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ECO 2023: Principles of Microeconomics: Chapter Notes for Exam 1

by: Sarah Sherr

ECO 2023: Principles of Microeconomics: Chapter Notes for Exam 1 ECO2023

Marketplace > University of Florida > Economcs > ECO2023 > ECO 2023 Principles of Microeconomics Chapter Notes for Exam 1
Sarah Sherr

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You didn't buy the textbook? You didn't read chapters 1-4? This is a minor study guide that outlines chapters 1-4 from the textbook, which will ALL be covered in exam 1!!!!
Principles of Microeconomics
Study Guide
ECO2023, ECO 2023, ECO, MARK, Rush, Microeconomics
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This 6 page Study Guide was uploaded by Sarah Sherr on Monday February 1, 2016. The Study Guide belongs to ECO2023 at University of Florida taught by Rush,Mark in Fall 2015. Since its upload, it has received 28 views. For similar materials see Principles of Microeconomics in Economcs at University of Florida.


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Date Created: 02/01/16
Sarah Sherr ECO 2023: Principles of Microeconomics Professor Mark Rush   Exam 1: Chapter Notes CHAPTER 1   After studying this chapter, be able to:  Define economics and distinguish between micro and macro  Explain the two big questions of economics  Explain the key ideas that define the economic way of thinking  Explain how the economists go about their work as social scientists and policy advisors Economics is…  The study of CHOICES and their CONSEQUENCES  A fundamental fact that dominates our lives: We want more than we can get.   Scarcity: Our inability to get everything we want.  Scarcity is universal.  Confronts all living things.  Social science that studies the choices the individuals, businesses, governments and entire societies make as they cope with scarcity and incentives.  What everyone/society can get is limited by the productive resources available.  What governments can afford is limited by the taxes they collect.  Incentive: a reward that encourages an action or a penalty that discourages one.  Two Big Economic Questions o How do choices end up determining what, how (land, labor, capital,  entrepreneurship), and for whom goods and services are produced? o Do choices made in the pursuit of self­interest also promote the self interest?  Land: Gifts of nature  Labor: Work time and work effort that people devote to producing goods and services. o The quality of labor depends on human capital (knowledge and skill people  obtain from education, training, experience, etc.)   Capital: Tools, instruments, machines, etc, used to produce goods and services.  Entrepreneurship: Human resource that organizes land, labor, capital and makes all  business CHOICES and DECISIONS.  IMPORTANT!!! o Land earns rent o Labor earns wages  Labor earns the most in the process of production o Capital earns interest o Entrepreneurship earns profit  Efficient: If it is not possible to make someone better off without making someone else  worse off.    Economic Way of Thinking: o A choice is a tradeoff o People make rational choices by comparing benefits and costs o Benefit is what you gain from something o Cost is what you must give up to get something o Most choices are “how­much” choices made at the margin. o Choices respond to incentives.  Positive Statement: About what is.  Can be right or wrong, but can always be backed up  by facts.  Normative Statement: What ought to be. Policy goals are normative statements.  Unscrambling Cause and Effect: Positive statements about cause and effect ie Are  computers getting cheaper because more people are buying them?  Economic Model: Description of some aspect of the economic world that includes only  those features that are needed for the purpose at hand.   CETERIS PARIBUS: If all other relevant things remain the same. CHAPTER 2  After studying this chapter, be able to… o Define the production possibilities frontier and use it to calculate opportunity  cost o Distinguish between production possibilities and preferences and describe an  efficient allocation of resources o Explain how current production choices expand future production possibilities o Explain how specialization and trade expand production possibilities o Describe the economic institutions that coordinate decisions  Production Efficiency: if we produce goods and services at the lowest possible cost.  Allocative Efficiency: When goods and services are produced at the lowest possible cost  and in the quantities that provide the greatest possible benefit.  Marginal Cost: The opportunity cost of making one more unit of it.  o Calculated from the slope of the PPF.  Marginal Benefit: Benefit received from consuming one more unit of it. Is subjective.  Depends on people's Preferences (likes and dislikes and intensities of those feelings).  Marginal Benefit Curve: Shows the relationship between the marginal benefit from a  good and the quantity consumed of the good.  Capital Accumulation: the growth of capital resources, including human capital.  Firm: An economic unit that hires factors of production and organizes them to produce  and sell goods and services.  Markets: Any arrangement that enables buyers and sellers to get information and to do  business with each other.  Property Rights: The social arrangements that govern the ownership, use and disposal  of anything that people value.  Money: Any commodity or token that is generally acceptable as a means of payment. CHAPTER 3   After studying this chapter, be able to… o Describe a competitive market and think about a price as an opportunity cost. o Explain the influences on demand. o Explain the influences on supply. o Explain how demand and supply determine prices and quantities bought and sold. o Use the demand and supply model to make predictions about changes in prices  and quantities.  