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UTA / Economics / ECON 2306 / Do people always act in their own self interest?

Do people always act in their own self interest?

Do people always act in their own self interest?

Description

School: University of Texas at Arlington
Department: Economics
Course: Microeconomics
Professor: Roger wehr
Term: Spring 2016
Tags: Economics, Microeconomics, and Macroeconomics
Cost: 50
Name: Study Guide 1
Description: Summarized Notes for Exam 1
Uploaded: 02/15/2016
7 Pages 58 Views 3 Unlocks
Reviews

Mr. Verna Berge (Rating: )

Clutch. So clutch. Thank you sooo much Asiah!!! Thanks so much for your help! Needed it bad lol



The Fundamental Principles of Economics


Do people always act in their own self interest?



1. Scarcity (limited/fixed in supply ) is inescapable

2. Risk is unavoidable

3. Therefore, all persons must make choices (opportunity cost—the next best choice) a. Unlimited wants/fixed resources

4. Incentives matter

5. People generally act in their own self-interest

a. Adam Smith—Wealth of Nations; “Invisible Hand” motivated by self-interest 6. There is often more than one way to produce things

a. Cobb-Douglass Production Function

i. Q=f(K,L)

ii. Output=f(capital, labor)

b. Can produce things in capital intensive or labor intensive

i. In US, typically cheaper to produce in capital goods

ii. Why is Gas more expensive than Orange Juice even though Gas is more  


What is the circular flow of goods and services?



If you want to learn more check out What are the three types of contraction?

complicated to make? (bc Gas is a capital good)

c. Where you produce: productivity relative to wage rate

7. Voluntary exchange is mutually advantageous

8. It is wealth, not poverty which has causes

a. Focus on why nations become rich and not why they become poor

b. What creates wealth? Specialize and Trade (not because they have a lot resources) 9. Public policies have primary effects & secondary effects, some good, some bad a. Primary effects: intended Don't forget about the age old question of If 200.0 g of zinc sulfide contains 134.2 g of zinc, how many grams of sulfur can be obtained from 1.18 kg of zinc sulfide?

b. Secondary effects: unintended consequences

c. Examples:

i. “Path to hell is paid with good intentions”

ii. In Indonesia: if you save a drowning woman, you’ll be put to death


What are the six economic indicators?



1. Telling woman in Indonesia to learn how to swim because no one will  

save you---results? Woman in Indonesia rarely drown

iii. ↑Minimum Wage---helps lower-income people, but ↑unemployment

iv. Seatbelt law---↓traffic fatality, but ↑traffic accidents

10. In the end, economic laws tend to prevail

Topics studied under microeconomics

∙ Individuals (maximize utility/satisfaction)

∙ Firms/Entrepreneurs (maximize profit)

∙ Politicians (maximize votes/power)

Intelligence—comes from “inter” and “lego” meaning “between” and “to choose”

2 Most Noble Profession? Plumber/AC Repair (“menial” jobs that are often overlooked); Manager of  McDonalds (promoting trade btwn nations)

Economics Overview If you want to learn more check out Why do enzyme systems important?

∙ Economics:

o a social science (lack of experimentation in the macro level for it to be a hard science), o which attempts to explain how individuals, firms, & nations allocate (how to distribute) o scarce resources (limited ‘inputs’ or ‘factors of production’)

o among competing interests (opportunity cost)

∙ Positive vs Normative

o Positive: fact, “what is”

o Normative: value judgment, “what should” or “ought to be”

∙ Macro vs Micro

o Macro (Sectors of Macro)

▪ aggregate (sum, total, whole)

▪ π=inflation

o Micro (Levels of Micro)

▪ individuals, entrepreneurs, firms, industries Don't forget about the age old question of What is the purpose of capitalism?

▪ politicians and voters

▪ π=profit

∙ = TR (total revenue) – TC (total cost)

∙ = P (price) * Q (quantity) – ATC (avg total cost) * Q (quantity)

∙ = Q(P-ATC)

∙ *fun fact: P > AVC (keep operating) not necessarily when P < ATC

∙ Three Questions

o What? --- Allocation of inputs (resources)

o How? --- Production (capital or labor intensive)

o For whom? --- Allocation of outputs (products, goods)

∙ Four Systems

o Capitalists (free market/Laissez-faire)---Price controls

o Command and Control---Government controls

o Compromise---Price AND Government both control

o Customary (traditional)---Tradition (everything by tradition)

∙ Four Factors of Production & Their Respective Payments

o Land---Rent

o Labor----Wage

o Capital---Interest

o Entrepreneurship---Profit

National Income (for MACRO)

∙ Circular Flow Diagram---movement of cash and goods/services If you want to learn more check out What are the exceptions in the octet rule?

∙ Six Economic Warnings---choose one with less variables

1. Post hoc ergo propter hoc ‘fallacy (after this ∴ because of this fallacy) (time series data) 2. Fallacy of Composition---what works for one person doesn’t mean it’ll work for group 3. Correlation ≠ Causation (cross sectional data)

4. Violation of “ceteris paribus” (all else equal)

5. Inclusion of an Irrelevant Variable

6. Exclude a Relevant Variable

Demand, Supply, Equilibrium & Disequilibrium If you want to learn more check out What are the biological differences between male and female?

