ARE Midterm 1 Review
ARE Midterm 1 Review ARE 1150
Popular in Principles of Agriculture & Resource Economics
Popular in Agricultural & Resource Econ
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This 7 page Study Guide was uploaded by Caitrín Hall on Saturday February 20, 2016. The Study Guide belongs to ARE 1150 at University of Connecticut taught by Emma Bojinova in Spring 2016. Since its upload, it has received 81 views. For similar materials see Principles of Agriculture & Resource Economics in Agricultural & Resource Econ at University of Connecticut.
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Date Created: 02/20/16
ARE 1150 Midterm 1 Chapter 1 Overview Three key economic ideas: 1. People are rational. 2. People respond to economic incentives. 3. Optimal decisions are made at the margin. Marginal analysis – analysis that involves comparing marginal benefits and marginal costs Economic reasoning – making decisions on the basis of costs and benefits There are usually subjective monetary and opportunity costs vs. benefits Trade off – the idea that because of scarcity, producing more of one good or service means producing less of another good or service; trade-offs are made when Opportunity cost – highest-valued alternative that must be given up to engage in an activity; choosing the best option means sacrificing only the 2d best option Centrally Planned vs. Market Economics Centrally planned economy (pure command)– government decides how economic resources will be allocated o Full control of central planner o Common resources o What is produced? What the government deems necessary o How is it produced? Government determines capitol/labor intensity o Who gets output? Equal distribution, “to each according to their need” o Ex) Cambodia, China, Cuba, North Korea o (Ideal) motivation: Communal good Market economy (pure market)– decisions of households and firms interacting in markets allocate economic resources o No government intervention o Laissez-Faire o Allocation and choices left solely to market o Private resources o Determined by Market Price Mechanism (invisible hand) o Capitalism o Free markets o What is produced? What people are willing and able to buy o How is it produced? Efficiently & profit maximizing o Who gets output? Based on ability, effort, and inheritance/wealth o Motivation: Self interest Profit Wealth Efficiency and Equity Productive efficiency – good or service produced at lowest cost Allocative efficiency – production is in accordance with consumer preferences; each good is produced until marginal cost outweighs benefit Voluntary exchange – occurs in markets when both the buyer and seller are made better off by the transaction Equity – fair distribution of economic benefits Normative and Positive Analysis Positive analysis is concerned with what is Normative analysis is concerned with what ought to be; cannot be proven or disproven Economics is about positive analysis (measures costs vs. benefits) Microeconomics – the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices Macroeconomics – the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth Chapter 2 Overview Production possibilities frontier (PPF) – a curve showing the maximum attainable combinations of 2 products that may be produced with available resources and current technology Graphing the PPF One good or service is plotted along the vertical y-axis The other good or service is plotted alone the horizontal x-axis All points on the PPF are attainable and efficient because all resources are being fully utilized All points within/beneath the PPF are attainable but inefficient because all resources are not being fully utilized All points outside/above the PPF are efficient but unattainable with the current given resources Opportunity cost – highest-valued alternative that must be given up to engage in an activity Increasing Marginal Opportunity Costs A bowed (curved) PPF opportunity cost depends on where the economy currently is on the curve Increasing marginal opportunity costs occur because some factors of production are better suited to 1 good over another The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity o Ex) the more hours you spend studying, the less your grade will increase per each additional hour greater opportunity cost of studying Constant opportunity cost demonstrates a linear relationship between goods/services Economic Growth – ability of the economy to increase the production of goods & services Absolute advantage – the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources Comparative advantage – the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors The basis of trade is comparative advantage The Circular Flow of Income Households o Consist of all individuals in a home o Suppliers of factors of production o People sell their labor services to firms Firms o Demanders of factors of production o Use funds they receive from selling goods and services to buy factors of production that produce those goods and services Chapter 3 Overview Demand schedule – a table that shows the relationship between the price of a product and the quantity of the product demanded Quantity demanded – the amount of a good or service that a consumer is willing and able to purchase at a given price Demand curve – a curve that shows the relationship between the price of a product and the quantity of the product demanded Market demand – the demand by all the consumers of a given good or service Law of demand – the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease Variables That Shift Market Demand Income o Normal good – a good for which the demand increases as income rises and decreases as income falls; ex) more buy cars, less buy bikes o Inferior good – a good for which the demand increases as income falls and decreases as income rises; ex) more buy bikes, less buy cars Prices of related goods o Substitutes – goods & services that can be used for the same purpose o Complements – goods & services that are used together Tastes Population and demographics Expected future prices A Change in Demand vs. a Change in Quantity demanded Change in demand o Shift in demand curve (increase right or decrease left) o Occurs if there is a change in one of the variables besides price that affects willingness of consumers to buy products Change in quantity demanded o Movement along the demand curve as a result of a change in product price o Increase up along curve or decrease down along curve Quantity supplied – the amount of a good or service that a firm is willing and able to supply at a given price Supply schedule – a table that shows the relationship between the price of a product and the quantity of the product supplied Supply curve – a curve that shows the relationship between the price of a product and the quantity of the product supplied Law of supply – the rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied Positive relationship between price and quantity supplied Variables That Shift Market Supply Prices of inputs Technological change – a positive or negative change in the ability of a firm to produce a given level output with a given quantity of inputs Prices of substitutes in production Number of firms in the market o When new firms enter, the curve shifts right o When existing firms leave, the curve shifts left Expected future prices o If a firm expects that the price of a product will increase in the future, it has incentive to decrease supply until later A Change in Supply vs. a Change in Quantity Supplied Change in supply shift in curve; change in quantity movement along curve Market equilibrium – a situation in which quantity demanded equals quantity supplied Surplus – a situation in which quantity supplied is greater than the quantity demanded Firms have unsold goods piling up they decrease price as an incentive increases quantity demanded and decreases quantity supplied Shortage – a situation in which quantity demanded is greater than the quantity supplied Firms are able to raise the price without losing sales higher price increases quantity supplied and decreases quantity demanded The Effects of Shifts in Supply on Equilibrium Shift to the right surplus at the original equilibrium price The surplus is eliminated as the EQ price falls EQ quantity then rises If curve shifts left EQ price rises while EQ quantity falls The Effect of Shifts in Demand on Equilibrium Incomes increase demand curve shifts right This causes a shortage at the original EQ price EQ price rises to eliminate shortage If curve shifts left EQ price and quantity both decrease The Effect of Shifts in Demand and Supply over Time Whether EQ price rises or falls over time depends on whether demand shifts to the right more than does supply Table 3.3 Supply Curve Supply Curve Supply Curve Unchanged Shifts Right Shifts Left Demand Curve Q & P Q increases; P Q decreases; P Unchanged unchanged decreases increases Demand Curve Q & P increase Q increases; P Q does either; P Shifts Right does either increases Demand Curve Q & P decrease Q does either; P Q decreases; P Shifts Left decreases does either 3 open-ended question topics: 1) Absolute advantage, comparative advantage, and opportunity costs (compute and/or explain), PPFs 2) Factors that shift demand and supply, the impact on P and Q when D shifts, S shifts, or both shift at the same time (simultaneous shifts) 3) Microeconomics vs. macroeconomics, positive vs. normative, marginal analysis, different economic systems Shifts in a Curve vs. Movements along a Curve When a shift in a demand or supply curve causes a change in the EQ price, the change in price does not cause a further shift in demand or supply For supply or demand to increase, the whole curve must shift
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