ECON 201: Microeconomics; Unit 1 Study Guide
ECON 201: Microeconomics; Unit 1 Study Guide Econ 201
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This 9 page Study Guide was uploaded by Jensine Bonner on Monday February 22, 2016. The Study Guide belongs to Econ 201 at Towson University taught by Dr. Leppo II in Winter 2016. Since its upload, it has received 186 views. For similar materials see Microeconomic Principles in Economcs at Towson University.
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Date Created: 02/22/16
ECON 201: Microeconomics Notes taken, interpreted, and formatted by: Jensine Bonner Study Guide for Exam #1 (Chapters 1-4) Terms: ^ (HH) - Household (BF) - Business Firm (G) - Government ^ (s) - services (g) – goods (l) - labor (S) - supply (P) - price ^ (QS) - Quantity Supply (QD) – Quantity Demand ^ (K) - Capital ^ (MC) - Marginal Cost (MP) - Marginal Principle (MB) - Marginal Benefit Chapter 1 Adam Smith (Founder of Modern Economics) The Wealth of Nations (1776) Karl Marx Communist Manifesto (1848) Das Capital (1867) The Difference Smith…… Believed the distribution of resources would be better through free market Marx….. Was concerned with the distribution of resources • Economics will always come down to supply & demand, and at the end of the day consumers (me and you) are in control of the demand. • Also, large business firms are against free market because they pose competition • True innovators and hard workers are rewarded through true Capitalism Free Market Market Economy - Is supply & demand with little-no control from the government A completely free market is an unrealistic form of market economy where buyers and sellers are allowed to transact freely. This transaction is based upon a mutual agreement on price without intervention from the state (ex. Tax, subsidies, or regulation). Financial markets are seen as securities, and they are commonly traded. The price of these financial markets are not affected by availability. (Foreign exchange rates rise and fall freely through supply & demand for currency) Law of Supply & Demand Supply means…. Supply of a resource Demand means…. Demand for that resource (Availability of a particular product, and the demand (desire) that product has on prices.) If there is a low supply & a high demand, The price will be high --------------- The greater the supply & the lower the demand, the lower the price will be. 1) What to produce? (Answered 2nd) 2) How to produce? (Answered 3rd, last) 3) Who consumes? (Answered 1st) ------ (4) Economic institutions that we focus on 1) (HH) Household: 1 or more persons living under a roof. *the (HH) is catalyst that makes an economy work* Makes up 67%, and the gov. makes up 18%. - Gain income Income: is the flow of resources or $ = to those productive resources - Barter & trade Both parties involved want what the other has - Consume 1) Durable goods: the product lasts 3+ years 2) Non-durable goods: last 3 or less years 3) Service: Intangible item of consumption Save (Savings) 2) (BF) Business Firm(s): Takes input & changes them into intermediate & final goods for consumption. Inputs: Factors of Production 1st- Land (nat. resources): HH controls 2nd- Capital (K): human sacrifices or effort 3rd- Entrepreneur: Individual who coordinates our F.O.P (Factor of Production) (4) Economic institutions that we focus on 1) (HH) Household: 1 or more persons living under a roof. *the (HH) is catalyst that makes an economy work* Makes up 67%, and the gov. makes up 18%. - Gain income Income: is the flow of resources or $ = to those productive resources - Barter & trade Both parties involved want what the other has - Consume 1) Durable goods: the product lasts 3+ years 2) Non-durable goods: last 3 or less years 3) Service: Intangible item of consumption Save (Savings) 2) (BF) Business Firm(s): Takes input & changes them into intermediate & final goods for consumption. Inputs: Factors of Production 1st- Land (nat. resources): HH controls 2nd- Capital (K): human sacrifices or effort 3rd- Entrepreneur: Individual who coordinates our F.O.P (Factor of Production) 3) Government (G): 1) Establish rules for a level playing field (In order to minimize cost, rules should be simple & concise) 2) Provide a $$ supply (S). A uniform money supply encourages economic stability - An unstable $$ supply leads to inflation can lead to hyper-inflation Hyper Inflation 3) Provide external benefits & cost that we would not provide ourselves 4) Financial Intermediaries: The money in capital market (Ex. banks & brokerage firms) Terms to know - Positive Economics: What is or will be - Normative Economics: What should be - Ceteris Paribus: Factors held fixed or other things being equal End of Chapter 1 Chapter 2 Marginal Principle (MP) - Opportunity Cost (OC) Is what a consumer chooses to sacrifice to get something else -Relative Prices: Production of a good & or service stated in terms of another good (g) or (s) service (Ex. 1 Cake or 4 cupcakes) - OC of 1 cake= 4 cupcakes - OC of 1 cupcake= ¼ cake 1) Marginal Benefits (MB): Extra benefits resulting from a small (incremental) increase from a given activity 2) Marginal Cost (MC): Extra cost resulting from a small (incremental) increase in a given activity The answer to many problems in Microeconomics will be MB=MC. Why? -MB must go down, MC must go up, and the overall MB will increase. - Overall, you (consumer) are most often thinking about your own satisfaction Explicit Cost: Have to pay directly *($$)* Implicit Cost: Didn’t pay it out *forgone, could’ve but didn’t* Ex.1) Attending College Tuition & Books: $ 30,000 (Explicit Cost) Forgone Income: $ 40,000 (Implicit Cost) Food: $ 4,000 (Not part of opp. cost for attending college) Apartment: $6,000 (Not part of opp. cost for attending college) 30,000 + 40,000= 70,000 (total opp. cost) Production Possibilities Frontier (Curve) Is a curve that shows the possible combination of production a BF can produce while fully utilizing their F or P (Factors of Production) -When a curve is exaggerated in the middle, there are imperfect substitutes -The closer the products are in substitutability, the straighter the line will be -Normally, you will be producing, and should