∙ Demand

1. Definition

1. The various quantities

2. Of a good or service

3. Which a consumer

4. Is both willing and able

5. To purchase

6. At various prices

7. Per unit of time

8. Ceteris paribus

2. Graph

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P

3. Formula

▪ Qt=f(P)

Quantity (dependent)

▪ Inverse relationship

4. Change in quantity demanded vs Change in Demand

▪ Quantity Demanded: movement ALONG the curve/changes only by price ▪ Non-price parameters of demand (shifts entire line):

∙ # of buyers

∙ Expectations of buyers

∙ Price of other goods, income, # of burgers, tastes, preferences,  

advertising, price expectations of burgers

∙ Income: NORMAL vs INFERIOR

∙ Price of other goods: COMPLIMENTS “and” vs SUBSTITUTES “or” vs  

UNRELATED

∙ Supply

1. Definition

1. The various quantities

2. Of a good or service

3. Which a producer

4. Is both willing and able

5. To produce

6. At various prices

7. Per unit of time

8. Ceteris paribus

2. Graph

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t

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p

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3. Formula

▪ Qs=f(P)

Quantity (dependent)

▪ Positive relationship

4. Change in Quantity Supply (price changes---move along line) vs Change in Supply ▪ Non-price parameters of supply (change in supply---shifts entire line) ∙ # of sellers

∙ Expectations of sellers

∙ The price of inputs

∙ Technology

∙ Taxes/subsidies

∙ Weather

∙ Comparative Statics

1. Identify initial equilibrium price and quantity

2. Identify the shifts

▪ DL or DR

▪ SL or SR

3. Identify the new equilibrium price and quantity

∙ Price Floors and Price Ceilings

∙ Price Flooring

▪ MIN value

▪ govt sided with the seller

▪ Must be set above the eq price to be effective and must result in a surplus ∙ Price Ceiling

▪ MAX value

▪ govt sided with the buyer

▪ Must be set below the eq price to be effective and must result in shortage ∙ Shifting Both Demand & Supply

∙ DR and SR P? Q↑

∙ DL and SL P? Q↓

∙ DR and SL P↑ Q?

∙ DL and SR P↓ Q?

Production Possibilities

∙ Perfectly Adaptable (perfectly straight line/constant ratio---unlikely)

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Q

Quantity Made for Good #1

∙ Specialized Resources---resources catered to a certain good (increasing opportunity cost from  shifting between amount of goods produced)---the graph is bowed out

e

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Quantity Made for Good #1

∙ Consumer Sovereignty

∙ Production Efficiency---Any point on PPF

∙ Allocative Efficiency---The best combination of goods on the PPF according to demand/supply ∙ Unattainable---any point to the right of the PPF

∙ Inefficient---any point to the left of the PPF

Elasticity---a measure of usefulness

e

c

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P

Elastic

Unit elastic

Inelastic

Quantity

∙ % change in quantity = %∆Q* = ��2−��1 

(��2+��1)/2∗ 100

∙ % change in price = %∆P* = ��2−��1 

∙ |%∆Q∗ 

(��2+��1)/2∗ 100

%∆P∗| > 1 it is elastic or = ∞ it is perfectly elastic

o Uptight/sensitive

o Does not need a huge discount to get people’s attention

∙ |%∆Q∗ 

%∆P∗| < 1 it is inelastic or = 0 it is perfectly inelastic

o Insensitive

o Should be more dramatic in price decrease to get people’s attention

∙ |%∆Q∗ 

%∆P∗| = 1 it is unit elastic

∙ # of Substitute

o Many Substitutes---Elastic

o Few Substitutes---Inelastic

∙ Time

o Long Run---Elastic

o Short Run---Inelastic

∙ Product

o Narrowly Defined---Elastic

o Broadly Defined---Inelastic

∙ % of Budget

o Large Part---Elastic

o Small Part---Inelastic

∙ Luxury vs Necessity

o Luxury---Elastic

o Necessity---Inelastic

Elasticity

∙ Elasticity and Total Revenue

o If demand is elastic at P, then decreasing price will increase total revenue

o If demand is inelastic at P, then increasing price will increase total revenue

o If demand is unit elastic at P, then raising/lowering price does not have a huge effect ∙ Elasticity and Taxation

o Raise tax by $0.50, Q* from 1200 units to 1000 units, P* from 0.80 to 1.20

o Tax Revenue = $0.50 * 1000 units = $500

o Tax incidence = 80

o Consumer Burden = $0.40 * 1000 units = $400

o Producer Burden = $0.10 * 1000 units = $100

▪ CB > PB = Inelastic

▪ CB < PB = Elastic

▪ PB = CB = Unit Elastic

o Dead Wight Loss = $0.50 * (1200 – 1000) units * ½ = $50

Type

General Formula

Sign or magnitude important??

Interpretation

Price

%∆Q∗ 

%∆P∗

(based on demand curve so sign  is always negative)

Magnitude

>1 elastic OR ∞ perf elastic

<1 inelastic OR 0 perf inelastic =1 unit elastic

Income

%∆Q∗ 

%∆Income∗

Sign

(+) = normal good

(-) = inferior

Advertising

%∆Q∗ 

%∆����∗

(Hopefully) positive

Magnitude

(-)=BAD AD

Cross-price

%∆����∗

%∆����∗

Sign

(+) = substitutes

(-) = compliments

(0) = unrelated

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