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Exam 2 Study Materials

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by: Crystal Boutwell

Exam 2 Study Materials ECON 2020 - 4

Marketplace > Auburn University > Economcs > ECON 2020 - 4 > Exam 2 Study Materials
Crystal Boutwell
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These are notes from class with important things you need to know for exam 2.
Principles of Microeconomics
William Macy Finck
Study Guide
Econ, Microeconomics, Fink, production possibilities frontier, elasticity, test, exam
50 ?




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"No all-nighter needed with these notes...Thank you!!!"
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This 12 page Study Guide was uploaded by Crystal Boutwell on Wednesday February 17, 2016. The Study Guide belongs to ECON 2020 - 4 at Auburn University taught by William Macy Finck in Fall 2015. Since its upload, it has received 120 views. For similar materials see Principles of Microeconomics in Economcs at Auburn University.

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Date Created: 02/17/16
P RODUCTION P OSSIBILITIES F RONTIER (PPF) -Curve that graphs all possible combinations of two given goods than an economy can produce. Assumptions: 1. A single economy produces only two goods 2. The quantity of resources is fixed. 3. Technology is fixed. 4. Resources are identical (Applies to example 1 only). A: Inefficient (unemployment) Class PPF B: Efficient (full Constant Opportunity Cost employment) C. Unattainable (given Fish our assumptions) 5 AB decrease in unemployment. BA increase in C unemployment. NOTE:Once full B employment is attained, the only way A to increase the production of one good is to take resources 0 45 Coconuts away from another. All Efficient Combinations (when everyone has the same skill set) Fish 0 1 2 3 4 5 Coconuts 45 36 27 18 9 0 Opportunity --- 9C 9C 9C 9C 9C Cost of a fish Opportunity cost of Nth unit of x = quantity of Y at n-1 – quantity of Y at n. Opportunity cost of 1 fish = 45 coconuts at 0 fish – 36 coconuts at 1 fish = 9. Law of increasing opportunity costs: As production of a good increases, the opportunity cost of producing an additional unit rises. (Remember opportunity cost=number of units of the other goods given up.) All Efficient Combinations (When people have differing skill sets) Fish 0 1 2 3 4 5 Coconuts 45 42 36 27 15 0 Opportunity --- 36C 6C 9C 12C 15C Cost of a Fish Opportunity Cost formula same as before. A: Inefficient (unemployment) B: Now inefficient. Fish C. Now Attainable and efficient D. Now attainable through economic growth or trade. D ABC decrease in unemployment. 5 CBA increase in unemployment. C B A 0 45 Coconuts Economic Growth: an outward shift of the PPF Causes: 1. An increase in available resources 2. A technological improvement. 3. A change in regulation. Through growth, we can produce bundle D. Through trade, we can consumer bundle D without a PPF shift. INTERNATIONAL T RADE M ARKETS Trade Fish Coconuts Them 10 30 Us 12 48 Absolute Advantage: the ability to produce more in a given time frame. Can be split between two economies. Comparative advantage: the ability to produce at a lower marginal opportunity cost. Determines which economy should produce each good. Coconuts Fish Opportunity Cost of a Coconut Opportunity Cost of a fish Them 20 10 ½ F 2C US 48 12 ¼ F 4C Opportunity of good x =quantity of y/quantity x *We are better at producing coconuts because we only give up ¼ of a fish. They are better at producing fish because they only give us 2 coconuts. In our Trade Production: they will produce 10 F and 0 C. We will produce 0 F and 48 C. Production and Consumption *given data: the economies agree to trade 3 coconuts for each fish traded. ~mutually beneficial. *the fish producing economy is willing to trade 4 fish for coconuts. *How much of each good will each economy produce and consumer? Production Them 10 Fish 0 Coconuts Us 0 Fish 48 Coconuts Trade They Export(we import) 4 fish We export(they import) 12 coconuts Consumption Them 6 fish 12 coconuts Us 4 fish 36 coconuts Production—Them: 10 F + 0 C Us: 0 F + 48 C Consumption—Them: 6 F + 12 C Us: 4 F + 36 C Remember: International trade arises primarily from comparative advantage. If we have CA, we will export. If not, we will IMPORT. EXPORT M ARKETS Qn= no trade equilibrium Price Qd== domestic demanded Sd Qs= domestic supplied Pw=price in world market Pw Pn Dw Dd Qd Qn Qs Quantity When the market opens to free trade, international consumers are added to demand. *Does not create a surplus, because we will sell the other materials abroad. (Qs-Qd), How does this effect social welfare? Consumers lose everything between Pn and Pw Lost consumer surplus. Producers gain Producer surplus. Net Welfare Gain. IMPORT M ARKETS Qn= no trade equilibrium Price Qd== domestic consumption Sd Qs= domestic production Pw=price