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Econ 1 Midterm Study Guide

by: Daniel Ochs

Econ 1 Midterm Study Guide econ 1

Daniel Ochs

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Midterm study guide for chapter 1-5
Principles of Economics
Study Guide
Econ, Economics
50 ?




Popular in Principles of Economics

Popular in Economcs

This 7 page Study Guide was uploaded by Daniel Ochs on Thursday April 21, 2016. The Study Guide belongs to econ 1 at University of California - Los Angeles taught by Convery in Spring 2016. Since its upload, it has received 77 views. For similar materials see Principles of Economics in Economcs at University of California - Los Angeles.


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Date Created: 04/21/16
Spring 2016- Midterm 1 Economics 1- Midterm 1 Study Guide Chapter 1- 10 Principles of Economics - Scarcity- the limited nature of society’s resources - Economics- the study of how society manages its scarce resources I. Big Ideas A. Incentives Matter • Incentives- something that induces a person to act B. Markets are usually a good way to organize economic activity • Market- A group of buyers and sellers (need not be in a single location) - “organize economic activity”: what (goods to produce), how (to produce them), how much (of each to produce), who (gets them) C. People face tradeoffs • Central Idea: society faces an important tradeoff: efficiency vs equality - Efficiency- when society gets the most from its scarce resources - Equality- when prosperity is distributed uniformly among society’s members D. Rational people think at the margin: systematically and purposefully do the best they can to achieve their objectives E. The power of trade: Trade can make everyone better off F. The importance of wealth and economic growth • Central Idea: A country’s standard of living depends on its ability to produce goods and services • Central Idea: The most important determinant of living standards is productivity G. Institutions Matter • Central Idea: The Important role for government is to enforce property rights • Central Idea: Public policy may promote efficiency • Central Idea: Government may alter market outcome to promote equity 1 Spring 2016- Midterm 1 H. Economic booms and bursts cannot be avoided but can be moderated • Central Idea: Policymakers use Fiscal Policy and Monetary Policy to attempt to smooth out this economic volatility - Fiscal policy: the use of government revenue (taxation) and expenditure (spending) to influence the economy - Monetary policy: the process by which the government controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability I. Prices rise when the government prints too much money • Inflation- increase in the general level of prices - inflation is excessive quantity of money making value less J. Central banking: Central Idea: Society faces a short-run tradeoff between inflation and unemployment II. Principles of Economics Categories - The principles of decision making are: • People face tradeoffs • The cost of any action is measured in terms of foregone opportunities • Rational people make decisions by comparing marginal costs and marginal benefits • People respond to incentives - The principles of interactions among people are: • Trade can be mutually beneficial • Markets are usually a good way of coordinating trade • Government can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable - The principles of the economy as a whole are: • Productivity is the ultimate source of living standards • Money growth is the ultimate source of inflation 2 Spring 2016- Midterm 1 Chapter 2- Thinking Like an Economist - Circular-Flow Diagram • Visual model of the economy, shows how dollars flow through markets among households and firms - Production Possibilities Frontier [Graph] Graph that shows the combinations of two goods the economy can possibly • produce given the available resources and the available technology • Slope of PPF graph is opportunity cost • Economic Growth increases productivity (graph up and to the right) [Shifts PPF outward] • PPF bow-shaped when different workers have different skills - Economists as Policy Advisors: offer advice on how to improve the world • Positive statements: attempt to describe the world as it is [Testable Theory] • Normative statements: attempt to prescribe how the world should be [Opinion Based] Chapter 3- Interdependence and Gains from Trade - Interdependence: Trade can make everyone better off • Markets Link the World • Market Link to One Another - Comparative vs. Absolute Advantage • Comparative advantage: the ability to proceed a good at a lower opportunity cost than another producer • Absolute advantage: the ability to produce a good using fewer inputs than another producer • When people—or countries—specialize in the goods in which they have a comparative advantage, the economic “pie” grows and trade can make everyone better off 3 Spring 2016- Midterm 1 Chapter 4- Supply and Demand - Markets and Competition • Supply and Demand are the forces that make market economies work • Market: group of buyers and sellers of a particular good or service - Buyers determine demand of product & Sellers determine the supply of product • Competitive Market: a market with many buyers and sellers, where each has a negligible effect on the market price • Perfectly competitive market: all goods are exactly the same - Demand: represents the behavior of buyers • Quantity Demand: amount of a good that buyers are willing and able to purchase • Law of Demand: the claim that the unity demanded of a good falls when the price of the good rises • Demand Curve: graph of the relationship between the price of a good and the quantity demanded Horizontally: how much buyers are willing to purchase at a certain price • • Vertically: highest price buyers are willing to pay for a certain quantity • Consumer Surplus: consumer’s gain from exchange - Demand Shifters (Price: Cause a movement along the D curve) • Income - Normal good: a good for which other things equal, an increase in income leads to and increase in demand - Inferior good: a good for which other thing equal, an increase in income leads to a decrease in demand • Price of Substituents: two goods for which an increase in the price of one leads to an increase in the demand for the others • Price of Complements: two goods for which an increase in the price of one, leads to a decrease in the demand for the other • Expectations (about the future), Population (number of buyers), and Tastes 4 Spring 2016- Midterm 1 - Supply • Quantity Supplied: amount of a good that sellers are willing and able to sell • Law of Supply: claim that the quantity suppled of a good rises when the price of the good rises, other things equal • Supply Curve: graph of the relationship between price of a good and the unity suppled • Horizontally: how much supplies are willing to sell at a certain price • Vertically: minimum price for which suppliers are wiling to sell certain quantities • Producer Surplus: producer’s gain from exchange - Market price - minimum price a producer is willing to sell - Supply Shifters • Technological Innovations, Input Prices, and Expectations • Taxes and Subsidies - Subsidy on production makers sellers willing to supply a greater quantity at a given price - Subsidy on production lowers costs and increases supply • Entry or Exit of Producers - Entry implies more sellers are coming in to the market (increasing supply) - Exit implies fewer sellers in the marker (decreasing supply) Changes in Opportunity Costs • - Equilibrium: a Situation in which the market price has reached the level at which unity supplied equals quantity demanded (Qs = Qd) • Surplus: quantity supplied is greater than quantity demanded. • Shortage: quantity demanded is greater than quantity supplied - Law of Supply and Demand: claim that the price of any good adjusts to bring the quantity suppled and quantity demanded for that good into balance 5 Spring 2016- Midterm 1 Chapter 5- Elasticity and Its Application - Elasticity: numerical measure of the responsiveness of Qd or Qs to one of its determinate - Elasticity of Demand • Elastic: when an increase in price reduces the quantity demanded a lot Inelastic: when the same increase in price reduced quantity demanded just a little • - Detriments of the Elasticity of Demand • Availability of Substitutes: Price elasticity is higher when more goods are available • Time Horizon: Price elasticity is higher in the long run than the short run • Category of product: Price elasticity is higher for narrow goods than broad ones • Necessities vs Luxuries: Price elasticity is higher for luxuries than for necessities • Purchase Size: Price elasticity is higher for larger parts of budget - Price Elasticity of Demand (Ed) = (% change in quantity demanded) / (% change in price) • [Ed] < 1 = inelastic P and R move Together • [Ed] > 1 = elastic P and R move Opposite • [Ed] = 1 = unit elastic: P moves but R stays the Same - Percentage Changes • Midpoint Method: [(end value - start value) / (midpoint)] x 100% • Price elasticity = % change of P / % change of Q - Variety of Demand curves flatter curve (smaller slope) = bigger elasticity • • steeper curve (larger slope) = smaller elasticity • slope of a linear demand curve is constant, but its elasticity is not - Total Revenue (R) = Price (P) x Quantity (Q) - Elasticity of Supply 6 Spring 2016- Midterm 1 • Elastic: when an increase in price reduces the quantity supplied a lot • Inelastic: when the same increase in price increases quantity supplied just a little - Detriments of the Elasticity of Supply • Change in Per-Unit Costs with Increased Production - More elastic when easy to produce at constant unit cost and manufactured goods • Time Horizon: More elastic in long run Share of Market for Inputs: More elastic in small share of market for inputs • • Geographic Scope: More elastic when supplying locally - Price Elasticity using Midpoint Formula - Income elasticity of demand = % change in Qd / % change in income - Cross-Price elasticity of Demand = % change in Qd for good 1 / % change in price of good 2 First Lecture - Opportunity Cost: the value of the next best alternative forgone when an action is taken • Chose option A but option B is next best option and your opportunity cost - Production Possibility Frontier (PPF): table, graph, or equation that shows the different combinations of outputs that can be produced from a given set of resources (inputs) and technology - Derivation of each country’s PPF • Trial-and-error approach • “Short-cut” approach • [Footnote] math - Slope of PPF: opportunity cost of goods labeled on horizontal axis • Opportunity cost of S: Rise/Run = Labor Hours per T / Labor Hours per S - No Trade Scenario 7


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