Exam 1 Study Guide

what is Scarce good?

Orange – DEFINITONS

Green - FORMULAS

Test Criteria

∙ Be on time with name (last, first) and ID pre-bubbled on scantron.

∙ Do not forget pencils, blue scantron, calculator, and I.D. No scratch  paper – it will be provided.

∙ Answer keys will be posted on canvas until next test is taken.  

∙ If you come in late, try to sit on the outside isle to avoid disturbing the  people who are already taking their test.

Test Setup

∙ Chapter 1 – 4 questions

∙ Chapter 3 – 14 questions

∙ Chapter 6 – 3 questions

∙ Chapter 5 – 4 questions

∙ Problem set – 13

∙ Math – 7 questions

∙ Graphs – 2 (5 questions about graphs)

∙ Draw your own graph – up to 7 questions

∙ Multiple choice – 5 questions

∙ Theme – Anchorman The Legend of Ron Burgundy  

Definitions – Orange

∙ Economics - the study of the behavior exhibited by individuals,  organizations, and society as a whole in making ideal decisions under

what is Explicit costs?

scarcity conditions.

∙ Scarcity - A situation in which a resource used to make a good or  service is limited (supply) compared to our desire for them (demand). ∙ Scarce good - an economic good that cannot be obtained in an  unlimited amount at zero cost.

∙ Free good - an economic good that can be obtained in any quantity  desired at zero cost.

∙ Cost - What the individual is giving up by choosing to obtain the  desired product; In a standard market transaction, this is what the  producer must pay in order to provide the product.

∙ Price - indication for the producers letting them know what and how  much of a product needs to be produced; In a standard market  transaction, this is how much the consumer can expect to pay for  product.

∙ Explicit costs- regulated payments taken directly out-of-pocket ∙ Implicit/opportunity costs- The most valuable option available ∙ Resources/inputs/factors-the amount of elements used in the  manufacturing of goods and services

what is Labor?

∙ Labor - an exertion of mental and physical efforts used in the  production process.

∙ Capital - goods that are manufactured and used in the production of  other goods and services.

∙ Utility - the joy an individual will experience as a consumer when the  desired good or service is obtained. Don't forget about the age old question of What are the Five characteristics of All living things?

∙ Marginal - something that will be added to the existing unit that  creates a change; additional

∙ Economic principle - Statements about economic behavior or the  economy that enable predictions of the probable effects of certain  actions.

∙ Model - A simplified representation of how something works. ∙ Market - Any institution that brings together buyers and sellers of a  particular good or service.  

∙ Demand schedule - A table that shows how much of a good or service  consumers will want to buy at various prices.

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∙ Law of Demand - The price of a good and the quantity demanded are  inversely related.

∙ Demand Curve - A line that shows the maximum that consumers are  willing to pay for any quantity.

∙ Quantity demanded (Qd)- The number of units consumers are willing  to buy at a specific price.

∙ Substitutes-Goods that take the place of each other in consumption. The price of one good and the demand for the other move together. We also discuss several other topics like What are the 10 largest cities in the world ?

∙ Complements-Goods that are used together in consumption. The  price of one good and the demand for the other move opposite.

∙ Normal Goods- Goods for which income and demand move together. ∙ Inferior Goods- Goods for which income and demand move opposite. ∙ Supply Schedule - A table that shows how much of a good or service  producers will offer for sale at various prices.

∙ Law of Supply - The price of a good and the quantity supplied are  directly (positively) related.

∙ Quantity supplied - The number of units producers are willing to offer  for sale at a specific price.

∙ Supply curve - A line that shows the minimum that producers are  willing to accept as payment for any quantity.

∙ Technology - the production process of changing economic resources  into goods and services; when technology improves, supply increases. ∙ Equilibrium price - price at which the market clears (Qs = Qd) ∙ Price floor- minimum legal price

∙ Price ceiling - a maximum legal price  

∙ Willingness to pay - The maximum price at which a consumer will buy  a good.

Concepts

Types of costs

∙ Explicit costs

∙ Implicit/opportunity costs

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o Economic cost = explicit costs + implicit costs

Example of Economic Cost (Notes Example)

The cost of two semesters at Auburn totals up to $10,696. The estimated  cost each student should spend on books in a year is $1,200. The  equation is based off of the assumption that the student will complete  their degree in 4 years.

∙ Cost of Tuition = (explicit) $10,696 x 4 = $42,784 We also discuss several other topics like what markets get wrong?

∙ Cost of Books = (explicit) $1,200 x 4 = $4,800

$42,784 + $4,800 = $47,584

The following is an estimated yearly average of a full-time job wage for a  student over the 4-year period of attending college.  

