ECON 2020 Exam 1 Study Guide
ECON 2020 Exam 1 Study Guide Econ 2020
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This 21 page Study Guide was uploaded by Brianna Notetaker on Saturday September 3, 2016. The Study Guide belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 166 views.
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Date Created: 09/03/16
Exam 1Study Guide Orange – DEFINITONS Green - FORMULAS Test Criteria Be on time withname (last,first)andID pre-bubbledonscantron. Do not forget pencils,bluescantron,calculator,andI.D.No scratch paper– itwill be provided. Answer keys will be postedoncanvasuntilnexttest is taken. If youcome inlate, tryto siton the outsideisletoavoiddisturbingthe peoplewhoare alreadytakingtheirtest. Test Setup Chapter1– 4questions Chapter3 – 14questions Chapter6 – 3questions Chapter5 – 4questions Problemset – 13 Math– 7 questions Graphs– 2 (5questionsaboutgraphs) Draw yourown graph – up to 7questions Multiplechoice– 5questions Theme – AnchormanTheLegend of RonBurgundy Definitions– Orange Economics- the studyofthe behaviorexhibitedbyindividuals, organizations,andsocietyas a wholein makingidealdecisionsunder scarcity conditions. Scarcity -A situationinwhicha resource usedto make a good or service is limited(supply)comparedtoour desirefor them (demand). Scarce good -an economicgoodthatcannotbe obtainedinan unlimitedamountatzero cost. Free good- aneconomicgood thatcan be obtainedinanyquantity desiredat zero cost. Cost- Whatthe individualisgivingup bychoosingto obtainthe desiredproduct;In a standardmarkettransaction,thisiswhatthe producermust payin orderto providetheproduct. Price -indicationfortheproducerslettingthem knowwhat andhow much ofa productneedsto be produced;In a standardmarket transaction,thisishowmuch theconsumer can expectto payfor product. Explicitcosts- regulatedpaymentstakendirectlyout-of-pocket Implicit/opportunitycosts-The most valuableoptionavailable Resources/inputs/factors-the amountofelementsusedin the manufacturingofgoods andservices Labor -an exertionofmentalandphysicalefforts usedin the productionprocess. Capital-goods thatare manufacturedandusedinthe productionof othergoods andservices. Utility-the joyanindividualwillexperienceasa consumerwhen the desiredgoodor service is obtained. Marginal- somethingthatwillbe addedtothe existingunitthat creates a change;additional Economicprinciple-Statementsabouteconomicbehaviororthe economythatenablepredictionsofthe probableeffectsofcertain actions. Model- A simplifiedrepresentationofhowsomethingworks. Market - Anyinstitutionthatbringstogetherbuyersandsellersofa particulargoodor service. Demandschedule- A tablethatshowshowmuch of a goodor service consumerswill wantto buyat variousprices. 2 Law ofDemand- The price ofa good andthequantitydemandedare inverselyrelated. DemandCurve - A linethatshows themaximumthatconsumersare willingto payfor anyquantity. Quantitydemanded(Qd)- The numberofunitsconsumersare willing to buyat a specificprice. Substitutes-Goodsthattake theplace ofeach otherin consumption. The price ofonegood andthe demandfor theother movetogether. Complements-Goodsthatare usedtogether inconsumption. The price ofone goodandthe demandfor the othermoveopposite. NormalGoods-Goodsfor which income anddemandmovetogether. InferiorGoods-Goodsfor which income anddemandmoveopposite. SupplySchedule- A tablethatshowshowmuch ofa goodor service producerswilloffer for saleat variousprices. Law ofSupply- Theprice of a goodandthe quantitysuppliedare directly(positively)related. Quantitysupplied-The numberofunitsproducersarewillingto offer for sale ata specificprice. Supplycurve - A linethatshows the minimumthatproducersare willingto accept as paymentfor anyquantity. Technology- theproductionprocessofchangingeconomicresources intogoodsandservices; when technologyimproves,supplyincreases. Equilibriumprice-price at which the market clears (Qs = Qd) Price floor- minimumlegalprice Price ceiling- a maximumlegal price Willingnesstopay- The maximumprice at which a consumerwill buy a good. Concepts Types ofcosts Explicitcosts Implicit/opportunitycosts 3 o Economiccost = explicitcosts+ implicitcosts ExampleofEconomicCost(Notes Example) The cost oftwo semesters