Microeconomics Exam 1 Review
Microeconomics Exam 1 Review Econ 10223
Popular in Microeconomics
verified elite notetaker
Popular in Economcs
verified elite notetaker
This 7 page Study Guide was uploaded by Jade Frederickson on Saturday February 6, 2016. The Study Guide belongs to Econ 10223 at Texas Christian University taught by Dr. Watson in Spring 2016. Since its upload, it has received 181 views. For similar materials see Microeconomics in Economcs at Texas Christian University.
Reviews for Microeconomics Exam 1 Review
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/06/16
Microeconomics Review Exam 1 Chapter 1 1. SCARCITY means that there is a limited amount of all resources not everyone can always get all of the resources they want because you cannot produce an infinite amount of goods. 2. Principle 7 states that governments can sometimes improve market outcomes, however if a market is left on its own to allocate resources efficiently, MARKET FAILURE can occur market is unsuccessful. 3. Principle 1 states that people face tradeoffs; the main one that society faces is EQUALITY VS. EFFICIENCY. a. In equality, society distributes economic prosperity uniformly among all members of society (no. of slices in the economic pie). b. In efficiency, society gets the maximum benefits from is scarce resources more productive (size of the economic pie). c. These two are tradeoffs, however, because to be more efficient, you must award people, but to be more equal, you have to reduce incentives, which reduces efficiency. 4. Principle 6 states that markets are usually a good way to organize economic activity, and according to Adam Smith’s “INVISIBLE HAND,” households and firms act in ways such that the market produces desirable outcomes (i.e. equilibrium see 18). a. When everyone acts out of their own selfinterest, prices establish themselves at equilibrium. Chapter 2 5. Economics is a type of social science and economists are scientists that can devise theories, collect data and analyze data. They run into problems, though, because economists cannot conduct controlled experiments. a. Controlled experiments are impractical because, for example, you cannot just print a trillion dollars and throw it out into the economy and see what happens. b. Must retroactively look at past data and trends to determine theories. c. Economists must assume. 6. In the circular flow diagram, there are TWO DESCION MAKERS (households/consumers and firms/businesses) and TWO MARKET TYPES (market for goods and services/output market and market for factors of production/input market). a. Do not memorize the flow chart, but for a visual, here it is 7. A PRODCUTION POSSIBLITLES FRONTIER (PPF) is a graph of the combinations of output that the economy can possibly produce given the available factors of production and the production of technology. a. b. On the following PPF, anything on the curve (A, B) is feasible and efficient. Anything outside the graph (C) is not feasible right now but can be someday with increased technology. Anything inside the graph (D) is feasible but inefficient due to not using all of your resources efficiently. 8. NORMATIVE STATEMENTS attempt to prescribe how the world should be (prescriptive) and give an opinion such as: The government should raise the minimum wage. a. POSITIVE STATEMENTS attempt to describe how the world currently is by confirming or refuting current evidence, such as: Minimum wage laws increase unemployment. 9. An OPPORTUNITY COST is the cost of whatever must be given up to attain another item. a. For example, on the above PPF, to produce at point A as opposed to point B, your opportunity cost is 100 fewer books produced. To produce at point B as opposed to point A, your opportunity cost is 200 less loaves of bread produced. Chapter 3 10. An ABSOLUTE ADVANTAGE is the ability to produce a good using fewer inputs than another producer (ex: if it takes Rose 20 min to produce 1 oz. of meat, and it takes Frank 60 minutes to do the same, AND it only takes Rose 10 min/oz. potatoes and it takes Frank 15 minutes, Rose has the absolute advantage). a. A COMPARITIVE ADVANTAGE is the ability to produce a good at a lower opportunity cost than another producer (ex: if Frank’s opportunity cost of 1 oz. of meat is 4 oz. potatoes, and Rose’s is 2 oz. potatoes, AND Frank’s opportunity cost of 1 oz. of potatoes is ¼ oz. meat and Rose’s is ½ oz. of meat, Frank has the comparative advantage in producing potatoes and Rose has the comparative advantage in producing meat. b. Produce what you have the comparative advantage in c. Someone can have the absolute advantage in both goods, but not the comparative advantage. Chapter 4 11. In a perfectly competitive market, no single buyer or seller has any advantage over another and has no control over price become PRICE TAKERS because they must settle for the market price. 12. The QUANTITY DEMANDED by the buyers is the amount of a good that buyers are willing and able to purchase whereas DEMAND is the relationship between the price of a good and the quantity demanded represented in a table and as a curve on a graph. 