Econ 101 Study Guide
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This 5 page Study Guide was uploaded by Michael Notetaker on Thursday February 4, 2016. The Study Guide belongs to ECON101 at University of Delaware taught by Odobasic, Aida in Spring 2015. Since its upload, it has received 33 views.
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Date Created: 02/04/16
Ryan Cleary 1/12/16 Midterm 1 Econ101 Chapter 1 • Scarcity-restricts options and demands choices, resources are limited • Opportunity cost-the price you paid/the thing you gave up in order to get something • Utility-pleasure or satisfaction • Marginal-extra • Marginal analysis-comparison of marginal benefit and marginal cost • We assume everyone acts with rational self-interest, not selfishly • Other-things-equal/ceteris paribus-the things that aren’t being studied are assumed to have no effect on the results (Pepsi example-we assume we only change the price of Pepsi, not price of Coke or taste of Pepsi etc.) • Microeconomics-the study of individual consumers, firms, or markets (ex. increase in the market of fashion) • Macroeconomics-the study of the market more generally/the entire market (ex. the unemployment of the United States) • Positive economics-economic statements that can be true or false, factual (ex. the economy fell 3 points yesterday) • Normative economics-economic statements that involve value judgment, up for debate (ex. the unemployment rate ought to be lower) • Economizing problem-the need to make choices because economic wants exceed economic means • Budget line-a schedule that shows various combinations of two products a consumer can purchase with specific income (ex. DVD’s and books) • Trade-offs-giving up purchasing one thing in order to purchase another • Economic resources-capital (machines, things that go into the production of consumer goods), entrepreneurial ability (innovative ideas, risk taking, bringing resources together), land (natural resources), and labor (manual and intellectual) • Consumer goods-goods that satisfy consumers immediately • Capital goods-goods that help grow economy, goods that help enhance production of consumer goods • Production possibility curves/tables o Law of increasing opportunity cost-as the production of a particular good increases, the opportunity cost of production of an additional unit increases (ex. additional robot is 4 , 3/ ,2 / , and 1 unit of pizza), you have to use less skilled resources or more scarce materials to produce more units (resources are not interchangeable) o Economic growth-trade, additional resources, education, technology that uses resources more efficiently, shifts curve outward • Fallacy of composition-good for one person doesn’t mean good for society (ex. Google maps) Chapter 3 • Demand-schedule that shows the amount consumers are willing and able to purchase at a given price • Law of demand-other-things-equal, as price falls, the quantity demanded increases o Price acts as an obstacle to buyers o Law of diminishing marginal utility-an additional unit consumed has a lower marginal benefit than the previous unit consumed, consumers are willing to pay less and less for an additional unit (ex. slices of pizza) o Income effect-lower prices make you feel richer because your money goes further and you will buy additional units o Substitute effect-switching product to some other similar product that is cheaper (ex. chicken prices went down, more chicken will be bought because people will substitute chicken for steak) o Demand curve=marginal benefit curve o Only change in price can cause change in quantity demanded, movement along curve o Change in demand shifts curve • Determinants of demand-things that shift demand curve, TRIBE o Taste preference-consumers will consume more of a product if the newspaper publishes an article saying how good it is for you o Related goods § Complementary goods-goods that are used conjointly, as price of complementary goods fall, specific good demand increases § Substitute goods-goods that are used instead, as prices of substitute goods falls, demand for specific goods falls o Income § Inferior goods-cheap goods, as income falls, demand for specific good increases (ex. Raman noodles) § Normal goods-most goods, as income rises, demand for specific good increases (ex. Mercedes) o Buyers-if there is an influx of new buyers, the demand for specific good will increase (ex. baby boom increased demand for baby food) o Expectations-consumers expectations of future prices, if the expectation is that prices for homes will rises in the future, the demand for houses now will increase • Supply-schedule that shows the amount of supply producers are willing and able to produce at a specific price • Law of Supply-other-things-equal, as price rises, the quantity supplied rises o Price acts as an incentive for producers o At some point costs will rise-more production means higher cost of production o Supply curve=marginal cost curve o Prices are the only thing that changes the quantity supplied, movement along curve o Change in supply shifts curve • Determinants of supply-things that shift supply curve, ROTTEN o Resources price-increase in cost of production, decreases profit and decreases supply o Other prices goods-if the price of another good that the producers is able to produce with the same resources increases, the demand for the specific good will decrease (ex. if the price of watermelon goes