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Macroeconomics 1200, Test 1

by: Emilee Schlader

Macroeconomics 1200, Test 1 ECON 1200

Emilee Schlader
Missouri S&T
GPA 3.25

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About this Document

This is the test 1 study guide/list of terms to know
Sarah Steelman
Study Guide
supply, demand
50 ?




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This 4 page Study Guide was uploaded by Emilee Schlader on Thursday February 25, 2016. The Study Guide belongs to ECON 1200 at Missouri University of Science and Technology taught by Sarah Steelman in Winter 2016. Since its upload, it has received 52 views. For similar materials see Macroeconomics in Economcs at Missouri University of Science and Technology.


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Date Created: 02/25/16
Macroeconomics Review Sheet for Exam 1  These are concepts you need to understand for the first Exam: Incentives: factors that motivate you to act or exert effort -tax refund, pay raise (+) -jail, fees, failing class (-) Scarcity: The condition caused by individual’s wants exceeding capacity of available resources to satisfy those wants Production possibility curve: graphical representation of the opportunity cost concept, a relationship showing the combinations of goods that can be produced in a given time period if an economy’s resources are fully employed/using the best available technology. If all units of all resources were perfectly substitutable for all uses, the curve would be a linear function or a straight line, opportunity cost would be constant rather than increasing Marginal: “additional” Marginal Analysis: Marginal benefit >= Marginal cost, Net benefit is difference between the two Opportunity cost: The highest-valued alternative that must be sacrificed in order to get something else; just the best choice, not all alternatives. Somewhat subjective, might not be a numerical value How trade creates value: In a market, buyers and sellers are brought together to exchange goods and services voluntarily, which is trade. Benefits both parties and there is no trade unless they both feel they could gain from it Who is Adam Smith and invisible hand: Wrote Wealth of Nations in 1776, modern work of economics. individuals act in their own self interest but at the same time, society benefits from it Comparative Advantage: when a person, firm or country can produce something at a lower cost than others/competitors Absolute Advantage: you, a firm or a country can produce more of a good/service with the resources available than others/competitors The law of supply and demand: The prices in a market economy are determined by the forces of supply and demand. -The law of supply states that the quantity supplied rises as the market price rises, falls as price falls. -The law of demand states that the quantity demanded falls as the price rises, rises as the price falls. Normal goods: good in which we buy more of when we get more income. -Direct relationship between income and demand Inferior goods: good in which we buy less of when we get more income. -Inverse relationship between income and demand Substitute goods: goods that can be used in place of each other. -Direct relationship between the price of good X and demand for good Y Compliment goods: two goods used together. -Inverse relationship between the price of good X and demand for good Y Non-price shifters of demand: changes in income, price of related goods, changes in tastes and preferences, future expectations, number of buyers Non-price shifters of supply: cost of inputs, changes in technology, taxes and subsidies, number of buyers, price expectations How non-price shifters effect supply and demand and market equilibrium: Supply and demand curves shift to the left and the right effecting equilibrium point accordingly Movements along the curve vs shifts: caused by a change in price of the good vs. cause by changes in non-price factors Market equilibrium: intersection of the supply and demand curves. -Equilibrium price: price that causes quantity supplied to equal quantity demanded -Equilibrium quantity: the numerical quantity supplied and demanded at the equilibrium price How changes in price affect quantity demanded: price decrease, quantity demanded increase. Price increase, quantity demanded decrease. (Inversely related) How changes in price affect quantity supplied price decrease, quantity supplied decrease. Price increase, quantity supplied increase. (Directly related) Surplus: quantity supplied > quantity demanded. Occurs at any price above equilibrium. Price will fall over time towards equilibrium Shortage: quantity demanded > quantity supplied. Occurs at any price below equilibrium. Price will rise over time towards equilibrium How consumer surplus is created: difference between willingness to pay for a good and the actual price paid to get the good How producer surplus is created: difference between willingness to sell a good and the price actually received for that good Welfare economics: The study of how the allocation of resources affects economic well-being Market Efficiency: when total surplus is maximized in a market -Total surplus = Consumer surplus + Producer surplus Price ceilings: legally established maximum price for a good or service -In the long run: flatten out of supply + demand, shortage/surplus expands -non-binding price ceiling: above equilibrium, LEGAL BELOW -binding price ceiling: below equilibrium, LEGAL BELOW Price floors: legally established minimum price for a good or service -In the long run: flatten out of supply + demand, shortage/surplus expands -non-binding price floor: below equilibrium, LEGAL ABOVE -binding price floor: above equilibrium, LEGAL ABOVE Black Markets: created to either use all the surplus at a lower price or sell products at a high price because of a shortage Importance of markets and price mechanism: determines the means by which consumers and businesses interact to determine the use of scarce resources between competing uses Macroeconomics: The study of the broader economy


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