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by: Tram Dang

ECON 2023 Test 1 STUDY GUIDE ECON 2023

Marketplace > University of Arkansas > Microeconomics > ECON 2023 > ECON 2023 Test 1 STUDY GUIDE
Tram Dang
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Chapter 1-6
Principle of microeconomics
o' brian
Study Guide
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This 8 page Study Guide was uploaded by Tram Dang on Thursday September 8, 2016. The Study Guide belongs to ECON 2023 at University of Arkansas taught by o' brian in Fall 2016. Since its upload, it has received 45 views. For similar materials see Principle of microeconomics in Microeconomics at University of Arkansas.


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Date Created: 09/08/16
ECON 2023 TEST 1 STUDY GUIDE CHAP. 1 ­ 10 PRINCIPLES OF ECONOMICS 1.People face tradeoffs. 2.The cost of any action is measured in terms of foregone opportunities. 3.Rational people make decisions by comparing marginal costs and marginal benefits. 4.People respond to incentives. 5.Trade can be mutually beneficial. 6.Markets are usually a good way of coordinating trade. 7.Government can potentially improve market outcomes if there is a market failure or if the  market outcome is inequitable.  8.Productivity is the ultimate source of living standards. 9.Money growth is the ultimate source of inflation. 10.Society faces a short­run tradeoff between inflation and unemployment. Glossary ● Scarcity – the limited nature of society’s resources ● Economics – the study of how society manage its resources ● Efficiency – the property of society getting the most it can from its scarce  resources. ● Equality – the property of distributing economic prosperity uniformly among the  members of society ● Opportunity cost – whatever must be given up to obtain some item ● Rational people – people who systematically and purposefully do the best they  can to achieve their objectives ● Marginal change – a small incremental adjustment to a plan of action ● Incentive – something that induces a person to act ● Market economy – an economy that allocates resources through the  decentralized decisions of many firms and households as they interact in markets for  goods and services ● Property rights – the ability of an individual to own and exercise control over  scarce resources ● Market failure – a situation in which a market left on its own fails to allocate  resources efficiently ● Externality – the impact of one person’s actions on the well­being of a bystander ● Market power – the ability of a single economic actor to have a substantial  influence on market prices ● Inflation – an increase in the overall level of prices in the economy ● Business cycle – fluctuations in economic activity, such as employment and  production  CHAP. 2 2 roles ● Scientists: try to explain the world ● Policy advisors: try to improve it Model is based on assumptions The Circular­ Flow Diagram 2 type of decision makers : households and firms ● Households ○ Buy and consume goods and service (from firms) ○ Own and sell factors of production (labor, land, capital,  Entrepreneurial Ability) ● Firms   ○ Produce and sell goods and services (to households) ○ Hire and use factors of production Production Possibilities Frontier (PPF) ­ shows the trade­off between the outputs of different  goods at a given time, but the trade­off can change over time The PPF could be a straight line or bow­shaped ● If opportunity cost remains constant, PPF is a straight line.  ● If opportunity cost of a good rises as more of the good is produced, PPF is bow­ shaped. Glossary ● Circular­flow diagram ­ a visual model of the economy that shows how dollars  flow through markets among households and firms   ● Production possibilities frontier ­ a graph that shows the combinations of  output that the economy can possibly produce given the available factors of production  and the available production technology  ● Microeconomics ­ the study of how households and firms make decisions and  how they interact in markets ● Macroeconomics ­ the study of economy wide phenomena including inflation,  unemployment, and economic growth  ● Positive statements ­ claims that attempts to describe the world as it is ○ Ex: The sky is blue ● Normative statements ­ claims that attempts to prescribe how the world should  be  ○ Ex: The govt should raise the minimum wage  CHAP. 3 ­ INTERDEPENDENCE AND THE GAINS FROM TRADE  Trade can make everyone better off  Glossary ● Absolute advantage ­ the ability to produce a good using fewer inputs (labor  hours) than another producer ● Comparative advantage ­ the ability to produce a good at a lower opportunity  cost than another producer  ● Import ­ goods produced abroad and sold domestically ● Export ­ goods produced domestically and sold abroad  CHAP. 4 ­ THE MARKET FORCES OF SUPPLY AND DEMAND  Demand curve Shifters ● Income (normal good & inferior good) ● Price of related goods (substitutes and complements) ● Taste  ● Expectation Supply curve Shifters ● Input prices ● Technology ● Number of sellers ● Expectation 3 Steps to Analyzing changes in Equilibrium 1. Decide whether the event shifts the supply or demand curve (or perhaps both) 2. Decide in which direction the curve shifts 3. Use the supply­and­demand diagram to see how the shift changes the  equilibrium price and quantity  Glossary ● Market ­ a group of buyers and sellers of a particular good or service ● Competitive market ­ many buyers and sellers that each has a negligible impact on the market price ● Perfectly competitive ­ All goods exactly the same; buyers and sellers so  numerous that no one can affect market price—each is a “price taker” ● Quantity demand ­ the amount of a good that buyers are willing and able to  purchase ● Law of demand ­  price up, quantity demanded down  ● Demand schedule ­ a table that shows the relationship between the price of a  good and the quantity demanded ● Demand curve ­ graph ● Normal good ­ demand for a good falls when income falls ○ Ex: restaurant, expensive food ● Inferior good ­  demand for a good rise when income falls ○ Ex: hamburger, fast food, cheap food  ● Substitutes ­ in 2 goods, an increase in the price of one causes an increase in  demand for the other.   ○ Ex: pizza and hamburger ● Complements­ in 2 goods, an increase in the price of one causes a fall in  demand for the other.   ○ Ex: computers and software. If price of computers rises,people  buy fewer computers, and therefore less software.  ● Quantity supplied ­ the amount of a good that sellers are willing and able to sell ● Law of supply ­ price up, quantity supplied up  ● Equilibrium price ­ the price that balances quantity supplied and quantity  demanded ● Surplus ­  when quantity supplied is greater than quantity demanded ● Shortage ­ when quantity supplied is lower than quantity demanded ● Law of supply and demand ­ price of any good adjusts to bring the quantity  demanded for that good into balance ● Change in supply:  a shift in the S curve occurs when a nonprice determinant of supply changes (like technology or costs) ● Change in the quantity supplied: a movement along a fixed S curve occurs  when P changes  ● Change in demand: a shift in the D curve occurs when a nonprice determinant  of demand changes (like income or # of buyers) ● Change in the quantity demanded: a movement along a fixed D curve occurs  when P changes  CHAP. 5 ­ ELASTICITY AND ITS APPLICATION  Price Elasticity of Demand ● Anything above 1 is really affect Percentage Changes Midpoint Method “Perfectly inelastic demand”  (one extreme case) Inelastic demand  Unit Elastic demand Elastic demand  “Perfectly elastic demand”  (the other extreme) % Change in anything: Change Average Also place:     % Change Q on top              % Change P on bottom Price elasticity is higher for narrowly defined goods than for broadly defined ones. Ex: Pizza vs. Sunscreen ● >1 ­  Elastic (raise price ­ lose money) ● =1 ­ Lintary (most total revenue, not profit) ● <1­ Inelastic (low price­ gain money) Slope of linear demand curve is constant, but its elasticity is not Price Elastic and Total Revenue   Price Elastic of Supply Glossary d s ● Elasticity ­ a numerical measure of the responsiveness of  Q   or  Q   to one of  its determinants.   d ● Price elasticity of demand ­ measures how much Q  responds to a change in  P. ● Total revenue ­  amount paid by buyers and receivers of a good  ● Income elasticity of demand ­ measure of how much quantity demanded of a  good responds to a change in consumer’s income ● Cross­price elasticity of demand ­ measure of how much quantity demanded  of one good responds to a change in the price of another good ● Price elasticity of supply ­ measure of how much quantity supplied of a good  responds to a change in the price of that good  CHAP.6 ­ SUPPLY, DEMAND, AND GOVERNMENT POLICIES Glossary ● Price Ceiling ­ legal maximum on the price at which a good can be sold. ● Price Floor ­ legal minimum on the price at which a good can be sold. ● Tax Incidence – the manner in which the burden of a tax is shared among  participants in a market; essentially “who pays for it.”


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