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Final Study Guide

by: Bernardo Aidar

Final Study Guide Econ 150

Bernardo Aidar

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About this Document

These notes cover what the exam for the fall semester was, mostly based on the lessons and from the book
Dr. Safner
Study Guide
Economics, Intro to Economics
50 ?




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This 12 page Study Guide was uploaded by Bernardo Aidar on Monday February 8, 2016. The Study Guide belongs to Econ 150 at Wake Forest University taught by Dr. Safner in Winter 2016. Since its upload, it has received 26 views. For similar materials see in Economcs at Wake Forest University.


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Date Created: 02/08/16
Econ 150 Final Study Guide Equimarginal principle -> Optimum solution is when MC=MB Invisible hand -> People acting in their own self interest will move the market towards betterment Opportunity Cost -> The cost opportunities lost of making a choice Positive Economics -> Describes the effects of particular actions (objective and fact based) Normative Economics -> Describes the values and ideas of particular actions (subjective and value based) Consumer surplus -> Max WTP [D curve] - Market Price (P*) [actually paid] Producer Surplus -> Market Price (P*) - Min WTA [S curve] Price below equilibrium -> Shortage -> Price above equilibrium -> Surplus -> Supply change is caused by -> * Price of inputs (increases in these increase supply) * Level of technology (increases in this increases supply) * Number of sellers (increases in this increases supply) * Expectations of future prices (increases in this decrease supply) Demand change is caused by -> * Tastes (increases in preference increase demand) * Income (increases in income increase demand, for "normal goods") · Increases in income which decrease demand are called "inferior goods" * Price of substitutes (increases in price increases demand) * Price of complements (increases in price decrease demand) * Number of buyers (increases in this increase demand) * Expectations of future prices (increases in this increase demand) Elastic Demand -> Big response in supply, little response in price -> Inelastic Demand -> Little response in supply, large response in price -> Cross price elasticity of demand -> How much do people change consumption of good A if theres a change of price in good B * If positive: substitutes (B becomes more expensive than A, switch to buying more A) * If negative: complements (Bundle of A+B becomes more expensive, buy less of A (and B)) Price ceiling -> A maximum price allowed for a product: A market with a price ceiling control (e.g. rent control) where there is a maximum legal price can lead to a permanent shortage. -> Price floor -> Minimum price for a product: A market with a price floor control (e.g. minimum wage), where there is a minimum legal price can lead to a permanent surplus. Statutory burden -> Who is legally required to pay Economic burden -> Who ends up paying for taxes or changing their behavior Tax on sellers -> Tax on buyers -> Who actually pays the taxes? -> Whoever has the most inelastic curve (suppliers or demanders) Factors of production -> - Land: all natural resources, rented or exchanged for rent - Labor: physical expenditure of human energy, rented for wages - Capital: higher order goods, borrowed for interest - Entrepreneurship: undertaking a risky venture in pursuit of prot Sole proprietorship -> One person owns the business. All decision power and profits but has all the responsibility for debts Partnership -> Two or more owners Corporation -> Large companies where the owners are legally separated from the corporation. Total Revenue (TR) (curves) -> price x quantity Average revenue (AR) -> TR/ Q Marginal revenue (MR) -> ∆TR/ ∆QF Fixed Cost (FC) -> Cost that must be paid regardless of period of production Variable cost (VC) -> Cost that changes with amount produced Total Cost (TC) -> fixed + variable cost Average (Total) Cost (AC) -> Total cost per quantity (TC/Q) Average Variable Cost (AVC) -> Variable costs per quantity (VC/Q) Marginal Cost (MC) -> additional cost per additional unit output ∆TC/ ∆Q When to produce -> P ≥ AC When to exit the market -> P < AC *Produce on the long run if P ≥ AVC How much to produce -> MC = MR Price takers -> Firms accept the price set by the market demand and supply. Firms set Q when MC=MR Price Searcher -> Monopolies are price searchers, set the price to maximize profit. Set the Q where MC = MR -> Monopoly graph -> Monopoly creates deadweight loss by lowering quantity and raising price (reducing mutually beneficial exchanges) -> Sources of control of monopoly power -> Control over a key resource, barriers to enter, natural monopolies (public ultilities, subways, power plants), network effects (already established norm for the product) Oligopoly -> Few large sellers (AT&T, Verizon, Sprint, T-Mobile). Firms are interdependent on other firms strategies (prisoners dilemma). Prisoners dilemma -> Noncooperative, both players will always choose what benefits them individually the most. -> Nash Equilibrium -> Outcome where neither player has an incentive to switch strategies Collusive outcome -> Outcome where both players could form a cartel and raise their prices Cartel -> Companies collectively choose an outcome to benefit both of them. Cartels are unstable because firms have an incentive to cheat Monopolistic Competition -> Many firms, each with some market power. Entry and exit, profits attract new entrants in long run. In the long run there are no profits Price Discrimination (First Degree) -> Charge each customers their reservation price (most WTP) Price Discrimination (Second degree) -> Bundles of quantities at different price Price Discrimination (Third degree) -> Firms split markets into separate market segments, charging more inelastic market higher price, more elastic market lower price -> Tying -> Lowering the price of a good (printer) and raising the price of a necessary complementary goods (ink), to get high-volume users to buy more ink Bundling -> Selling similar goods in a bundle, rather than individually (e.g. Microsoft Office) to promote more production and sales of diverse products Structure of Political Economy -> Externalities -> Where the private cost/benefit is different than the social cost/benefit and the person is not internalizing the external harm/benefit Rent-seeking -> where special interests invest resources to persuade government agents to make policy that benefits their group at others' expense. Regulatory capture -> Regulatory capture is a situation where a regulatory agency, meant to regulate an industry for the public interest, ends up being "captured" by that industry, which designs regulations for its own benefit. Mercantilism/Protectionism -> A nation gets wealthy by accumulating money (Fallacy) Wealth -> Ability to consume (must first produce!); more money can lead to inflation Favorable balance of trade -> exports > imports (Fallacy) * All trades are mutually beneficial, both countries benefit from trade * Current account: value of goods & services exported (+) and imported (-) * Capital account: value of investment inflows (+) and outflows (-) * Mercantilists want to max current account, but any increase(decrease) in current account is matched by an opposite decrease(increase) in capital account * Trade is always balanced! Tariff on imported goods -> Used to benefit domestic producers Domestic demand (demand within one country) * Domestic supply (suppliers within country) * World supply (total world supplying to country) * Equilibrium at PW+t where QD = Q′ Inflation -> An increase in the price level (a decrease in purchasing power) Deflation -> A decrease in the price level (an increase in purchasing power) How interest works -> Price that makes it worthwhile for people to lend money today in exchange for receiving money in the future · FV = PV(1 + r)^n · FV: future value, PV: present value, r: interest rate, n: number of periods Nominal Variable -> Measured in historical money prices (price at the time) Real variable -> Adjusted for changes in value of money Inflation rate -> (CPI2−CPI1)/CPI1 ∗ 100% Comparing nominal prices to real prices -> Real priceY1 = Nominal priceY1 ∗ (CPI2/CPI1) Equity Markets -> Market selling shares of companies Credit/Debt Markets -> Markets that sell loans and bonds (prices increase with as interest rates decrease). Government can crowd out private borrowing by forcing up interest rates Quantity Theory of Money -> M(Money supply)*V(Velocity of Money) = P(price level)*Y(real production) Gross Domestic Product -> Y = C + I + G + (X-M) Y: national income/product (GDP) · C: consumption spending · I: investment spending · G: government spending (not transfer payments) · X: exports · M: imports Monetary Policy -> Central banks aiming for macroeconomic stability via targeting a stable price level or interest rates Fiscal Policy -> Government spending to promote macroeconomic stability Government budget identity -> G = T + D + M * G: government spending * T: tax revenue * D: government borrowing (bonds) * M: money printed Budget Surplus -> If Government spending < Government budget identity Budget Deficit -> If Government spending > Government budget identity Government must borrow money (+D) - must pay back in future (raise T or lower G), risks crowding out · Or print money (+M) - risks inflation Frictional Unemployment -> Natural and voluntary unemployment Cyclical Unemployment -> Unnatural unemployment (e.g Recessions) Business Cycle -> The cycle that the economy goes through, cycle of booms and busts Recession -> Sustained negative GDP growth and increase on unemployment


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