Econ 1 - Midterm 1 Study Guide
Econ 1 - Midterm 1 Study Guide Econ 1
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This 5 page Study Guide was uploaded by Elena Stacy on Saturday July 9, 2016. The Study Guide belongs to Econ 1 at University of California Berkeley taught by Monica Deza in Summer 2016. Since its upload, it has received 557 views. For similar materials see Introduction to Economics in Economcs at University of California Berkeley.
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Date Created: 07/09/16
Prepared by: Elena Marie Stacy Study Guide Econ 1 - Midterm #1 Basics of Economics: I. Micro v. Macro a. Micro: the study of decisions of individual people or individual firms b. Macro: the study of the aggregate i. National economy ii. Global economy iii. Trends II. Positive v. Normative a. Positive: factual information about economics i. The unemployment rate fell by 3% b. Normative: subjective recommendations on economics i. We should do XYZ in order to fix ABC problem III. Correlation does not imply causation a. Counterfactual: If XYZ had not happened, then ABC would have happened instead. IV. Economic models a. Used to simplify the world and aid in the study of economic phenomena i. “All models are wrong, but some are useful” ii. Often contain *assumptions* that are needed to examine situations in a simpler way Check for understanding: What is economics? What is the difference between micro and macro? Can you give your own examples of each? What is the difference between positive and normative economics? Examples? Are economic models accurate representations of the world? Production Possibilities Frontier (PPF): I. PPF: graphical representation of the possible output levels of two goods in relation to one another II. Opportunity cost a. The best possible other thing that you will be forgoing by doing something i. Not only monetary costs, but also includes things like time, happiness, etc. ii. In reference to the PPF, this mostly refers to the amount of one good that you are forgoing by producing an amount of the other good 1. Ex. You can produce 20 lattes in one hour, or 100 drip coffees in one hour. Therefore, the opportunity cost of producing 20 lattes is 100 drip coffees. The opportunity cost of producing 1 latte is 5 drip coffees. III. Absolute advantage & Comparative advantage a. Absolute advantage: If you are more efficient at producing something compared to someone else Prepared by: Elena Marie Stacy b. Comparative advantage: You have a lower opportunity cost for producing something compared to someone else c. IMPORTANT: Absolute advantage does not necessarily imply comparative advantage & vice versa, however, it is possible to have both absolute advantage & comparative advantage in producing a good. i. Ex. John produces 100 lattes in 1 hour and Mike produces 50 lattes in one hour. John produces 70 cups of drip coffee in 1 hour and Mike produces 10 cups of drip coffee in 1 hour. 1. It looks like Mike has no advantage at all (He kind of sucks at this barista thing), because John has absolute advantage in both making lattes and making drip coffee. However, it costs John 70 cups of drip coffee in order to make 100 lattes (.7 cups of coffee for every one latte) while it only costs Mike 10 cups of coffee to make 50 lattes (.2 cups of coffee for every one latte) Mike has comparative advantage in making lattes, because his opportunity cost is lower! d. Specialization: It is more efficient to specialize and trade than it is for everyone to be self sufficient i. A society with “jacks of all trades” is not very efficient. Everyone should specialize in what they have comparative advantage at. 1. Mike should make lattes and John should make drip coffee Check for understanding: What is the PPF? Can you draw one? What is opportunity cost? Apply it to your daily choices. What is the difference between absolute advantage & comparative advantage? Why should we specialize? (Do an example problem to prove to yourself that specialization is more efficient) Who should do what? Supply and Demand Curves: I. The curves a. Supply curve: graphical representation of the relationship between price of a good and quantity that producers are willing to supply i. Upward sloping b. Demand curve: graphical representation of the relationship between price of a good and quantity that consumers are willing to buy, or rather, that consumers demand. II. Movements and shifts a. Movement along curve: a movement along the supply or demand curve is the resultof a change in the price of a good i. Supply: If price goes up, that is a positive movement along the curve, resulting in more quantity supplied. If price goes down, there is a negative movement along the curve, resulting in less quantity supplied. (This is due to the upward/positive slope of the curve) Prepared by: Elena Marie Stacy ii. Demand: If price goes up, there is a negative movement along the curve, resulting in less quantity demanded. If price goes down, there is a positive movement along the curve, resulting in more quantity demanded. (Downward/negative slope of the demand curve) b. Shift of curve: a shift of the supply or demand curve occurs when something other than price affects the quantity that consumers are willing to buy at any given price, or the quantity that producers are willing to sell at any given price i. Change in price of substitutes 1. If the price of a substitute for a good increases, the demand curve for the good will shift right a. Starbucks gets more expensive, so we demand more Peet’s 2. If the price of a substitute for a good decreases, the demand curve for the good will shift left a. Starbucks gets cheaper, we demand less Peet’s (but more Starbucks) ii. Change in price of complements 1. If the price of a complement for a good increases, the demand curve for the good will shift left a. Peanut butter gets more expensive, we demand less jelly 2. If the price of a complement for a good decreases, the demand curve for the good will shift right a. Peanut butter gets cheaper, we demand more jelly as well iii. Change in preferences (news stories, trends, etc.) 1. Child dies from a Burger King burger, demand for Burger King decreases (shifts left) iv. Availability of resources 1. We are in a drought, supply for Arrowhead water bottles decreases (shifts left) v. Aggregate income changes (recessions/booms/wage changes) 1. Normal goods vs. inferior goods a. In a recession, the demand curve for inferior goods shifts to the right and the demand curve for normal goods shifts to the left i. Demand more thrift clothing, used cars, & ramen in a recession ii. Demand less designer clothing, new/luxury cars, and lobster in a recession b. In a boom, the demand curve for inferior goods shifts to the left and the demand curve for normal goods shifts to the right. i. Demand more designer clothing, new/luxury cars, and lobster in a boom ii. Demand less thrift clothing, used cars, & ramen in a boom c. The shifts in words: i. Demand increases – the demand curve shifts to the right Prepared by: Elena Marie Stacy ii. Demand decreases – demand curve shifts to the left iii. Supply increases – supply curve shifts to the right iv. Supply decreases – supply curve shifts to the left Simultaneous shifts of Supply increases Supply decreases supply and demand Price: ambiguous Price: Up Demand increases Quantity: up Quantity: ambiguous Price: down Price: ambiguous Demand decreases Quantity: ambiguous Quantity: down *Table taken from Deza lecture notes, as I found it particularly useful & important to remember* Check for understanding: What do the supply and demand curves represent?What do they look like? What is on each axis? How do you identify a shift vs. a movement along curve? What causes a shift? Can you identify the direction of shift? Can you verbalize it correctly? (You will be expected to explain in words what is happening to the graphs) What happens if both curves shift at the same time? Why are price and quantitychanges sometimes ambiguous when the curves shift simultaneously? Elasticity: I. Price elasticity of demand: measure of consumer responsiveness to changes in price for a good a. Ratio of change in price to change in quantity demanded b. Perfectly Inelastic: Price change does not affect quantity demanded c. Perfectly Elastic: Price change drastically changes quantity demanded i. (Most goods are only relatively elastic or inelastic) Calculation: Prepared by: Elena Marie Stacy Check for understanding: What is price elasticity of demand? When is something perfectly elastic? Perfectly inelastic? When is something relatively elastic? Relatively inelastic? What are some examples of each? How can we apply this to normative economics?
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