atAuburntotalsupto $10,696. The estimated cost each studentshouldspendonbooksina year is $1,200. The equationisbasedoffoftheassumptionthatthestudentwillcomplete theirdegree in4 years. Cost ofTuition = (explicit) $10,696 x 4= $42,784 Cost ofBooks = (explicit) $1,200 x 4 = $4,800 $42,784 + $4,800 = $47,584 The followingisan estimatedyearlyaverage ofa full-timejob wage for a studentoverthe 4-year periodofattendingcollege. Full-time job = (implicit) $26,104 x4 = $104,416 Economiccost = $47,584 + $104,416 = $152,000 Types ofResources Natural– materialsthataresuppliedbythe earththatcannotbe manufacturedsuchas water, oil,land,minerals,etc. Labor – an exertionofmentalandphysicalefforts usedin the productionprocess. Capital–goods thatare manufacturedandusedinthe productionofothergoodsandservices. Entrepreneurship–thecapabilityofmerging differentresources togetherto create a valuableproduct. Changein Demand vs. Changein QuantityDemanded (∆ D vs. ∆ Qd) Changein Quantitydemanded -A change in the amount purchasedcausedbya change in theprice; a movementalong the curve. 4 Changein Demand- A shiftofthe entire curve to theleft or right. Factors that shift theDemand Curve 1. Income (Normal/Inferiorgoods) 2. Price ofRelatedGoods(Substitutes/Complements) 5 3. ExpectationsofFuturePrices – Expectedfutureprice changes andcurrent demandmoretogether. 4. Numberof Buyers– Ex.As the“babyboomers”age, demand for socialsecurity,Viagra,etc. increases. 5. TastesandPreferences – Ex.Long t-shirts,monograms Changein Supply vs. Changein Supply Demanded (∆ S vs. ∆ Qs) Changein quantitysupplied -A change inthe amountofferedfor salecaused bya change in theprice; a movementalongthe curve. 6 Changein Supply-A shift ofthe entirecurveto the left or right. RightShift Left Shift Factors that shift theSupply Curve 1. Input/ResourcePrices(Inputprice andsupplymoveopposite) 2. Technology 7 3. Taxes- taxationandsupplymoveopposite 4. Expectationsoffutureprices -expected futureprice changes and current supplymoveopposite;goodmustbe durable/storable 5. Numberofsellers- usuallythenumberofsellersin a market changes as profitschange;firms willenter when profitis highand exitwhen it is low. Price Rationing Price rationing–the allocationofgoodsamongconsumers using prices. Economistsbelievethatpricerationingisthe most efficientmethod ofallocatinggoodsandservices. Everyconsumer willingto payat leastthe equilibriumpricewillget to havethe good. Withprice rationing,theconsumerswillingto paythemost willbe the recipientsofthegood. Withotherrationingmethods,theallocationisrandom. Consequencesof Price Ceilings 8 1. Shortages 2. Inefficientallocationamongconsumers 3. Wastedresources 4. Low quality Consequencesof Price Floors 1. Surpluses 2. Efficientallocationamongproducers 3. Wastedresources 4. Protectionfrom imports Graphs CircularFlow Product $ Markets Goods and services Households Firms Resources $ Resource Markets 9 Market Analysis (S and D Shifts) Whathappenstothe marketfor SUVs when the price ofgas (a compliment)falls? 1. Demandincreases 2. Shortageat the oldprice 3. Pe rises 4. Qe rises Whathappenstothe marketfor SUVs when the price ofsteel (an input)falls? 10 1. Supplyincreases 2. Surplusatthe oldprice 3. Pe falls 4. Qe rises Steel is aninputinSUVs. SUVs andgas are compliments.What happenstothemarket for gas when theprice ofsteel falls? 1. SupplyofSUVs increases 2. Price ofSUVs fall 3. Demandfor gas increases 4. Pe rises 5. Qe rises 11 Whathappenstothe marketfor gas when we expect higher future prices?(onlygraph where bothwill shift) 1. Demandincreases 2. Supplydecreases 3. Pe rises 4. Qe indeterminate(Idon’tknow) Price Ceiling 12 Price Floor 1. Whateffect woulda price ceilingpf$27 haveon thismarket? a. Whenthe price goes down from $36 to $27, youend up with a shortage.Shortageof90 – 50 = 40 units 2. Whateffect woulda price floorof $27haveon thismarket? b.None, themarket remainsin equilibrium 13 Price controlshaveno effect onthe market price if theyare notset properly. A price ceilingset abovePe, or a price floorset above,will notchange the behaviorofproducersandconsumers;themarket remainsin equilibrium. Youcannotassumethatceilingmeansshortage or floormeans surplus. ConsumerSurplus On a graph,consumersurplusisthe area abovethe price butbelow the demandcurve. Price andconsumersurplusmoveopposite. 