up, farmers will use there land to produce watermelon instead of cucumbers) o Taxes and subsidies-taxes increase the cost of production and decrease supply, increase in subsidies (money paid to producer by government) decreases cost of production and increases supply o Technology-technological advancement makes production more efficient decreasing cost of production and increases supply o Expectations of producers-the expectation of a price increase in cars in the future will decrease the supply of cars presently o Number of sellers-an increase in the number of sellers will increase the supply • Equilibrium price-the price of a product at the point where the quantity supplied equals quantity demanded • Equilibrium quantity-the quantity of a product at the point where the quantity supplied equals quantity demanded • Production efficiency-the production of any particular good in the least costly way • Allocative efficiency-the particular mix of goods and services most highly demanded by society (occurs at equilibrium) • Surplus-excess supply, quantity supplied is greater than quantity demanded, wasting resources • Shortage-excess demand, quantity demanded is greater than quantity supplied • Complex changes o Change in supply-decreases in supply will raise prices and decrease quantity of demand o Change in demand-decreases in demand will lower prices and decrease the quantity supplied o Supply increases and demand decreases-equilibrium price will drop and the equilibrium quantity will be indeterminate o Supply decreases and demand increases-equilibrium price will raise and the equilibrium quantity will be indeterminate o Supply and demand increase-equilibrium price will be indeterminate and equilibrium quantity will raise o Supply and demand decrease-equilibrium price will be indeterminate and equilibrium quantity will drop • Price ceiling-a legal limit on the maximum price of a product, rent control, causes shortages because the price decreases and the producer’s profit goes down and causes quantity supplied decrease and quantity demanded increase • Price floor-a legal limit on the minimum price of a product, cigarettes/minimum wage, causes surplus because the price rises and the producer’s profits rise and causes quantity supplied to increase and quantity demanded to decrease Chapter 4 • Market failures-situations where resources are not allocated efficiently and causes over/underproduction • Demand-side market failures-demand curves do not represent consumer’s full willingness to pay for a certain product (ex. fireworks, public goods, flu shots) o Under-production, shortage, demand is lower than reality o Positive externalities o Loss of efficiency o Marginal benefit is greater than marginal cost • Supply-side market failures-supply curves fail to represent the full cost of production (ex. pollution, second-hand smoke) o Over-production, surplus, supply is greater than reality o Negative externalities o Loss of efficiency o Marginal cost is greater than marginal benefit • Consumer surplus-difference between maximum willingness to pay and the actual price paid for a product, utility exceeds price for individual, extra benefit from paying less than maximum price • Producer surplus-difference between minimum price accepted and actual price sold, price exceeds minimum price producer would accept, extra benefit from receiving a higher price • Supply curves=marginal cost curves=minimum acceptable price curves • Demand curves=marginal benefit curves=maximum willingness to pay curves • At equilibrium, maximum surplus (both consumer and producer) is achieved • Private goods-produced in the market by private firms, offered for sale (ex. cars) o Rivalry-after product is consumed another consumed gets no benefit from it o Excludability-producers can refuse the consumption of a product based on price • Pubic goods-offered by government (ex. street lamps, national defense, clean air) o Nonrivalry-after a product is consumed, others can still get benefit from it o Nonexcludability-cannot refuse the consumption of the product once it is put in place o Free-rider problem-people who don’t pay can still benefit from product, government provides product because there is no way to charge for the use of these goods show taxation covers the cost, demand curves underreport o Cost-benefit analysis-determining whether or not to produce a good based on the total cost and benefits from the good (highway example from book) o Quasi-public good-a good that could be provided through market system, but because of many positive externalities is provided by government through taxation (ex. public education, streets, museums) • Positive externality-benefits associated with the production or consumption of a good to an external third party (ex. flu shots, many public goods, specialized training, home improvements) • Negative externality-costs associated with the production or consumption of a good to an external third party (ex. pollution, noise pollution, second-hand smoke) • Subsidies, giving money to producers of positive externality, and government provisions, provided specific goods, help reduce the underallocation of goods that have positive externalities • Direct controls, laws forcing polluting companies to clean the air the emit, and specific taxes, taxing companies that emit polluted air, help reduce the effects of negative externalities
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