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Popular in Economcs
This 17 page Study Guide was uploaded by Madison Rude on Saturday February 21, 2015. The Study Guide belongs to APEC 1101 at University of Minnesota taught by Tade Okediji in Spring2015. Since its upload, it has received 263 views. For similar materials see 1101 in Economcs at University of Minnesota.
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Date Created: 02/21/15
CH 1 Notes Thinking Like An Economist 12015 Economics study of how people cope with scarcity amp how coping mechanisms affect society Scarcity Principle because of scarcity we39re forced to make tradeoffs 0 CostBenefit Principle do it But ONLY if the good outweighs the bad 0 We must measure the costs amp benefits somehow o Scarcity time energy money supplies etc Economic Surplus yielding a positive total i e benefits savings are greater than costs Opportunity Cost the value of what you must sacrifice to take a certain action EX 0 To see a movie costs 10 but you have to give up a babysitting job that pays 20 0 Total opportunity cost 30 I Opportunity cost is the value of your best alternative to surplus Do NOT use the costbenefit analysis with proportionspercentages bc 10 saved is still 10 saved regardless of what percentage you save on a particular item Implicit Costs costs that must be taken into account but are often overlooked EX 0 If you use frequent flier miles to go on a spring break trip you save money on that trip but then need money for airfare to your brother39s wedding because you used up all your miles LECTURE Notes Week 1 12215 Economics a social science used to explain society HOW and WHY we coordinate our wantsdesires within social amp political constructs of society Scarcity major economic issue we use economics to allocate resources efficiently GUIDE TO ECONOMIC REASONING o Costbenefit principle Marginal Cost incremental cost of producing the last unit of output EX 0 A company produced notebooks 0 They make 10 notebooks 0 Total cost of 10 notebooks 20 0 The 11th notebook increases cost to 24 The incremental cost of the last unit of output notebook 11 i THIS is the marginal cost Sunk Cost costs already incurred that can39t be recovered o In the relevant costs when decisionmaking Something you have to pay regardless of your decision EX 0 When you decide whether or not to attend class the tuition you already paid won39t be in your marginal cost it39s irrelevant and unrecoverable Marginal Benefit incremental gain from consuming goodsservices 0 We base economic reasoning on the idea that everything has a cost Opportunity Cost the value of the best alternative that must be sacrificed to satisfy a desire ECONOMIC amp MARKET FORCES o Opportunity cost applies to everything o It allows us to understand how society responds to scarcity Economic Force a necessary reaction to scarcity Market Force also an economic force but the market has the free reign of the scarce good they can allocate it at will Now that we have an economic force how do we allocate the scarce good The price system allocated the good so the price goes up during shortage amp down during abundance supply amp demand Economic force is ALWAYS happening but that doesn39t mean we want it to be a market force 0 For Example we wouldn39t want the market controlling things like adoption people paying for children 0 When we don39t want something to become a market force we utilize political and social institutions DISCUSSION Notes Week 1 12315 Explicit Costs Direct cost of the thing you want to bydo o A concert ticket that costs 30 gt 30 is the explicit price Implicit Costs Indirect costs you incursacrifice for the thing you want to buydo 0 Giving up a babysitting job 35 to go to the concert Do NOT consider sunk costs in opportunity costs EX 0 If you already bought the ticket 30 and you decide to babysit your sister39s dog 20 your opportunity cost is 20 because the ticket is a sunk cost Opportunity costs are implicit and hypothetical o The only costs that should be considered when deciding on an action are those incurred directly by that action amp those avoided by not taking that action Normative Economic Principle a principle that says how people should behave EX 0 NOT a statement of fact a statement open for debate quotshould wequot Positive Economic Principle one that predicts how people will behave EX 0 An empirically provable statement quotifthenquot Incentive Principle person is more likely to take action if benefits rise and vice versa Week 2 Notes 12615 Comparative Advantage when someone is comparatively better at one thing amp therefore their opportunity cost is lower Absolute Advantage when it takes one person less time to perform a task than another Principal of Comparative Advantage Everyone is better off concentrating on the activity where their opportunity cost is lowest the thing they have the comparative advantage at Production Possibilities Curve PPCPPF a graph that shows how much of two goods can be produced if it39s a quotone or the otherquot situation Principal of Increasing Opportunity Cost When expanding the production of any good lst use the resources with the lowest opportunity cost amp then use resources with higher opportunity costs Invisible Hand an innate force that guides householdsfirms to interact in the market in ways that create desirable market outcomes for society Household demander supplier Supplydemand governed by price amp price feedback 0 Buyers look at how much it costs 0 Sellers look at how much is bought 0 The price determines the societal value of the good 0 When markets work well people pursue their own interests which helps the social