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EC 110 Exam 1 Study Guide - Zirlott

by: Haley

EC 110 Exam 1 Study Guide - Zirlott EC 110

Marketplace > University of Alabama - Tuscaloosa > Microeconomics > EC 110 > EC 110 Exam 1 Study Guide Zirlott
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Completed study guide including all vocab and key concepts for chapters 1-4 of Fundamentals of Microeconomics
Principles of Microeconomics
Kent O. Zirlott
Study Guide
Economics, Microeconomic, Microeconomics, ec110
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This 7 page Study Guide was uploaded by Haley on Tuesday August 9, 2016. The Study Guide belongs to EC 110 at University of Alabama - Tuscaloosa taught by Kent O. Zirlott in Fall 2016. Since its upload, it has received 8 views. For similar materials see Principles of Microeconomics in Microeconomics at University of Alabama - Tuscaloosa.


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Date Created: 08/09/16
Ch.1 1. Definitionsand Concepts a. Efficiency:means that societyis getting the maximum benefits from its scarce resources. b. Equality: means that those benefits are distributed uniformly among society’s members. c. Opportunity cost:what you give up I order to getan item. d. Rational People: people who systematicallyand purposefully do the best they canto achievetheir objectives,given the availableopportunities. e. Marginal change:term economists use to describe a small incremental adjustment to anexisting planof action. f. Incentive: something (such as a prospect of punishment or a reward) that induces a person to act. g. Market economy: economy in which the decisions of a central planner are replaced by the decisions ofmillions of firms and households. h. Property rights: right of individuals to own and control their own scarce resources. i. Market failure: a situation in which the market on its own fails toproduce an efficientallocation of resources. j. Externality: the impact of one person’s actions on the well-being of a bystander. k. Market power: the ability of a singleperson or firm (or a small group) to unduly influence market prices. l. Productivity: the amount of goods and services produced by eachunit of labor input. m. Inflation: an increasein the overall level of prices in the economy. n. Business cycle:theirregular and largelyunpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed. 2. What isthe study of economics? What is microeconomics andmacroeconomics? a. The study of how societymanages its scarceresources. b. Microeconomics: study of how households and firms make decisions and how they interact in the market. c. Macroeconomics: study of economy-wide phenomena. 3. What isequality (equity)? What is scarcity? a. Equality (equity): when prosperity is distributed uniformly among society’s members. b. Scarcity: limited nature ofsociety’s resources. 4. What isefficiency? a. When societygets the most out of its scarce resources. 5. What are tradeoffs and opportunity costs? How do you measure opportunity costs? Examples. a. Tradeoffs: the decisions made to achievesomething alsoinvolve giving something elseup. b. Opportunity costs:whatever must be given up to obtain something else;the relevant cost for decision making. c. We measure opportunity cost by comparing what could be gainedor lostfrom our two choices. 6. What isrationality and thinking at the margin? a. Rationalityis wanting to do the best you canto achieveyour goals. b. Thinking atthe margin is wanting to useyour resources to be as productive as possible. 7. Benefitsof trade a. Specialization and trade allow countries to produce more effectivelythan ifthey did not trade with eachother. 8. What isa market and market economy? a. Market: a group of buyers and sellers. b. Market economy: allocates resources through the decisions of many households and firms as they interact in markets. 9. What isthe invisible hand? a. It works through the price systemand refers to the interaction of buyers and sellers whichdetermines prices. It causes prices to benefit both the sellerand buyer. 10. What isa market failure? a. When the market fails toallocatesociety’s resources effectively. Ch. 2 1. Definitionsand Concepts a. Circular-flow diagram: visual model ofthe economy in which the economy is simplifiedto include only firms and households. b. Production possibilities frontier: a graph that shows the various combinations of outputs that the economy canpossiblyproduce giventhe availablefactors of production and production technology that firms use to turn these factors into output. c. Positivestatements: statements that are descriptive and make a claimabout how the world is. d. Normative statements: statements that are prescriptive and make a claimabout how the world ought to be. 2. What are models?