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ECN212 Exam 1 Study Guide

by: Phoebe Chang

ECN212 Exam 1 Study Guide ECN 212

Marketplace > Business > ECN 212 > ECN212 Exam 1 Study Guide
Phoebe Chang
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Introduction to Microeconomics Supply and Demand Surpluses and the Calculation Elasticity and the Calculation Opportunity Cost and the Calculation The Market Government interference and Taxes
William Foster
Study Guide
Math, economy, tax, Government, surplus, Microeconomics
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This 13 page Study Guide was uploaded by Phoebe Chang on Thursday February 11, 2016. The Study Guide belongs to ECN 212 at a university taught by William Foster in Spring 2016. Since its upload, it has received 232 views.


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Date Created: 02/11/16
Microeconomic Exam #1 Study Guide CLASSNUMBER:ECN212 PROFESSO:W ILLIAM FOSTERNOTE TAKE:PHOEBECHANG 1 S UPPLY AND D EMAND The law of demand The law of supply Graph Relationship Negative Positive (↑ Price / ↓ Demand) (↑ Price / ↑ Supply ) 1. Income  Inferior good (↑ Income / ↓ Demand)  Normal good (↑ Income / ↑ Demand) 1. Production state of technology 2. Price of alternative good  Shift outward  Substitution (Advanced technology, (↑ Price / ↑ Demand) tragedy event for survivors)  Complements  Shift inward (↑ Price / ↓ Demand) (Natural disaster, War) 3. Tastes and Preference 2. Price of an input  (↑ Desire/ ↑ Demand)  (↑ Price / ↓ Supply) Factors that 4. Consumer Expectation 3. Producer Expectation shift the curve  Prices Expectation  Price Expectation (↑ Expectation/ ↓ Demand) (↑ Expectation/ ↓ Supply)  Income Expectation 4. Taxes and Subsides (↑ Expectation/ ↑ Demand)  Taxes 5. Population and Demography (↑ Taxes / ↓ Supply)  Certain group of population  Subsides have certain demand (↑ Subsides / ↑ Supply) (↑ Population / ↑ Demand) 5. Number of Sellers 6. Derived Demand  (↑ Seller / ↑ Demand)  Demand of a processed good changes the demand of the source of the good (↑ Processed / ↑Source) 2 S URPLUSES Consumer Surplus Producer Surplus  Excess assets including income, profits, and goods Common Definition  Not allowing the market price to fall or rise too much Difference between ‘willing to buy for’ andDifference between ‘willing to sell for’ Detailed the actual bought price and the actual sold price Definition The lower the market price is, the betteThe higher the market price is, the better. S URPLUSES CALCULATION S TEPS Step 1 – Find P Step 2 – D / S = 0 Find D */ S * Step 3 – D / S = P Find Q Step 4 – Calculate the triangle • Yellow = Consumer • Green = Producer • Both = Total surplus 4 B ASIC C ONCEPTS OF M ICROECONOMIC Microeconomic Focus (Personal) • Motives matter o Incentives changes people’s behavior o Study of people, social situation: Move the cheese, not the mouse o Motivations for different people  Suppliers = Produce efficiently (low cost)  Entrepreneurs = Innovative + highly valued  Resources owner = Develop + supply high valued producers • Market works efficiently = self-interest aligned interest o The invisible hand = self-interest leads to benefit to society o Profit is the main motive for business activities o All prices have information • Trade-offs are everywhere o Opportunity cost = Invisible Loss o Accounting cost = Money Value o Real Prices = Value of money changes (time, effort, money) • Thinking on the margin o Margin cost: bad o Margin benefit: good o Margin cost and benefit to make decisions o Sunk cost shouldn’t be included in decisions (Lost that is not recoverable) • Trading power o Both sides win, happier due to the trade Scarcity • Short in supply to satisfy all desires at zero price • Therefore we need to make choices / buy for things / sacrifice for alternative • Item is scare = desire to get it at zero price = Goods o Air = No  Pay tax to maintain the breathable pay o Garbage/Pollution/Smog/Noise = No  Pay to get rid of the bads Rationing / Price System • Market System = pay the most gets it = pricing o Interaction between people = buyers / sellers = contains information o Capitalism- trades and industries controlled by private owners for profit, not state yet resolves the basic economic problems • Economize = gaining the most with least cost o Seller sell for more than the product’s value o Buyers buy when the product’s value is lower o Value to seller < Price < Value to buyer • Rational Behavior o Making choices that is best for the market participants own interest Interest of Economists • Positive Analysis o “What is” = facts o The actual relationship between different aspects of the world o Can be supported or corroborated by evidence o E.g. The increase in the cost of diving insurance due to DUI (measuring dollars) • Normative Analysis o “What ought to be" o An opinion that is involved with some judgement o Cannot be supported or corroborated by evidence o NOT discussed in economics because cannot share same values with everyone Laws of Supply and Demand has consequences • Consequences o Trying to control prices / quantity will have unwanted reactions o Good intentions might not have good results o E.g. Prohibition, new restriction laws, black markets • Cannot ignore the demand and supply desire • Secondary Effects are important o Increasing bad behavior due to insurance, car safety equipment (E.g. Apple Care, Seatbelt, etc.) o Price Controls (E.g. minimum wage, rent control) Definitions • Microeconomic o aka Price Theory o Branch of economic that focus on smaller human units o E.g. individuals households, small businesses decisions • Macroeconomic o Branch of economic that focus on a complex human o How human behavior affects outcomes in highly aggregated markets (E.g. labor / consumer products) • Ceteris Paribus o All things are equal or constant • Theory o Then can be used to predict and explain real-world situations without justification since it’s proven already o Shows connections of facts o Based on assumptions o Need confirmation of the fact o Not definite o Can show cause-and-effects • Models o Based on someone else’s feet o Built to simplify things and reduce dimensions of the world • Association / Correlation o Doesn’t show causation o Statistics never allow us to prove cause-and-effects • Fallacy of Composition o The wrong concept of ‘individual view = group views' Division of Labor • Break down the production to different tasks • Specialization + Division of Labor = Increase Output o Allow individuals take advantages of their existing skills o Allow individuals to expertise on certain skill o Allows for mass production technology to work Trade • Foundation of the trade = mutual gain • Value o Letting go least value items / Getting more value items • Transaction costs o Time o Effort o Resources needed to be used for a trade o Reduce our ability to gain from potential trades • Middlemen o Person who buys, sells or arranges trades o Government requirements o Reduce transaction costs o E.g. Online selling websites, local grocer Production Possibilities Frontier • Frontier o Due to limited resource, there are limitations for input and output o Shows the maximum of an individual or economy can create based on resources quantity • Resources in production o Capital o Entrepreneurship o Labor o Land • Production possibilities curve (PPC) o On the PPC = efficient o In the PPC = inefficient o Out of the PPC = impossible • Shifting PPC Outward o Increase in economy resources o Advancing technology o Improvement in rules of economy o Increasing labor and work time  E.g. WWII increased PPC Opportunity Cost o Alternative cost is important when the option is fixed o The lower the opportunity cost is the better (the lesser you lose) o E.g. Left-handed catchers are more valuable as pitchers o Three types  Explicit costs— can be transferred into money prices  Implicit costs— the opportunity cost  Economy cost— explicit + implicit Law of comparative advantage • Absolute Advantage o Ability of one to carry out a certain economic activity more efficiently than the other • Comparative Advantage o One specialize on lower opportunity cost good = an increase on total economic welfare • Having absolute advantage at all production ≠ have advantage on comparative advantage  O PPORTUNITY C OSTC ALCULATION Losing Sacrafied Production ) ( ) Gaining Chosen Production 5 T HE M ARKET Markets • A market includes supply and demand for a product • Equilibrium (e / P*) o Where demand and supply cross each other on price and quantity graph o Same quantity supplied and demanded • Excess Supply o More quantity supplied than demanded (XS) o “Buyers’ market" • Excess Demand o More quantity demanded than supplied (XD) • In Free Market o Shortage = Higher Price o Surpluses = Lower Price • The Law of Marginal Utility o Individual will stop