∙ Full-time job = (implicit) $26,104 x 4 = $104,416

∙ Economic cost = $47,584 + $104,416 = $152,000  

Types of Resources

∙ Natural – materials that are supplied by the earth that cannot be  manufactured such as water, oil, land, minerals, etc.

∙ Labor – an exertion of mental and physical efforts used in the  production process.

∙ Capital – goods that are manufactured and used in the  production of other goods and services.

∙ Entrepreneurship – the capability of merging different resources  together to create a valuable product.

Change in Demand vs. Change in Quantity Demanded (∆ D vs. ∆ Qd)

∙ Change in Quantity demanded - A change in the amount  purchased caused by a change in the price; a movement along  the curve.

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∙ Change in Demand - A shift of the entire curve to the left or  right. We also discuss several other topics like Who is Gustav Fechner?

Factors that shift the Demand Curve

1. Income (Normal/Inferior goods)

2. Price of Related Goods (Substitutes/Complements)

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3. Expectations of Future Prices – Expected future price changes  and current demand more together.

4. Number of Buyers – Ex. As the “baby boomers” age, demand  for social security, Viagra, etc. increases.

5. Tastes and Preferences – Ex. Long t-shirts, monograms

Change in Supply vs. Change in Supply Demanded (∆ S vs. ∆ Qs) Don't forget about the age old question of What is Sustainability?

∙ Change in quantity supplied -A change in the amount offered for  sale caused by a change in the price; a movement along the curve.

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∙ Change in Supply - A shift of the entire curve to the left or right.  Right Shift Left Shift If you want to learn more check out Why psychologists do not conduct therapy?

Factors that shift the Supply Curve

1. Input/Resource Prices (Input price and supply move opposite) 2. Technology

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3. Taxes - taxation and supply move opposite

4. Expectations of future prices - expected future price changes and  current supply move opposite; good must be durable/storable 5. Number of sellers - usually the number of sellers in a market  changes as profits change; firms will enter when profit is high and  exit when it is low.

Price Rationing

∙ Price rationing – the allocation of goods among consumers using  prices.

∙ Economists believe that price rationing is the most efficient method  of allocating goods and services.

∙ Every consumer willing to pay at least the equilibrium price will get  to have the good.

∙ With price rationing, the consumers willing to pay the most will be the  recipients of the good.

∙ With other rationing methods, the allocation is random. Consequences of Price Ceilings

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1. Shortages

2. Inefficient allocation among consumers 

3. Wasted resources

4. Low quality

Consequences of Price Floors

1. Surpluses

2. Efficient allocation among producers 

3. Wasted resources

4. Protection from imports

Graphs

Circular Flow

Product  

$ Goods and  

Markets

services

Households

Resources $ Resource  

Markets

Firms

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Market Analysis (S and D Shifts)

∙ What happens to the market for SUVs when the price of gas (a  compliment) falls?

1. Demand increases

2. Shortage at the old price

3. Pe rises

4. Qe rises

∙ What happens to the market for SUVs when the price of steel (an  input) falls?

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1. Supply increases

2. Surplus at the old price

3. Pe falls

4. Qe rises

∙ Steel is an input in SUVs. SUVs and gas are compliments. What  happens to the market for gas when the price of steel falls?

1. Supply of SUVs increases

2. Price of SUVs fall

3. Demand for gas increases

4. Pe rises

5. Qe rises

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∙ What happens to the market for gas when we expect higher future  prices? (only graph where both will shift)

1. Demand increases

2. Supply decreases

3. Pe rises

4. Qe indeterminate (I don’t know)

Price Ceiling

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Price Floor

1. What effect would a price ceiling pf $27 have on this market? a. When the price goes down from $36 to $27, you end up  with a shortage. Shortage of 90 – 50 = 40 units

2. What effect would a price floor of $27 have on this market? b. None, the market remains in equilibrium

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∙ Price controls have no effect on the market price if they are not set  properly.  

∙ A price ceiling set above Pe, or a price floor set above, will not change  the behavior of producers and consumers; the market remains in  equilibrium.  

▪ You cannot assume that ceiling means shortage or floor means  surplus.

Consumer Surplus

∙ On a graph, consumer surplus is the area above the price but below  the demand curve.  

∙ Price and consumer surplus move opposite.

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Producer Surplus

∙ On graph, producer surplus is the area below the price but above the  supply curve.

∙ Price and producer surplus move together.

Formulas/Equations- Green

Economic Cost

Economic cost = explicit costs + implicit costs

∙ Equilibrium price - price at which the market clears (Qs = Qd) Solving for Pe and Qe

Qs = 2 + 2P

Qd = 20 – 4P

Find the equilibrium price and quantity.

Solution: Qs = Qd 

2 + 2P = 20 – 4P

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6P = 18 

Pe = $3 

*Plug Pe back into both equations.