(economicsmodels) a. Highlysimplifiedrepresentations of a more complicated reality that are used by economists to study economic issues. 3. Characteristics of the Circular Flow Diagram. a. It is a visual model of the economy that shows how dollars flow through markets, firms, and households. i. Two actors: households and firms. ii. Two markets: market for goods and services andmarket for factors of production. 4. How does the Circular Flow Diagram work? Who are its “actors” and what do they do? What are the two markets? Know what flows from each actor to eachmarket… etc. a. Two actors: households and firms. b. Two markets: market for goods and services andmarket for factors of production. 5. What are the factors of production and the payments to them? a. Factors of production areresources the economy uses to produce goods and services. i. Land, labor, capital (buildings and machines usedin production), and entrepreneurship. b. Households own factors of production, buy goods and services. c. Firms own goods and services,buy factors of productions. 6. Characteristics of the Production Possibility Frontier (PPF). a. A graph that shows the combinations of 2 goods the economy canproduce given the availableresources and technology. b. Points on the PPF: possible,efficient c. Points under PPF: possible,not efficient d. Points above PPF: currently unobtainable 7. How does the PPF work? What does it tell us? a. Moving along a PPF involves shifting resources from the production of one good to another. b. The slopeof the PPF tells you the opportunity costof one good in terms ofthe other. 8. Increasing and constant opportunity costs and how they affectthe shape of the PPF. a. Constant: PPF is a straightline i. Same resources are useful for producing in either industry. b. Increasing:PPF is bow-shaped. i. The resources arespecializedand not easilyadaptablefor producing in either industry. 9. What causes the PPF to shift or pivot outward? And what would be the result of the shift? a. Economic growth shifts the PPF outward. b. This would result ina higher production rate. 10. Normative vs. Positive statements a. Normative: attempt to describe the world as itshould be (uses “should”). b. Positive: describeworld as itis. Ch. 3 1. Definitionsand Concepts a. Absolute advantage: the producer that requires the smallerquantity of inputs to produce a good. b. Comparative advantage: the producer who gives up less ofother goods to produce a certain good and has a smalleropportunity cost for that good. c. Imports: goods that are produced abroad and solddomestically. d. Exports: goods that are produced domesticallyand sold abroad. 2. Solving for Absolute Advantage. a. Whichever producer can produce more ofa singlegood. 3. Characteristics or Rules ofComparative Advantage. a. Eachgood produced by the individual that has the smalleropportunity costof producing that good. b. Doesn’t always mean you’ll make money atyour comparative advantage. c. One person can have absoluteadvantage in both goods, but cannot have comparative advantage inboth goods. 4. Solving for Comparative Advantage (Calculating the Opportunity Costs for eachproducer and for eachgood.) 5. What isspecialization? a. When a country uses its resources to make what it has advantagein, in order to promote trade. Ch. 4 1. Definitionsand Concepts a. Competitive market: a market in which there are somany buyers and sellers that eachhas a negligibleimpacton the market price. b. Quantity demanded: the amount ofthe good that buyers are willing and ableto purchase. c. Lawof demand: when the price of a good rises,the quantity demanded of the good falls,andwhen the price falls,thequantity demanded rises. d. Demand schedule:a tablethat shows the relationship between the price of the good and the quality demanded, holding constant everything elsethat influences how much of the good consumers want to buy. e. Demand curve: the linerelating price and quantity demanded. f. Normal good: a good who’s demand falls when income falls. g. Inferior good: a good who’s demand rises when income falls. h. Substitutes: pairs of goods that are used inplaceof each other; a fall inthe price of one good reduces the demand for another good. i. Complements: pairs of goods that are usedtogether; a fall inthe price of one good raises the demand for another good. j. Quantity supplied: the amount of a good the sellers andwilling and ableto sell. k. Lawof supply: when the price of a good rises,thequantity of the good supplied alsorises,andwhen the price falls,thequantity suppliedfalls as well. l. Supply schedule: a table that shows the relationship between of a good and the quantity supplied. m. Supply curve: the curve