interests as if guided by an invisible hand Economic Insight generalizations made about how abstract economies work Law of Demand When the price goes up peoplefirms purchase less units Economic Model abstract representation of reality Product Market Circular Flow Model Goods amp Services lgt Firms Households ltl W Labor 0 Land Factor Market Efficiency achieving a goal as cheaply as possible Microeconomics study of individual choice amp how that choice is influence by economic forces Economic Institutions an entity that can influence economic decisions economic theory applies to reality through economic institutions Economic Policy Options actions or inactions ta ken by government to influence the economic behavior good policies should be objective Positive Economics 0 Study of how the economy should work 0 A statement that can be empirically verified an if then statement Normative Economics 0 Study of what the goals of the economy should be 0 A statement of opinion that is open for debate a statement of quotshould wequot Art of EconomicsPolitical Economy the application of knowledge gained in positive economics to achieve the goals we determine in normative economics the outcome of this is policy Policy Social amp Political Forces 0 Historical factors These things shape economic 0 Political forces etc 7 7 DOWN Week 3 Notes 2315 Market all the buyerssellers of a particular good Demand Curve a graph showing quantity of a good that buyers wish to buy each price Substitution Effect consumers may choose to buy a different product if their chosen product undergoes price changes Income Effect when the price change occurs some people won39t be able to afford as many units of the good Buyer39s Reservation Price the amount the buyer is willing to pay for a specific good Seller39s Reservation Price the lowest amount the seller is willing to offer for a good Supply Curve a graph showing the quantity of a good that sellers wish to sell a given price Equilibrium PriceQuantity when supply amp demand equal each other they intersect graphically to calculate this when given the equations for each curve simply set them equal to one another and solve for P price and then reenter the price value into one of the equations to find the equilibrium quantity Market Equilibrium when all buyerssellers are happy with their quantities the market price Change in the Quantity Demanded a movement along the demand curve that occurs in response to a change in price Change in Demand a shift in the entire demand curve Normal Good a good whose demand curve shifts when the income of buyers increasedecrease Inferior Good a good where the demand curve shifts left when the buyer39s income increases and right when it decreases it moves in the opposite direction of normal goods when income changes The 4 Rules of Supply amp Demand 1 An increase in demand will lead to an increase in both the equilibrium price and quantity 2 A decrease in demand will decrease both equilibrium price and quantity Increase in supply will decrease equilibrium price and equilibrium quantity 4 Decrease in supply will increase the equilibrium price and decrease the equilibrium quannny 5 Things that cause Increase in Demand 0 Decrease in price of complementary goods 0 Increase in price of substitutes 0 Increase in income on normal goods only 0 Increase in preference by demanders for good they want more 0 Increase in population of potential buyers 0 Expectation of higher prices in the future Things that cause Increase in Supply 0 Decrease in cost of materials 0 Improvement in technology which reduces cost in production 0 Improvement in weather 0 Increase in suppliers 0 Expectation of lower prices in the future Buyer Surplus difference between buyer39s reservation price amp what they actually pay can be calculated by finding the area of the triangle beneath the demand curve and above the price line Sellers Surplus difference between the price received amp the reservation price can be calculated by finding the area of the triangle above the supply curve and below the price line Total Surplus difference between buyer39s reservation price amp sellers reservation price Socially Optimal Quantity quantity of a good that results in the maximum possible economic surplus form producing amp consuming the good Discussion Notes Excise Tax tax on goods sold 1 Excise tax of 2 on the seller Qd 20000 500P 05 5000 1000P Price received by seller Pt Qs 5000 1000Pt 5000 1000P2 50001000P 2000 30001000P 20000500P 30001000P 17000 1500P P1133 gt price paid by customer pt 1133 2 933 gt price received by seller 2 Excise tax of 2 on the buyer Qd 20000500P 05 50001000P Find Price paid by consumer gt Pt Qd 20000 500Pt Qd 20000 500P2 5000 1000P 20000 500P 1000 5000 1000P 19000 500p new Qd 1000P 14000500P 1500P 14000 P 933 gt price received by seller Qd 19000500 x 933 14330 P2 933 2 1133 gt price paid by consumer Summary 0 Placing Pt on Qd equation and solving for Qd Qs will result in the price received by seller equaling price paid by consumer which equals Pt o Placing Pt on OS equation and solving for Qd Qs will result in the price paid by the customer to equal the price received by the seller which equals Pt Week4 Notes 21615 The demand curve is the relationship between the quantity demanded and all monetarynonmonetary costs The Law of Demand People do less of what they want to do as the cost of doing so rises Real Price dollar price of a good relative to average dollar price of all other goodsservices the relative price of one good to all other goods Nominal Price absolute price of a good in SS terms Rules of Substitution 0 When the price of one goodservice rises people turn to substitutions