be producing on the curve -Can produce anything on or within the curve -Outside of the curve is where you want to be, since outside of the curve shows more production Diminishing Returns : Essentially when 1 input increase while all other inputs remain fixed, Y will increase at a decreased rate. - The output will increase, but at a slower rate than it would if you increased the others as well Short Run : When (1) or more factors of production are fixed Long Run : A period long enough for a BF to change all factors of production Nominal Value : The real value of something (Ex. $5 is $5 because it literally says $5) Real Value : What you’re able to exchange it for - Anything that can be exchanged/trade for something - Anything you can buy with it Voluntary Exchange : The act of buyer & seller when, both parties are freely & willingly engaging in economic transaction - Exchange more equitable than “gifts” ( what is free, nothing is given to earn it) - Trade/Voluntary exchange is good and most profitable because there is no change to overall wealth End of Chapter 2 Chapter 3 What role do markets serve? Trade or exchange of goods - Large BF’s are opposed to free markets & exchanges. Why? markets force business’ to compete - Business’ desire to sell you as much (product) for as much money (cost) as they can - The competition between BF’s is what fosters efficiency - A direct cost to business is posed when a BF does not minimize price, but can’t minimize cost -BF’s don’t actually want to compete, but they have to Mercantilism: The driving reason behind why Adam Smith wrote the ‘Wealth of Nations’ - Main point o’ Mercantilism is zero-sum gain which translates to the idea that a market economy is inheritably flawed - (The idea that) (A) is better off only if (B) is worse off *Socialism & Communism are based upon zero-sum gain* * Colonization & the slave trade are often backed up by the principles used in Mercantilism* Absolute Advantage: The ability of a person, BF, or G to produce goods at a lower absolute or resource cost Theory of Competitive Advantage: The ability of a person, BF, or G to produce at a lower OC Circular Flow is a Diagram which shows: The flow of goods & $$ between markets 1) Factors Market: *Also referred to as the input market* When inputs that produce goods & services are sold by the owner of the factors of production -It’s role is to aide BF’s in finding resources 2) Product Market: The output or allocation market -Organizations that sell what is produced (Ex. Target & Walmart) (Continuation of Information on the Circular Flow Diagram) - The product(s) that are demanded and product(s) supplied have to match up - For BF to put more products into the market, they need more input (from the HH) so, more $$ goes back to the HH - The product that is demanded is the catalyst for the Circular Flow Diagram - Everything is ultimately paid by the HH - The cause of any recession or depression is over-spending. So in order to fix the problem(s) that are presented, something has to be taken back - Every section of the economy is taxed w/either a direct o’ indirect tax - The avg. person will pay 50% o’ income back by the end of the year - A BF would increase prices if the taxes were high - There is no competition (at least no true) competition with anyone - The Gov. tends to be insufficient when they don’t compete with each other - As the consumer, we are always making choices to decide how to spend $ How do you stimulate economy? - Private sector Definitions/Terms Market Economy- People specialize and exchange goods/services in a market Culturally Planned Economy- The Government decides (What, how much, & how) to produce and who consumes Export- Good(s) that are produced domestically and sold abroad Import- A good that is produced abroad and sold domestically End of Chapter 3 Chapter 4 Perfect Competition A market that has many buyers & sellers. There are so many that no (1) person(s) has control over the entire market Free Entry & Exit When there is no external cost associated w/ the item Homogeneous Product The products are identical to each other- interchangeable *Good/Closest example would be the agriculture market* Perfect Knowledge About a particular market No Collusion 2 or more BF get together in order to control the market In this market, a monopoly cannot be created Law of Demand (P) price & quantity demand (QD) vary inversely. - When P increases, QD decreases. This is an example of ceteris paribus. This will produce a negatively sloped curve Aggregate Demand= Total Demand - Within the demand that is presented, there can be individual demand curves - D & the QD are different When the curve moves change in demand If still on the same curve, but @ a different point on the curve then, it’s a change in QD Law of Supply *Based on BF* P & QS vary directly - An increase in P an increase in QS is ceteris paribus for the Law of Supply, and will produce a positively sloped curve - When a curve moves to the left, it decreases. When it moves to the right, it increases Equilibrium QD=QS (Q*) which translates to MB=MC Market Clearing Price (P*) - The price producers are willing to sell at & what consumers are willing to sell at everyone wins market clear 4 Primary Types of Goods Normal Good: As income increases; consumers want more Inferior Good: As income increases; consumers want less Substitute Good: (2) goods that are related in such a way that as the price of (1) good increases, the demand for the other increases (Ex. Coke & Pepsi) Complimentary Good(s): (2) goods related in such a way that as the price of (1) good increases, the demand for the other good decreases (Ex. An increase in Peanut Butter prices you’ll buy less Jelly) Be sure to know how to distinguish graphs that determine Normal goods, inferior goods, substitute goods, and complimentary goods Remember that equilibrium is not a stationary point, it moves in the area that it is within Be sure to know Price ceiling, and Price floor End of Unit 1 Study Guide. I hope that it was helpful to you! Notes will be uploaded weekly, so be sure to come back again! Please email me if you have any questions! - Jensine
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