relating the price and the quantity supplied. n. Equilibrium: where the supply and demand curves intersect. o. Equilibrium price: the price atequilibrium. p. Equilibrium quantity: the quantity at equilibrium. q. Surplus: when the quantity of the good supplied exceeds the quantity demanded. r. Shortage: when the quantity of the good demanded exceeds the quantity of the good supplied. s. Lawof supply and demand: the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance. 2. Difference betweenDemand and Quantity Demand (QD)and how they appear on a graph. a. The demand curve shows how the quantity ofgoods demanded depends on the price. b. Quantity demanded is the amount of the good that buyers are willing and ableto purchase. c. Individual demand is an individual’s demand for a product or good. 3. How do you create a market demand curve? a. Price goes on the vertical axis andquantity goes on the horizontal axis. 4. What isthe Law of Demand? a. When the price of a good rises,thequantity demanded of the good falls;when the price falls,the quantity demanded rises. 5. Difference betweenmoving along a demand curve and shifting a demand curve. a. Moving along the demand curve: when the price of the good changes. b. Shifting: happens when the quantity atevery price changes. 6. Difference between“Change in Demand” and “Change inQuantity Demanded”. a. Changein demand: represents a shiftin the demand curve. b. Changein quantity demanded: represents movement along the current demand curve. 7. What causes amovement along the demandcurve? (Remember,ifyou move upward along a demand curve,that is a decrease inquantity demanded. If you move downward along a demand curve,that is an increasein quantity demanded.) a. A changein quantity demanded. 8. What causes ashift of the demand curve? (Remember,if thedemand curveshifts to the right, that is an increasein demand. If the demand curveshifts to theleft,that is a decrease in demand.) a. A changein demand; when the quantity at every price changes. 9. What are the Determinants ofDemand and how a change in them will shift the demand curve? a. Income, price of related goods, tastes,expectations,number of buyers. 10. Normal vs. Inferior Good a. Normal: good who’s demand falls when income falls. b. Inferior: good who’s demand rises when income falls. 11. Substitutes vs. Complements a. Substitutes: pairs of goods that are used inplaceof each other. b. Complements: pairs of goods that are usedtogether. 12. Difference betweenSupply and Quantity Supplied (QS)and how they appear on a graph. a. Quantity supplied: amount of the good buyers and willing andable to sell. b. Supply: a seller’s individual supply. 13. How do you create a market supply curve? a. Sum of individual supply curves horizontally. 14. What isthe Law of Supply? a. When the price of a good rises,the quantity suppliedof the good alsorises, when the price falls,thequantity suppliedfalls as well. 15. Difference betweenmoving along a supply curve and shifting a supply curve. a. Shift happens when the price stays thesame. b. Moving along the curve happens when the prices change. 16. Difference between“Change in Supply” and “Change in Quantity Supplied”. a. Changein supply: change inthe overall supply of the good, results in a shift. b. Changein quantity supplied: represents movement along the current supply curve by the individual. 17. What causes amovement along the supply curve? (Remember,if you moveupward along a supply curve,that isan increase in quantity supplied. If you movedownward along a supply curve,that isa decrease in quantity supplied.) a. A changein the quantity supplied. 18. What causes ashift of the supply curve? (Remember,ifthe supply curveshifts to the right, that is an increasein supply. If thesupply curveshifts to theleft,that is a decrease in supply.) a. A price changeat every supply point. 19. What are the Determinants ofSupply and how a change in them will shift the supply curve? a. Input prices, technology, expectations about the future, number of sellers. 20. Supply and DemandTogether. a. Goal ofthis is equilibrium. 21. What isan Equilibrium? a. When the quantity supplied equals the quantity demanded. 22. How do you determine equilibrium price and quantity? (Both on agraph and mathematically.) a. Where the two curves intersect. 23. Shortage vs. Surplus a. Shortage: when the quantity suppliedis less thanthe quantity demanded. b. Surplus: when the quantity supplied it greater than the quantity demanded. 24. What happens to the equilibrium price and quantity ifthe supply curve shifts, ifthe demand curve shifts, or ifboth supply and demand shift? a. The equilibrium price shifts with the supply and demand of the good.


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