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ECO211 Study Guide

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by: May Thu

ECO211 Study Guide ECON 221

Marketplace > University of Miami > Economcs > ECON 221 > ECO211 Study Guide
May Thu
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This includes all the notes from all the lectures. The study guide has clear graphs and methods of calculations.
Economic Principles and Problems 211
David Spigelman
Study Guide
Microeconomics, Graphs, comparative advantage, absolute advantage, supply, demand, welfare
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This 15 page Study Guide was uploaded by May Thu on Sunday February 14, 2016. The Study Guide belongs to ECON 221 at University of Miami taught by David Spigelman in Spring 2016. Since its upload, it has received 214 views. For similar materials see Economic Principles and Problems 211 in Economcs at University of Miami.


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Date Created: 02/14/16
Sunday, February 14, 2016 ECO211- Exam Study Guide Chapter 1-5 - Economics: study of how you allocate resources under conditions of scarcity • Microeconomics: study of how individuals allocate resources under conditions of scarcity (small scale) • Positive economics: “as it is”, description and explanation of economic phenomena (scientific explanation: focuses on facts and cause-effect relationships and testing of economic theories) • Normative economics: “as it should be”, how to make things better (prospective) - 3 Principles (to maximize utility/pleasure) 1. Optimization: process of making the best choice possible with given available information 2. Equilibrium: when everyone is optimizing, no one would be better off with a different choice 3. Empiricism: analysis that uses data that is evidence-based to determine what is causing things to happen in the world - Opportunity cost: best alternative use of a resource (going to the watch one movie instead of the other one) - Scientific Method (2 Steps) • Step One: Developing models that can explain some part of the world • Step Two: Testing those models using data to see how closely the model matches what we actually observe - model: simplified description of reality (drastic simplification) - Causation VS Correlation • Causation: when one things affect the other • Correlation: when two things are related • Correlation doesn’t prove causation (There are omitted variables.) 1 Sunday, February 14, 2016 - Principle of Optimization at the margin • if the option is the best choice, you’ll be made better off as you move toward it, and worse off as you move away from it • marginal: incremental (small change) - Demand Schedule • Demand curve: Price increases, Quantity decreases • Exogenous: outside the system • Endogenous: inside the system (on the axis, price and quantity) • Quantity demanded: Things along the curve - Ceteris Paribus: all else equal - Supply Schedule • Price increases, Quantity increases - Things that shift the demand curve • Related goods: changes in prices of a substitute/complimentary good Taste and preferences • Consumer income • • Expected price of good • Normal VS Inferior goods - Normal: Income increases, consume more (demand increases) - Inferior: Income increases, consume less (demand decreases) 2 Sunday, February 14, 2016 - Things that shift the supply curve • Improvement in technology • Decrease in the cost of input • Expectation of falling prices • Weather • Exogenous factors cause the curve to shift, endogenous factors are along the line - Equilibrium: the point where the demand and supply curves intersect - Budget Constant - Consumer Surplus Formula - (What you’re willing to pay) - (what you actually pay) 3 Sunday, February 14, 2016 - Elasticities of Demand (IMPORTANT FOR EXAM) - Elasticity can go from zero to infinity on the demand curve - slope is constant **Elasticity DOES NOT EQUAL slope** - Can’t eyeball the number, must calculate except when: Or When demand or supply curve is vertical, it is perfectly inelastic. When demand or supply curve is horizontal, it is perfectly elastic. - Estimate of Elasticity formula •If the points are closer together, the more accurate the estimate will be •Take the absolute value of the answer so it will never be a negative number •Q intercept is perfectly inelastic 4 Sunday, February 14, 2016 - Elasticity of demand • Price elasticity of demand: ???? = ???? or η • Price elasticity of supply: η - Characteristics of ???? and η Characteristics Values ????fand η Perfectly Inelastic ???? and η= 0 ???? and η= between 0 and 1 Inelastic Unit Elastic ???? and η= 1 Elastic ???? and η= greater than 1 ???? and η= ∞ Perfectly Elastic - Graph Example 1 Price Quantity Demande(????) Quantity Suppli(η) 10 0 7.5 9 1 6 8 2 4.5 7 3 3 6 4 1.5 5 5 0 5 Sunday, February 14, 2016 • (????) is greater than 1, the demand curve is elastic and is above the unit elastic point which is 1 (Increase supply and lower price) • (η) is greater than 1, the supply curve is elastic • Short-run: Things tend to be more inelastic • Long-run: Things tend to be more elastic Factors of Production - Perfect Competition: no one buyer or seller can affect the market price by themselves (both consumer and firms are price takers) (free entry: anyone can enter the market) - Inputs of the production function (Factors of production) • Capital: physical input to the production process to create output (land, natural resources, machinery, factories) Labor: human work effort • - Cost of production - Cost = Fixed Cost + Variable Cost - Cost of Production Example 6 Sunday, February 14, 2016 - Function: C= 4x+2q 2 - p= 10 q: level oFC (Fixed VC C (Total MC ARC AVC AC R (p x q) Profit output for Cost) (variable Cost) (Marginal (FC/ q) (VC/q) (C/q) (R-C) the firm cost) (2q ) Cost) (ΔC/ΔQ) 0 4 0 4 2 - - - 0 -4 1 4 2 6 6 4 2 6 10 4 2 4 8 12 10 2 4 6 20 8 3 4 18 22 14 4/3 6 22/3 30 8 4 4 32 36 18 1 8 9 40 5 5 4 50 54 - 4/5 10 10 4/5 50 -4 Profit is going to be maximum between q (2) and