ECON Midterm Review
ECON Midterm Review ECON200
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This 6 page Study Guide was uploaded by Benjamin Smith on Wednesday February 18, 2015. The Study Guide belongs to ECON200 at University of Washington taught by Ellis in Fall. Since its upload, it has received 28 views. For similar materials see Micro Economics in Economcs at University of Washington.
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Date Created: 02/18/15
ECON Midterm Review What is Microeconomics Notion of Scarcity There are not enough items to satisfy everyone s needs Because things are scarce it creates competition on the market The reason the market is competitive is because there will always be goods that some people can buy that others want to buy also Social Science A positive statement is a statement consisting of facts with no opinion such as quotI ate 3 hamburgers todayquot A Normative statement is that that consists of an opinion such as quotPeople should eat less fatty foods like hamburgersquot Opportunity Cost This is the notion that when you make a decision to do something there is always something you39re giving up to do that An example is Someone receives a car for Christmas that39s worth 5000 and decides to keep it The opp Cost of keeping that car is the 5000 that they could have got for it so nothing is free Preferences and Constraints Preferences are variable that in uence our choices but cannot be measured Such examples love opera and others hate it so some would spend the money on going to a show while others would not Constraints are variables that effect behavior and CAN be tested Such example are price increase of some goods If the price increased on steak one would guess consumption of steak would go down Consumer Behavior and Demand Analysis Post Of Behavior The rst postulate is that People Have Preferences People D0 in fact rank alternative options and what option they like best Ordinal ranking is that of 1 2nd 3rd or 4th This can be like sports tournament Cardinal ranking is that of actual measurable amounts such as GPA The second postulate is that More is Preferred to Less This brings in that notion that humans wants will never be satis ed People will end up wanting more of one good more money and greater precision The 3rd Postulate is that People are Willing to Substitute One Good for Another This is pretty obvious and applicable This also works for bribes we have to eat our broccoli if we want dessert That last postulate is Diminishing Marginal Valuation This means that as people consume a good the good becomes less valuable to them each time An example is that one your famished and very hungry you go buy a pizza The very rst bite is the most valuable thing to you Eat bitepiece of pizza after that is not as valuable to you The postulate states For all indiv And all goods the marginal value of goods decreases as more of that good is consumed holding other things constant Marginal Values vs Total Value Marginal value is in terms of one additional unit of good It is the price or amount of a certain good we would give up in order to receive one additional unit of the good we are interested in Total Value is in terms of all units of the good Total value is the priceamount of good we would be willing to give up for all the good rather than none Example If the marginal value of someone with hamburges start off at 6 then 5 ect the marginal value of his 3rCI hamburger would be 4 The Total value is ALL those added together so it would be 14 dollars The Law of Demand The quantity demanded of any good or the level of any activity pursued varies in versey with the price of that good or activity holding other things constant Basically this is saying that as the price goes up the quantity demanded goes down which gives the downward slope of the demand curve Market Demand Curves The market demand curve is the lateral sum of indv Demand curves If at 4 person A wants 6 units and person B wants 4 units the mark demand is 10 As mentioned directly above market demand curves are always downward sloping t make sense because if Gas is 100gallon consumers will buy a lot more than if gas is 500gallon De nition of Elasticity Elasticity is the relationship between change in quantity demanded and change in price of each unit The Equaiton is E Percent change in quantity Percent change in Price If Elt1 then it is elastic if 1ltElt0 then it is Inelastic and if e1 the good is unitary elastic Elastic vs Inelastic If something is elastic that would mean there are lots of substitutes for that good so if price changed a little quantity would change more An example of this would be Calvin Klein clothing If the price went up since there are TONS of substitutes for this clothing that are much cheaper the quantity demanded would change more An example of an inelastic good would be medical services because although the price might increase A LOT people still need to get medical attention so the quantity of medial services would only change slightly Calculation of Elasticity at a Point Equation above Relative Elasticity39s of Different Demand Curves A steeper sloping demand curves yields a inelastic outcome This makes sense because a high slope demand curve would be that the price changes a lot while the quantity changes a little A small sloping demand curves yields an elasticity Relationship of Elasticity to the Avail of Goods As mentioned above if there are more substitutes avail Then the good39s elasticity will be more elastic Example Calvin Klein has tons of subs while medical services does not or else you could die therefore Medical services are inelastic DiamondWater Paradox Although diamonds aren39t necessary to live water costs MUCH less than diamonds do Does this mean people value diamonds higher than water In terms of value one must look at the total value of both water and diamonds The total value of water is much higher than that of diamonds because we consume much more it39s just that since there is not many diamonds in quantity the demand curve sets the price high Relative Vs Absolute Prices Changes A change of relative price is the change of price relative to another A change in Absolute price is the change in the general price An example of of absolute price changes is that if something cost 7 percent more one year than 5 years prior Relative prices are used in the demand curve so comparing both the change in price and change in quantity Second Law of Demand With the passage of time the response to a change in price becomes absolutely greater Another way of saying this is that longrun demand curves are more elastic than shortrun demand curves In thinking about it with examples think of gas prices If the price of gas went up 100 dollar for one week the demand curve might stay inelastic due to people thinking that the price might change soon so they can consume the same quantity as before Given 4 months of the 100 increase the quantity demanded should increase a lot more because people are realizing that gas prices are not going back down so they would then cut down on the quantity consumed more over than the price change Shipping the Good Apples out Even though a lot of really nice leather goods are made in Italy and the best apples are grown in Washington the US will nd more leather goods than Italy and the Eastern US will nd more good apples than Washington This is due to the prices of