Macroeconomics Exam 1 study guide
Macroeconomics Exam 1 study guide econ 22061-002
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This 4 page Study Guide was uploaded by Garrett Anderson on Saturday February 13, 2016. The Study Guide belongs to econ 22061-002 at Kent State University taught by Dr. Rohlin in Winter 2016. Since its upload, it has received 59 views. For similar materials see Macroeconomics in Economcs at Kent State University.
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Date Created: 02/13/16
Study Guide for Exam 1 Principles of Macroeconomics: Principle #1: Scarcity Scarcity the limited nature of society’s resources. Economics Study of how society manages its scarce resources. Principle #2: OC Opportunity Cost Anything you must give up, in order to obtain something Only the next best thing Principle #6: Markets are usually a good way to organize economic activity. Market economy: allocate resources through decentralized decisions of households & firms. Principle #7: Gov’t can sometimes improve market outcomes. 1. Create & enforce laws Enforce property rights. 2. Markets don’t make it the most efficient. Market Failure: Market fails to allocate resources efficiently. 2 Types: 1) Externality Production or consumption of a good effects bystanders. 2) Market Power Buyer or seller has substantial influence on the price. 3. Markets don’t make it as equitable as we would like. Principle #8: A country’s standard of living depends on its ability to produce goods& services. ProductivityAmount of G&S produced per unit of labor 8 times better standard of living than 100 years ago Principle #9: Prices rise when gov’t prints too much money. Inflation general rise in prices Principle #10: Society faces a short run tradeoff between inflation & unemployment. Stagflation inflation and unemployment is both high Chapter 3 Absolute Advantage: Book definition the ability to produce a good with fewer resources. Personal definition Whoever produces more of the good. Example: Jane can produce 100 bundles of wheat and 250 bundles of corn. Jacob can produce 50 bundles of wheat and 100 bundles of corn. Who has the absolute advantage? Answer: Jane has the absolute advantage in both wheat and corn because she produces more of both. Comparative Advantage: Book definition the ability to produce a good at a lower opportunity cost than another producer Personal definition Whoever produces one of the good for a lower cost. Example: Jane can produce 100 bundles of wheat and 250 bundles of corn. Jacob can produce 50 bundles of wheat and 100 bundles of corn. Who has the comparative advantage each? In order to find the opportunity cost of a good use the formula: Good 2 = Good 1/ Good 2 To find Jane’s opportunity cost for corn: Corn = Wheat/ Corn 100/250 = .4 In other words, to produce one bundle of corn it will cost Jane .4 bundle of wheat. To find Jane’s opportunity cost for wheat: Wheat = Corn/ Wheat 250/100 = 2.5 In other words, to produce one bundle of wheat it will cost Jane 2.5 bundles of corn. To find Jacob’s opportunity cost for corn: Corn = Wheat/ Corn 50/100 = .5 In other words, to produce one bundle of corn it will cost Jane .5 bundle of wheat. To find Jacob’s opportunity cost for wheat: Wheat = Corn/ Wheat 100/50 = 2 In other words, to produce one bundle of wheat it will cost Jane 2 bundles of corn. Jane has the comparative advantage in corn because she has a lower opportunity cost (.4) than Jacob (.5). Jacob has the comparative advantage in wheat because he has a lower opportunity cost (2) than Jane (2.5). Chapter 4 Law of Demand: Claim that Quantity demanded falls when the Price rises. Demand Schedule: Table that demonstrates the law of demand. Market demand is the sum of all demands. Demand Shifters: 1. Change in # of buyers 2. Change in income or wealth Normal Good: Demand for a good increases when income increases. Inferior Good: Demand increases when income decreases. 3. Price of related goods Compliment: Things that go together. Price of one good increases, the demand for the other falls. Substitute: Thing to replace another thing. Price of one good increases, the demand for the other increases. 4. Tastes 5. Expectations: Expect income to rise in future, increase demand today Law of Supply: Claim that Quantity supplied rises as price rises Supply Schedule: Price rises, make more products Supply Shifters: 1. # of sellers 2. Input prices (also wages) 3. Technology 4. Expectations –self fulfilling Ch. 5 Elasticity measure of responsiveness of quantity (S or D) to a change in its determinants (price) Elasticity of Demand/ Supply Formula: % change Q/ % change P = E Midpoint formula: [(X2X1)/ [(X2+X1)/2]] * 100 ***Use this midpoint formula for quantity demanded & price*** ***Elasticity of Demand/ Supply will always be negative. Take the absolute value*** Example: Q1 = 500 Q2 = 1000 P1 = 400 P2 = 100 Answer: Q = (1000500)/ ([1000+500]/2) * 100 = 500/ 750 * 100 = 66.66 % P = (100400)/ ([100+400]/2) * 100 = 300/ 250 * 100 = 120 % Q / P = 66.66 % / 120 % = .55 = E If E < 1, it is said to be inelastic. Inelastic’s graph is more vertical. Small change in quantity but large change in price. Example: Medicine. If E = 1, it is said to be unit elastic. If E > 1, it is said to be elastic. Elastic’s graph is more horizontal. Large change in quantity but small change in price. Example: Blue jeans or a luxury such as a cruise. Elast Inelastic Many # of close substitutes few/none Narrow Broad/ Narrowly defined Broad Long term Time Horizon (fuel) Short term Income elasticity of demand = % change Q/ % change I = E (i) Example: Q1 = 30 Q2 = 140 (I) 1 = 6000 (I) 2 = 14000 Answer: Q = (14030)/ ([140+30]/2) * 100 = 110/ 85 * 100 = 129.41 % I = (140006000)/ ([14000+6000]/2) * 100 = 8000/ 10000 * 100 = 80 % Q / I = 129.41 % / 80 % = 1.62 = E (i) E (i) > 0 = a normal good E (i) < 0 = inferior good E (i) = 0 = buys the same amount of a good Crossprice elasticity: % change Q Good (1) / % change Price Good (2) = E (xy) E (xy) > 0 = substitute E (xy) < 0 = compliment Example: Coke quantity rises from 100 units to 500 units. Pepsi price increases from $5 to $15. Answer: Q (1) = (500100)/ ([500+100]/2) * 100 = 400/ 300 * 100 = 133.33 % P (2) = (155)/ ([15+5]/2) * 100 = 10/ 10 * 100 = 100 % Q (1) / P (2) = 133.33 % / 100 % = 1.33 = E (xy)
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