q (3) - MC will go through and intersect AC curve at its maximum -AC will always be a “U” shape Competitive Model/ Point of Beauty ** Chapter 7 Online Homework NOT NEEDED, NO textbook reading required** ** Everything that’s going to be on the test will be mentioned during lecture** 7 Sunday, February 14, 2016 - Competitive Model (Perfect Competition/ Competition) • Assumptions: - Many buyers and sellers (both firms and consumers are price takers) - Free entry and exit (no barriers to enter market) - 0 profits in the long run (not actually 0, but economists don’t know what the rate of return is so they use 0) - homogeneous product (undifferentiated product): everybody makes exactly the same thing • Point of beauty: Profit = 0 • Firms must operate well to stay within point of beauty to stay in business • AC curve is like the supply curve for the firm • Supply curve for the industry is the aggregate supply • if the firm is not regulated (has choices): Output= MC = MR - Finding Profit • Function: Profit = (P-AC) x q •haded rectangle is the profit •There is profit if the shaded 8 Sunday, February 14, 2016 rectangle is above the AC curve, loss if the shaded rectangle is below the AC curve. Example test questions 1. What does it mean when the long-run supply curve is horizontal. - Because there is free entry and exit, when the price of a good is too high, firms will enter the market (supply increases), causing the price to go down back to the point of beauty/ back new equilibrium at the long run supply curve. D2 • LR Supply is in line with the point of beauty • Will always go back to the point of Situation: Demand goes up, E1 shifts to E2 beauty • causing the price to go up • Because prices go up, more firms enter the market causing the Supply to increase, E2 shifts to E3 and meets back at the LRS curve 2. What does it mean when the price is determined by technology in a competitive market? 9 Sunday, February 14, 2016 • If the firm comes up with better technology to increase output more •LR efficiently, the AC curve shifts down, and the point of beauty goes down (Price becomes cheaper and the consumer benefits) Production Possibility Frontier/ Comparative and Absolute Advantage - Production Possibility Frontier (PPF) •Sloping down because of diminishing returns •hows maximum output possibilities for two goods • intercept: maximum output for Product A • Intercept: maximum output for Product B - Absolute Advantage - country’s ability to produce a certain good more efficiently than the other country (Who can produce more of Product A? Who can produce more of Product B?) - US has an Absolute Advantage in making Laptops (3 is greater than 2 (China’s production of laptops)) -China has an Absolute 10 Sunday, February 14, 2016 Advantage is making Cars (6 is greater than 2 (US’s production of cars)) - Efficiency: “How big?” Maximizes welfare - Equity: Who gets what? - Trading can have winners and losers - Autarky: absence of trade - Comparative Advantage - Countries should tend to specialize in industries that take advantage of their relative factor endowments (Inputs: natural resources, labor, human capital) and specialize to be made better off - Steeper slope: has comparative advantage in product on Y axis - Flatter slope: has comparative advantage in product on X axis -Comparative Advantage Example Problem Which has the absolute advantage in making guns? • • No one. Both countries will produce 3 in autarky • Comparative Advantage • Swaziland: Guns • Swaziland has a steeper slope and has a comparative advantage in the Y axis product, guns • Madagascar: Butter 11 Sunday, February 14, 2016 • Madagascar has a flatter slope and has a comparative advantage in the X axis product, butter • What is the opportunity cost of producing 2 guns in Swaziland? * Multiply (2 guns) by (1 butter/ 3 guns) to cancel out the guns algebraically, so that we are left with just the butter What is the opportunity cost of producing 1 gun in Madagascar? • * Multiply (1 gun) by (2 butter/ 3 guns) to cancel out the guns algebraically, so that we are left with just the butter Welfare Analysis - Autarky: absence of trade - Dead weight gain: the market is working efficiently - tariffs: tax on imports - Infant Industry Argument (Import Substitution Industrialization) • putting tariffs of imports (ie: $1,000 on a Japanese car) so that infant industries (new industries) will develop and local manufacturers start producing • as local production rise, government can take off tariffs later and allow the local manufacturers to compete in the global market 12 Sunday, February 14, 2016 • the argument is used in Latin American countries and is failing EXAMPLE 1 Autarky (1) Free Trade (2) Δ (2-1) Consumer Surplus A+B A A-(B+A)= -B Producer Surplus E B+C+D+E (B+C+D+E)-(E)= B+C+D Government Revenue 0 0 0 Welfare (Add column) A+B+E A+B+C+D+E (A+B+C+D+E)-(A+B+E)= C+D Welfare analysis: Welfare is positive (C+D): efficient, increase welfare, total surplus, dead weight gain (look at bottom right corner of table) 13 Sunday, February 14, 2016 **Consumer Surplus: area below Demand curve, above the PA/PFT line** **Producer Surplus: area above Supply curve, below PA/PFT line** **Government Revenue: 0 in this case because there is no government intervention** EXAMPLE 2 Free Trade (1) With Tariff (2) Δ(2-1) Consumer Surplus A+B+C+D+E+F A+B (A+B)-(A+B+C+D+E+F)= -C-D-E-F Producer Surplus G C+G (C+G)-(G)= C Government 0 Area of rectangle (E)-(0)= E Revenue E Welfare A+B+C+D+E+F+G A+B+C+E+G (A+B+C+E+G)-(A+B+C+D+E+F +G)= -D-F 14 Sunday, February 14, 2016 Welfare analysis: Welfare is negative(-D-F): inefficient, decrease welfare, dead weight loss (look at bottom right corner of table) **Consumer Surplus: area below Demand curve, above the PFT/PWT line** **Producer Surplus: area above Supply curve, below PFT/PWT line** **Government Revenue: Area of rectangle E because the space presents the amount of taxes the government is collecting from the goods** 15


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