in world market Sw Pn Pw Dd Qs Qn Qd Quantity When the market opens to free trade, international producers are able to supply. Does not produce a shortage. Quantity of imported goods: Qd-Qs. Producers: lose area Consumers gain area Net welfare gain. Economists see higher social welfare as a good thing. Politicians see decreases in jobs as a bad thing. T YPES OF T RADE R ESTRICTIONS Tarriff: a tax levied on goods imported into a country. World supply will decrease Import quota: a specific limit or maximum quantity of a good permitted to be imported into a country during a given period. IMPACT OF A TARIFF Price Sd Pw+t Pw Dd Qs Qs1 Qd1 Qd Quantity Tariffs make importers not want to pay the tax. So they’ll either increase price or not sell there. Pre-tariff imports: Qd-Qs Gained Ps Post-tariff imports: Qd1-Qs1 Gained tax revenue (to govt) Value of tariff: Pw+t-Pw Deadweight loss T ARIFF VS . QUOTA *Import quotas have a similar impact, except the gained tax revenue goes to foreign producers rather than the US government. *With tariffs, foreign producers with lowest costs will import the most. *with quotas, only foreign producers with permission may import, regardless of costs. ELASTICITY -a measure of the relative responsiveness of one variable to a change in another. Price Elasticity of Demand: the ratio of the percent change in the quantity demanded to the percent change in the price. %∆???? ???? ∆???????? ∆???? ???? ???? %∆???? ; %???????? = ???????????????????????????????? ????????; %∆???? = ???????????????????????????????? ???? EXAMPLE ONE The price of a good falls from $10 to $8. The quantity demanded increases from 200 units to 250. Find Elasticity of demand. (250−200) %???????? = =0.25; 200 %∆???? = ($10−$8)=0.2 ; $10 0.25 ???? ???? = 1.25 0.2 M IDPOINTFORMULA (THIS IS THE ONE ’RE GOING TO NEED TO USE ON THE TEST. OT THE ONE ABOV) ∆???????? ???????????????????????????? ???????? ???? = ???? ∆???? ???????????????????????????? ???? POSSIBLEPRICEELASTICITCOEFFICIENTS 1. Ed =infinityperfectlyelastic—a tiny changeinpricecauses an infinitechangeinQd.Ex: Agriculturalmarkets Price —Demand —Supply P Quantity 2. Ed > 1 : elastic—flatter curve; A larger change in quantity demanded than a change in price. Ex: fast food, cereal (lot of subsitutes) Price —Demand —Supply P1 P Quantity 3. Ed =1; Unit elasticity—change in quantity is equal to the change in price; very boring 4. Ed < 1: Inelastic—The percent change in price is larger than the percent change in quantity Price —Demand —Supply P1 P Quantity 5. Ed = 0; Perfectly inelastic;a huge change in price causes no change in Qd. Price —Demand —Supply P1 P Quantity D ETERMINANTS OF PRICE ELASTICITY OF D EMAND (REMEMBER OPTIONS DRIVE ELASTICITY ) 1. Number of substitutes- a. Mores substitutes = more options = more flexible b. Number of substitutes and elasticity move together. 2. Time in which to make the purchase— a. Time and elasticity move together b. More time =more options 3. Proportion of income== a. The chunk of your income that is spent on this item b. Proportion and elasticity move together c. Larger proportion of your budget spent on it, more elastic. d. Smaller proportion of your budget spent on it, more inelastic 4. Luxuries vs. Necessities a. Needs can change over time!!! b. Needs and elasticity move opposite c. More you need something, the less elastic it is. TOTAL R EVENUE AND P RICE ELASTICITY Total Revenue: money earned from selling goods and services, NOT the same as profit, which includes costs. TR = PRICE x QUANTITY INELASTIC ELASTIC Pri —Demand — Pri —Demand — ce ce Supply Total Revenue Loss Total Revenue Loss Total Revenue Total P P P P 1 1 Quantit Quantit y Change in TR = new TR – old TR = y (new Qx new Price)- (old Qx Old Price) R ELATIONSHIP BETWEEN PRICE AND TR S UMMARY : -Ed > 1: price and TR move opposite Ed < 1: price and TR move together Ed = 1: price change does not affect TR P RICE E LASTICITY ALONG A LINEAR DEMAND CURVE Price $10 9 8 7 6 5 4 3 2 1 0 Q 0 1 2 3 4 5 6 7 8 9 10 TR $0 9 16 21 24 25 24 21 16 9 0 As price falls, TR rises, elastic As Price falls, PR falls, inelastic Ed > 1; Price —Demand —Supply Elastic P1 Ed < 1; Inelastic P At the midpoint, Ed =1; TR is maximized Quantity T YPES OF ELASTICITY (4 PTS EACH ON TEST ) 1. Price elasticity of supply: (ignore the sign) a. When supply is inelastic, Change in demand causes a big change in Pe. (large change in price, small Price —Demand —Supply P1 P Quantity change in supply) b. When supply is elastic, change in demand causes a big change in Qe. (small change in price, large change in quantity supplied.) Price —Demand —Supply P1 P Quantity 2. Income elasticity of demand: (pay attention to the sign) a. Negative Ei = inferior good b. Postivie Ei = normal good 3. Cross Elasticity of demand: (pay attention to the sign) a. Positive Exy = substitutes b. Negative Exy= complements


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