good close to vs far way with transportation cost In Washington if a good apple is 40 cents while an okay apple is 20 cents people would buy more of the okay apples because the price ratio is 21 If the cost of transportation is 20 cents for far away then people living far away would be looking at 60 cents for a good apple or 40 cents for an okay apple The ration of price is now 32 so buying a good apple doesn39t look so bad This makes more good apples purchased than if the good apples stayed close to the orchard Exchange and Supply Initial Differences in Marginal Values and gains from trade Gains from trade are the total bene ts that each consumerproducer make from a trade The gains from trade will always be the same comparing two indv With set marginal values Say consumer A marginal value is set at 6 and B is 0 because B has already consumed so much of the good If A pays 4 for that good A would gain 2 because that39s what he saved and B would gain 4 so the gains from trade would be a total of 6 This does not change If A paid 5 he would gain 1 and B would gain 5 making it 6 Calculations of Gains from Trade given Marginal Valuations this is mentioned above Supply lnitial Endowment minus quantity demanded for own consumption Say someone is given 10 brownies and they want 2 for their own consumption then their supply would be 8 Seller Surplus difference between total revenue and the area under the supply curve Another way of saying it is the difference bt the amount a producer receives and the minimum amount heshe would be willing to accept for that good Welfare Economics Pareto Criterion for Economic Ef ciency this is what economics think of as the best possible outcome because it makes everyone better off This is the point where people would pay the most amount for some good while producers give them the most quantity for that good After this point it is impossible to make some better off by making someone else better off Ef ciency of competitive markets This is spoken above This is the point that the selfinterests of both buyer and seller meet at a unique point Comp Markets are that of which buyers and sellers transact with one another at unique prices that are beyond the control of any one trader The Law of One Price It is apparent that when repeated purchases are made with many buyers and sellers present a single price becomes established at which all transaction take place An example of this is at grocery stores People don39t go up the clerk and try to bargain down the price of his Luclq Charms they just pay the price Private Public and Externality goods This refers to congestion Public goods are goods that are being jointly consumed by many people at one time Private goods are goods than when one idv Consumes them it directly effects that of another invd An example is that a park is a public good If one person goes to the park it does not affect whether someone else goes to a park Although if the capacity of the park is 100 people if 105 people go it might effect because of congestion that39s why public goods are in terms of before congestion is reached An example of a private good is sandwich If I go to a store and buyeat that sandwich I am making it impossible for anyone to consume that good directly effecting the consumption of the good therefore becoming a private good Supply and Demand Change in Demand Vs Change in quantity demanded These are two different things If something changes in the quantity demanded that is due to a price change of the good and the point simply moves along the demand curve A change in demand is referring to a shift in the entire demand curve This is due to something not involving the change of price Change in Supply vs Change in Quantity Supplied As before these are different If the quantity demanded of a certain good changes due to a price change the point is merely moving along the supply curve line A change in supply is the entire shift of the supply curve due to things other than price change of the good Income and CrossPrice Elasticities Income Elasticity percent change in quantity percent change in income Cross Price elastic percent change in quantity x percent change in price of y This would refer to how the price change of butter effects the quantity demanded of bread Substitutes Vs Compliments Subs are goods that can replace each other butter and margarine Compliments are goods that go well with each other butter and bread Subs will have a positive cross price elasticity because if the price of butter rose the quantity demanded of margarine would also rise because they can sub it for butter Compliments39 cross price elasticity are negative because if the price of bread rose the quantity demanded of butter would decrease Inferior vs Normal Goods Normal goods are goods that when income increase the demand curve for these goods would would shift right or up An example is steak Poor people can39t afford a lot of steak but when given an increase in income the demand for steak would go upright Inferior goods are that when given a raise in income would shift leftdown An example are beans Poor people would consume lots of beans because they are cheap and nutritious although they don39t taste good If their income went up they would be able to afford better food so the demand for beans would go down Effects of Sales Tax If the supply curve line was P 7q but then a tax of 3 was imposed then the new equation would be P 3 7Q This means that originally the producers would sell 7 units for a said price but with a tax they now have to sell it but with plus 3 dollars to get the desired amount This means consumers would have to spend more moneyunit so they will end up buying less in quantity This creates a deadweight loss which is money that goes neither the buyer consumer nor government It39s just money that is lost With tax burden if the demand curve for the good is steeper than the supply curve the consumers will end up paying more in taxes than the producers have to Effects of a Subsidy A subsidy is an amount of money the government will pay producers for selling a good If the The supply curve line was P7Q then the government added a 3 dollar subsidy the new line would be P7Q3 This would mean that the producers are now selling it for 3 dollars cheaper to consumers to make the same amount of money desired so consumers would then buy more in quantity This still creates a deadweight loss because there is money that is wasted and not going to anyone The only want to have no DWL is to have the Pareto Criterion Instead of tax revenue the new rectangle of money is that of what the tax payers have to give up Excess Demand and Supply This is where the government comes in Say where the points price of gas meets quantity demanded is 125 Say the government says gasoline sellers HAVE to sell gas at 150 This would decrease the quantity demanded by consumers leading to an excess in supply If the governemtn then lowered the price to 100 then the quantity demanded would be higher and would lead to an excess demand Shortages and Price Controls Shortages come from an excess demand If the price of gas was at 100 when it should be at 125 people would be consuming more than sellers had This would cause huge lines for gas and is de ned as a shortage Price controls are set by the government but never really work out because the market is always changing
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