Qe = 2 + 2(3) = 20 – 4(3) 

Qe = 8 units 

Surplus

Surplus = Qs – Qd units

∙ Surplus- at prices about Pe, Qs >Qd

∙ Surpluses put downward pressure on prices until the surplus is  eliminated

Shortage

Shortage = Qd – Qs units  

∙ Shortage - At prices below Pe, Qd >Qs

∙ Shortages put upward pressure on prices until the shortage is  eliminated  

Solving for Pe and Qe

Qs = 2 + 2P

Qd = 20 – 4P

Find the equilibrium price and quantity.

Solution: Qs = Qd 

2 + 2P = 20 – 4P 

6P = 18 

Pe = $3 

*Plug Pe back into both equations.

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Qe = 2 + 2(3) = 20 – 4(3) 

Qe = 8 units 

Consumer Surplus

∙ Consumer Surplus = willingness to pay – amount paid

∙ Willingness to pay – The maximum price at which a consumer will buy  a good.

Quantity

1

2

3

4

5

6

7

Willingness

$7

$5

$4.50

$4

$3.50

$2.50

$2

∙ What is consumer surplus if the market price of the good is $3.50? ▪ Cross off the numbers that will not contribute to your  

calculations. (ex. #6 and #7)

Total Willingness = $7 + $5 + $4.50 + $4 + $3.50 = $24

Total Paid = $3.50 x $5 = $17.50

Consumer Surplus = $24 – $17.50 - $6.50

Producer Surplus

∙ Producer surplus = amount received – willingness to accept ∙ Willingness to accept – The minimum price at which a producer will  sell a good

Quantity

1

2

3

4

5

6

7

Willingness

$.50

$1

$1.50

$2.50

$3.50

$4

$5

∙ What is producer surplus if the market price of the good is $3.50? ▪ Cross off the numbers not included in calculations (Ex. #6  and #7)

Total received = $3.50 x $5 = $17.50

Total Willing = $.50 + $1 + $1.50 + $2.50 +$3.50 = $9

Producer Surplus = $17.50 - $9 = $8.50

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Problem set answers

1. Alex is moving into a new place. He spent $60 on renting a van, $25 on  boxes, and $400 on new items for the apartment. He took two days  off from his job as a pin-setter at Bill’s Bowling Alley where he earns  $80 a day. Find Alex’s opportunity, explicit, and economic costs.  

∙ Explicit cost = 60 + 25 + 400 = $485

∙ Opportunity (implicit) cost = 80 + 80 = $160

∙ Economic costs = 485 +160 = $645

 2.

a) State equilibrium price and quantity for this market. $12 & 28 b) What effect would a price floor of $14 have on the market?  Qd = 8 Qs = 46  

Surplus = 46 – 8 = 38 units

c) What effect would a price ceiling of $14 have?  

No effect, market remains at equilibrium

3. Find Pe and Qe when Qd = 130 - 3P and Qs = 10 + 5P.  

130 – 3P = 10 + 5P  

120 = 8P  

120/8

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Pe = $15 (plug back in to the equations)

4. How would a decrease in the price of cheese (an input) affect the market  for pizza? What happens to Supply, Demand, Equilibrium Quantity and  Equilibrium Price?  

*Decrease in an input increases supply of pizza (shortages make prices go  up, surpluses make prices go down)

a. Supply increase

b. Demand does not change

c. Pe falls

d. Qe rises

5. How would a decrease in the price of hamburgers (a substitute) affect the  market for pizza? What happens to Supply, Demand, Equilibrium Quantity  and Equilibrium Price?

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a. Supply does not change

b. Demand decreases

c. Pe falls

d. Qe falls

6. TRICK QUESTION: How would a decrease in the price of pizza affect the  market for pizza? What happens to Supply, Demand, Quantity Supplied, and  Quantity Demanded?  

a. Supply does not change

b. Demand does not change

c. Quantity supplied decreases

d. Quantity demanded increases

7. Good X and good Y are two related consumption goods (neither is an  input.) If an increase in the price of good X causes the price of good Y to  eventually rise as well, how are good X and good Y related?

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(Work backwards) (graph) Good X and Good Y are substitutes

8. The following represents Scooby's demand for Scooby Snacks:  

Quantity

1

2

3

4

5

6

7

Willingness

$8

$5.50

$3.50

$2

$1

$.50

$.25

*Cross off 5,6, and 7 because he did not buy them

a) If the price of Scooby Snacks is $2, then how many Snacks will Scooby  purchase? 16

b) If the price of Scooby Snacks is $2, how much consumer surplus does  he derive from his consumption?

Total willingness = $8 + $5.50 + $3.50 + $2 = $19

Total paid = $2 x 4 = $8

Consumer surplus = $19 - $8 = $11

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