consuming to a certain point after increasing the consumption rate o E.g. All-you-can-eat buffet • Market Price (P) ≠ Equilibrium Price (P*) o Seller wants to sell more = Market price > Equilibrium price o Buyers want to buy more = Market price < Equilibrium price • Negative Externalities o Negative impact on others o E.g. second handed cig • Positive Externalities o Benefits for others o E.g. deodorant • Shortage o Demand exceed supply can afford o Don’t allow price to increase o E.g. rent control 6 G OVERNMENT INTERFERENCE AND T AXES Government in the markets o Price Ceilings  Legally setting a maximum price that is charged for a good  Set when price is below equilibrium price o Example of Price Ceilings: Rent control— Shortage  Shortage (lesser supply than demand needs)  Reductions in product quality (depreciation)  Wasteful lineups  Misallocation of resources (change of use of apt)  Loss from gains to trade  Black markets can develop (make the price closer to the market price)  Lesser housing built since the price is limited  Movement can happen (avoid the regulations)  More importance on non-price methods of rationing (knowing people, etc.)  Landlords discrimination towards certain groups  Long-term renters have more benefits than newcomers o Price Floors  Legally setting a minimum price that is charged for a good  Set when price is above equilibrium price o Example of Price Floor: Minimum Wage— Surplus  Affecting young, part-time worker the most  Less than 20% are below poverty line  Lesser labor demanded (low-skilled labor) / training on-the-job  Misallocation of resources  Encourage students to stop school  More technology involved (touch screen ordering, etc.)  Inward shift of supply curve due to increase of price input  Higher equilibrium price / Lower equilibrium quantity  Closing businesses since revenue cannot meet up with the wages expenses  Increase wage → Increase substitution technology → Outward shift of demand curve → Increase price + quantity sold Black Markets o Operations  Operates outside the legal system (to avoid price control)  Avoid taxes (cigarettes)  Illegal acts or production (e.g. gabling, weed, hookers, drugs)  Can be evaluated by demand / supply analysis  Higher profit  Violence used to resolve disputes o Legal System  Secure property rights Taxes o Tax is benefit and cost neutral o Tax Incidence  Statutory incidence  All individual are responsible for physically paying government a certain tax  Tax will have same effect on everyone regardless of who pays directly  The actual burden of a tax  Who pays more tax physically in the market  Producer vs Consumer  Depends on the elasticity of a good  Inelastic is expensive!  The more inelastic the good is, the more tax the consumer pay  100% paid by consumer when it’s perfectly inelastic  E.g. Toilet paper  The more elastic the good is, the less tax the consumer pay  100% paid by supplier when it’s perfectly elastic  E.g. Bottle water  Deadweight/Welfare Loss  Loss of the gains from trade due to imposition of a tax  Loss of consumer surplus + Loss of producer surplus  A triangle most likely  Consumer surplus + producer surplus = maximized  As time goes on, supply and demand become more elastic o Types of Taxes  Progressive tax  More income, more tax  e.g. property tax  Proportional tax  Everyone pays the same  e.g. 10% income tax  Regressive tax  More income, less tax  e.g. poor smokers, alcohol addicts  Marginal tax  Additional tax for different level of income  It gets higher and higher when you earn more  Marginal Tax Rate  The percentage of tax applied to your income for each tax bracket you qualify for.  Income threshold (10%, 15%, 20%, etc.) o Terms  Tax rate  The percentage taxed  Average Tax Rate  Tax liability / Taxable income  Tax base  The actual amount taxed  Tax revenues  Tax rate × Tax base  Laffer Curve  Shows tax rate & tax revenues relationship Subsidy o Definition  Payment for buyer or seller per unit of something  The law of supply and demand laws used to analyze subsidy impact  Not a tax benefit but can be consider as a type of tax benefit  Only affects supply curve o Impact  Inelastic goods  Sellers get more benefits from subsidy  Elastic goods  Buyers get more benefits from subsidy  Exception  Granted to certain group of people  E.g. elderly, poor people  Not subsidized group benefits none (pay higher prices)


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