for that goodservice Applying the Law of Demand 0 Highincome more willingness to pay 0 Lowincome more willingness to wait for goods 0 REAL prices amp income are what matter as opposed to nominal prices Individual amp Market Demand Curves 0 Using each individual39s demand curve we can add then together to create a market demand curve for that good Horizontal Addition 0 The process of adding individual demand curves to get the market demand curve when individual demand curves are identical we multiply each quantity on the individual demand curve by the number of consumers in the market Demand amp Consumer Surplus Consumer Surplus difference between a buyer39s reservation price for a product amp the price they actually pay Calculating Consumer Surplus 0 Calculate each individual39s surplus amp then add them together to get the cumulative consumer surplus o In order to find the total consumer surplus in a specific market we find the area of the triangle below the demand curve but above the market price using the formula 12baseheight consumer surplus consumer surplus is the cumulative sum of difference between reservation prices amp market prices Elasticity Price Elasticity of Demand change in the quantity demanded of a goodservice that results from a 1 change in its price EX 0 Price of beef falls 1 0 Demand for beef rises 2 0 Therefore the price elasticity of demand for beef 2 u o 39 Change In A of quantity demanded Price Elasticity of Change in of price Demand Elastic demand for a good is elastic with respect to price if it39s price elasticity of demand is less than 1 Inelastic price elasticity of demand is greater than 1 Unit Elastic price elasticity of demand 1 Determinants of Price Elasticitv of Demand Substitution demand will tend to be more elastic wrespect to price for products with easy substitutes Budget Share the larger the share of your budget an item takes up the greater your incentive to search for cheaper substitutes therefore big ticket items have higher elasticities Time things that last for years are less likely to be replaced due to a sudden price change Price Elasticity it change in 39uantiity m 1 ii iii change in price when two demand curves have a point in common the steeper the curve less elasticity this does NOT mean the steeper curve is more elasticity at every point 0 Elasticity declines along straightline demand curves 2 Special Cases 0 Horizontal demand curve slope of zero 0 Reciprocal of slope 0 Perfectly Elastic Demand demand for a good is perfectly elastic if it39s price elasticity of demand is co Perfectly Inelastic Demand price elasticity of demand is zero Total Expenditure Total Revenue 0 SS amount consumers spend on a product PxQ is equal to dollar amount sellers receive Rule 1 When price elasticity of demand is less than 1 the change in P and the change in Q move in opposite directions for and elastically demanded product the change in in Q will be greater than the change in P Q will outweigh P but they move in opposite directions Rule 2 When P elasticity is greater than 1 change in P and change in Q move in the same direction CrossPrice Elasticity of Demand by which the quantity demanded of the first good changes in response to a 1 change in the price of the second good 0 Defining the elasticity of a good in relation to other goods as opposed to evaluating it in relation to price Income elasticity of Demand by which a good39s quantity demanded changes in response to a 1 change in income 0 DO note the positivenegative signs when calculating elasticity in relation to cross priceincome 0 Do NOT note the sig when defining it in relation to price 0 Income elasticity of demand for inferior goods is negative 0 For normal goods its positive 0 When crossprice elasticity is positive the goods are substitutes 0 When negative they are complements Discussion Notes 22015 Supply amp Demand Demand Price I Quantity demanded not demand Things like income preferences of buyers change the ENTIRE demand curve Only price can change the quantity demanded same goes for supply curves Normal Goods Income Income demand f demand has a positive relationship between income amp demand they go the same way Inferior Goods Income f Income demand demand f EX Junk food people buy less as their income rises they go in opposite directions Price Ceiling Maximum price a seller can charge Below equilibrium price on graph Price Floor Minimum price set by government Above equilibrium price on graph Price ceilings help buyers rent control Price floors help sellers farmers Practice Problems In a market for coffee Qe Quantity Equilibrium pe Pe Price Equilibrium 1 Price of Tea Decreases o Qd for tea rises law of demand 0 Demand for coffee declines 0 Demand curve for coffee shifts left 0 Qe and Pe decrease 2 Consumer39s Income Rises o Qd for coffee rises law of normal goods 0 Demand curve shifts to the right 0 Qe and Pe increase 3 Price of Sugar Increases o Qd for sugar declines 0 Coffee amp Sugar are complements Qd also declines for coffee 0 Demand curve for coffee shifts left 0 Qe amp Pe decrease 4 Technological improvement in coffee production 0 OS for coffee rises shifted right 0 Qe increases 0 Pe decreases 5 Bad weather affects coffee bean fields amp price of tea increases 0 Bad weather Qs shifts left 0 Qe decreases o Pe increases 0 Price of Tea Qd shifts right 0 Qe rises o Pe rises Case 1 Suppose supply curve shifts more than demand curve 0 Qedeclines o Pe increases Case 2 Suppose supply curve and demand curve shift the same 0 Qe stays the same 0 Pe increases Case 3 Supply curve shifts less than demand curve 0 Qe increases 0 Pe increases
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