14 ProducerSurplus On graph,producersurplusisthe areabelowtheprice but abovethe supplycurve. Price andproducersurplusmovetogether. Formulas/Equations-Green EconomicCost Economiccost = explicitcosts+ implicitcosts Equilibriumprice-price at which the market clears (Qs = Qd) Solving for Peand Qe Qs = 2+ 2P Qd = 20 – 4P Findthe equilibriumpriceandquantity. Solution:Qs = Qd 2 + 2P = 20 – 4P 15 6P = 18 Pe= $3 *PlugPe backintobothequations. Qe= 2+ 2(3) = 20 – 4(3) Qe= 8units Surplus Surplus= Qs – Qd units Surplus-at prices aboutPe, Qs >Qd Surplusesputdownwardpressureon prices untilthesurplusis eliminated Shortage Shortage= Qd – Qs units Shortage- At prices belowPe, Qd >Qs Shortagesputupwardpressureon prices untiltheshortageis eliminated Solving for Peand Qe Qs = 2+ 2P Qd = 20 – 4P Findthe equilibriumpriceandquantity. Solution:Qs = Qd 2 + 2P = 20 – 4P 6P = 18 Pe= $3 *PlugPe backintobothequations. 16 Qe= 2+ 2(3) = 20 – 4(3) Qe= 8units ConsumerSurplus ConsumerSurplus= willingnesstopay– amountpaid Willingnesstopay– Themaximumprice at which a consumerwill buy a good. Quantity 1 2 3 4 5 6 7 Willingness $7 $5 $4.50 $4 $3.50 $2.50 $2 Whatis consumersurplusifthe marketprice of thegood is $3.50? Crossoff thenumbersthatwill notcontributetoyour calculations.(ex.#6and #7) TotalWillingness=$7 + $5 + $4.50 + $4 + $3.50 = $24 TotalPaid= $3.50 x $5 = $17.50 ConsumerSurplus= $24 – $17.50 - $6.50 ProducerSurplus Producer surplus= amountreceived– willingnesstoaccept Willingnesstoaccept – The minimumprice atwhich a producerwill sella good Quantity 1 2 3 4 5 6 7 Willingness $.50 $1 $1.50 $2.50 $3.50 $4 $5 Whatis producersurplusifthemarket price ofthe good is$3.50? Crossoff thenumbersnotincludedincalculations(Ex.#6 and#7) Totalreceived = $3.50 x $5 = $17.50 TotalWilling= $.50 + $1 + $1.50 + $2.50 +$3.50 = $9 Producer Surplus= $17.50 - $9 = $8.50 17 Problemset answers 1. Alexis movingintoa newplace.He spent$60 onrentinga van,$25 on boxes,and$400 on newitems for the apartment.He tooktwo days offfrom his jobas a pin-setterat Bill’sBowlingAlleywhere he earns $80 a day.FindAlex’sopportunity,explicit,andeconomiccosts. Explicitcost= 60 + 25 + 400 = $485 Opportunity(implicit)cost= 80+ 80 = $160 Economiccosts = 485 +160 = $645 2. a) State equilibriumpriceandquantityforthismarket.$12 & 28 b) Whateffect woulda price floorof $14haveon themarket? Qd = 8 Qs = 46 Surplus= 46 – 8 = 38units c) Whateffect woulda price ceilingof$14 have? No effect, market remainsatequilibrium 3. FindPe andQe when Qd = 130 -3P andQs = 10 + 5P. 130 – 3P = 10 + 5P 120 = 8P 120/8 18 Pe = $15 (plugbackin tothe equations) 4. How woulda decreasein the price ofcheese (an input)affect themarket for pizza?What happenstoSupply,Demand,EquilibriumQuantityand EquilibriumPrice? *Decrease in aninputincreasessupplyofpizza(shortagesmake prices go up,surplusesmakeprices go down) a. Supplyincrease b. Demanddoes notchange c. Pe falls d. Qe rises 5. How woulda decreasein the price ofhamburgers(a substitute)affectthe market for pizza?WhathappenstoSupply,Demand,EquilibriumQuantity andEquilibriumPrice? 19 a.Supplydoesnot change b.Demanddecreases c. Pe falls d.Qe falls 6. TRICKQUESTION: How woulda decrease inthe price ofpizzaaffect the market for pizza?WhathappenstoSupply,Demand,QuantitySupplied,and QuantityDemanded? a. Supplydoesnot change b. Demanddoes notchange c. Quantitysupplieddecreases d. Quantitydemandedincreases 7. GoodXand goodY are two relatedconsumptiongoods(neitherisan input.)Ifan increasein theprice ofgoodX causes the price ofgoodY to eventuallyriseas well,howare goodX andgood Y related? 20 (Workbackwards)(graph)GoodX andGoodY are substitutes 8. ThefollowingrepresentsScooby's demandfor ScoobySnacks: Quantity 1 2 3 4 5 6 7 Willingness $8 $5.50 $3.50 $2 $1 $.50 $.25 *Crossoff 5,6,and 7because he didnotbuythem a) If theprice of ScoobySnacks is $2,then howmanySnacks will Scooby purchase?16 b)If theprice of ScoobySnacks is $2,howmuch consumer surplusdoes he derivefrom hisconsumption? Totalwillingness=$8 + $5.50 + $3.50 + $2 = $19 Totalpaid= $2 x 4 = $8 Consumersurplus=$19 - $8 = $11 21
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