Law of Demand: Other things remaining the same, the higher the price of a good, the  smaller the quantity demanded, and the lower the price of the good, the greater the  quantity is demanded.  Factors in Changes in Demand: o The prices of related goods o Expected future prices o Income o Expected future income and credit o Population o Preferences  Move Along the Demand Curve: Change in quantity demanded.  Shift of the Demand Curve: Change in demand.  Law of Supply: Other things remaining the same, the higher price of a good, the greater  is the quantity supplied; and the lower the price of a good, the smaller is the quantity  supplied.  Factors of Changes in Supply: o The prices of factors of production o The prices of related goods o Expected future prices o The number of suppliers o Technology o The state of nature CHAPTER 4  After studying this chapter, be able to: o Define, calculate and explain the factors that influence the price elasticity of  demand. o Define, calculate and explain the factors that influence the income elasticity of  demand and the cross elasticity of demand. o Define, calculate and explain the factors that influence the elasticity of supply.  Price Elasticity of Demand: a units­free measure of the responsiveness of the quantity  demanded of a good to change its price when all other influences on buying plans remain  the same. o = Percentage change in quantity demanded / Percentage change in price o The ratio of the two percentages is a number without units o When the price of a good rises, the quantity demanded decreases.   o Because a positive change in price brings a negative change in the quantity  demanded, the price elasticity of demand is a negative number. o The absolute value, or the magnitude, is the important piece to tell us how  responsive the quantity demanded is, so we ignore the minus sign.  Perfectly Inelastic Demand o If the quantity demanded remains constant when the price changes, then the price  elasticity of demand is zero and the good is said to be (Above). o ie insulin; diabetics while buy it no matter the rise or fall in price.  Unit Elastic Demand:  o If the % change in the quantity demanded = % change in the price, then the price  inelasticity =1 and the good is said to have a (above).  Inelastic Demand: o The % change in the quantity demanded is less than the % change in price. o Price of Elasticity of Demand is between 0 and 1. o ie Food and Shelter  Perfectly Elastic Demand: o If the quantity demanded changes by an infinitely large percentage in response to  a tiny price change. o ie soft drink from two campus machines sold side by side.  Elastic Demand: o The % change in the quantity demanded exceeds the % change in price.  Factors that Influence the Elasticity of Demand: o The closeness of substitutes  The closer the substitute, the more elastic is the demand for  it.  Luxury generally has an elastic demand, necessities inelastic. o The proportion of income spent on the good  Demand for gum (will still buy if price rises) vs houses (won’t) o The time elapsed since the price change  The longer the time that has elapsed since a price change, the more elastic  is the demand.  Total Revenue and Elasticity: o Total revenue from the sale of a good = the price of the good multiplied by the  quantity sold.   o When a price changes, total rev also changes.   o Cut in price doesn’t always decrease total rev.  o Change in total revenue depends on the elasticity of demand in the following  way:  If demand is elastic, a 1% price cut increases the quantity sold by more  than 1% and total rev increases.  If demand is inelastic, a 1% price cut increases the quantity sold by less  than 1% and total rev decreases.  If demand is unit elastic, a 1% price cut increases the quantity sold by 1%  and total rev doesn’t change. o Total Rev Test:  If a price cut increases total revenue, demand is elastic.  If a price cut decreases total revenue, demand is inelastic.  If a price cut leaves total revenue unchanged, demand is unit elastic. o If you spend more on an item when its price falls, your demand is elastic; if you  spend the same amount, your demand is unit elastic; if you spend less, demand is  inelastic.   Income Elasticity of Demand o A measure of the responsiveness of the demand for a good or service to a change  in income, other things remaining the same. o Tells us by how much a demand curve shifts at a given price.  =% change in quantity demanded / percentage change in income.  Positive and >1 (normal good, income elastic).  Positive and <1 (normal good, income inelastic).  Negative (inferior good).  Cross Elasticity of Demand: o Measure of the responsiveness of the demand for a good to a change in the price  of a substitute or compliment, other things remaining the same.  = % change in the quantity demanded / % change in price of a substitute  or compliment.  Can be + or ­  If +, demand and the price of the other good change in the same  direction, and so are substitutes.  If ­, demand and the price of the other good change in opposite  directions, and so are compliments.  Elasticity of Supply: o Measures the responsiveness of the quantity supplied to a change in the price of a  good when all other influences on selling plans remain the same.  =% change in quantity supplied / percentage change in price. o If elasticity of supply is >1, supply is elastic o If elasticity of supply is <1, supply is inelastic. o When % change in price = % change in quantity, unit elastic.  Factors that Influence the Elasticity of Supply: o Resource substitution possibilities o Time frame for the supply decision.  Momentary supply  Short­run supply  Long­run supply


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