand:ameasureofhowmuchthequantitydemandedofagoodrespondstoachange in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in Price. The price elasticityof demand determines whether thedemand curve is steepor flat. Notethat 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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