13. The LAW OF DEMAND states that when the price of a good rises, consumers are willing and able to buy less, OR if the price of a good falls, consumers are willing and able to buy more. 14. The DEMAND CURVE SHIFTS when there is a change in income, change in prices of related goods (blueberry pie vs. ice cream), change in tastes, change is expectations (gas, lottery tickets) or a change in the number of buyers (immigration). a. Movement occurs along the demand curve when there is a change in price of the actual good. b. When there is an increase in your income, you have increased demand for NORMAL GOODS, and when there is a decrease in your income, you have a decreased demand for INFERIOR GOODS. i. You may buy more steak when you have an increase in income (normal good) and a decrease in purchase of spam (inferior good). ii. Similarly, if your income decreases, you may buy more inferior goods. c. In goods that are related, two goods are SUBSTITUTES when an increase in the price of one good leads to an increased demand for the other good (ex: if the price of chicken rises, you experience increased demand for beef instead because it is cheaper). d. Two goods are COMPLEMENTS when an increase in the price of one good leads to a decrease in demand for the other (ex: if the prices of computers rise, you have decreased demand for the software that goes along with it). 15. The QUANTITY SUPPLIED by the buyers is the amount of a good that sellers are willing and able to sell whereas SUPPLY is the relationship between the price of a good and the quantity supplied represented in a table and as a curve on a graph. 16. The LAW OF SUPPLY states that when the price of a good rises, sellers are willing and able to supply more, OR if the price of a good falls, sellers are willing and able to supply less. 17. The SUPPLY CURVE SHIFTS when there is a change in input prices (what goes into making a good), technology, expectations about the future (affect current supply), and number of sellers. a. Movement occurs along the supply curve when there is a change in price of the actual good. 18. EQUILIBRIUM is what the market strives for balance of quantity supplied and quantity demanded. 19. Markets not in equilibrium exhibit a SURPLUS (quantity supplied>quantity demanded and there is a downward pressure on price) or a SHORTAGE (quantity demanded>quantity supplied and there is an upward pressure on price) a. Surplus b. Shortage 20. When the equilibrium changes due to a shift in supply or demand, you must answer three questions to determine the new equilibrium price: a. Did the event shift the supply curve, the demand curve, or both curves? b. Did the curve shift to the left or right (or was there movement along the curve)? c. Use the supply and demand diagram to compare the initial and new prices, and see the effects on the equilibrium price and quantity. d. Chapter 5 21. Elasticity is the measure of responsiveness of the quantity demanded or supplied to a change of some other factor. a. ELASTIC DEMAND (OR SUPPLY) is when a change in price leads to a large change in quantity demanded (supplied). b. INELASTIC DEMAND (OR SUPPLY) is when a change in price leads to small change in quantity demanded (supplied). 22. The PRICE ELASTICITY OF DEMAND is the percentage change in quantity demanded divided by the percentage change in price. a. b. It can also be measured using the midpoint method, and when you have two points: *Can be used for both supply and demand c. Demand/supply is elastic when E(p) >1 d. Demand/supply is inelastic when E(p)<1 e. Demand/supply has unit elasticity when E(p)=1 23. On a demand curve, the steeper the curve is, the more inelastic the good is (ex: perfectly inelastic is a vertical line which resembles the letter “I”), but the flatter the curve is, the more elastic the good is. 24. TOTAL REVENUE is the amount paid by buyers and received by sellers and is equal to the price of the good times the quantity sold a. TR = (P x Q) b. If you raise the price of a good, i. When demand is inelastic, TR increases (price and TR move in same direction). ii. When demand is elastic, TR decreases (price and TR move in opposite directions). 25. INCOME ELASITCITY OF DEMAND is how much the quantity demanded of a good responds to a change in a consumer’s income. a. b. If E(i) is positive, it is a normal good, and if E(i) is negative, it is an inferior good. c. The larger the positive number, the more of a luxury the item is, and the smaller the positive number, the more of a necessity the good is. 26. CROSS PRICE ELASTICITY OF DEMAND is how much the quantity demanded of one good responds to a change in price of another good. a. b. If E is positive, the good is a substitute (replaceable goods), and if E is negative, the good is a complement (goods used together). 27. PRICE ELASTICITY OF SUPPLY is how much the quantity supplied of a good responds to a change in price of that good. a.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'