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ECON 2105, Study guide test 1

by: Randi

ECON 2105, Study guide test 1 ECON 2105

Marketplace > University of Georgia > Macro Economics > ECON 2105 > ECON 2105 Study guide test 1
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This study guide covers what we covered in lecture up to this point, as well as information from chapters 1-5 and 7 readings
Study Guide
unemployment, cyclical, structural, frictional, supply, demand, elasticity, laborforce, inputprices, rentcontrol, welfareeconomics, excisetax, imperfectmarkets, correlation, scatterplots, variables, pricegouging, reversecausation, monopoly, Incentives, specialization, trade, Calculations, endogeriousfactors
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This 18 page Study Guide was uploaded by Randi on Tuesday September 13, 2016. The Study Guide belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2016. Since its upload, it has received 180 views. For similar materials see Macroeconomics in Macro Economics at University of Georgia.


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Date Created: 09/13/16
Study  Guide  test  1     ECON 2105 PROF.  MCWHITE       Highlight  =  Important  Concept   Highlight  =  Key  term   Chapter  1:  The  Five  Foundations  of  Economics     • What  is  economics?   o Looking  at  human  behavior,  based  on  choices   o In  other  words,  it  is  the  study  of  making  choices  in  the  presence   limited  resources  and  unlimited  wants  (scarcity)   o To  study  the  economy  you  need:   § People  with  wants/needs   § Decisions  about  how  to  allocate  resources   § Resources  in  limited  supply   § Trade-­‐offs   o Positive  Economics:   § Positive  Economics  consists  of  facts,  not  opinions   o Normative  Economics:   § Normative  Economics  is  the  opposite  of  Positive.  It  is  opinion-­‐ based.     § People  argue  their  viewpoints     2  Divisions  of  economics:   1. Microeconomics:  focused  on  the  decisions  of  individual  units   (person/company/country)   Ø Concepts  like:  externalites,  Robert’s  budget,  a  firm’s  decisions   2. Macroeconomics:  focused  on  interactions  of  the  individuals  as  a  whole   economy   Ø Concepts  like:  GDP,  inflation,  tax  policy,  exchange  rates       • What  are  the  five  foundations  of  economics?   1. People  respond  to  incentives   o Incentives  are  motivation  factors  in  making  decisions  the  way   we  do  –  they  can  either  be  positive  or  negative        *They  change  our  behavior   Ø Direct  Incentive:  hopefully  causes  the  desired  result   Ø Indirect  Incentive:  Unexpected  behavior     2. Trade-­‐offs   o Because  we  cannot  do  everything,  we  must  consider  our   options  (trade-­‐offs)   Study  Guide  test  1        What  are  the  other  ways  I  could  allocate  my  resources?   o We  make  trade-­‐offs  with  our  resources     3. Opportunity  costs     o The  next  best  option  that  you  had  to  give  up   o The  highest  value  forgone  alternative   o The  trade-­‐off  of  your  next  best  choice  for  your  resources     4. People  make  decisions  at  the  margin   o Marginal  thinking  is  evaluating  the  cost/benefit  of  one   more  additional  unit   o This  is  based  off  the  assumption  of  the  Principle  of  Self-­‐ Interest:  People  are  rational  and  want  to  make  the  best   decision  on  how  to  spend  their  resources   o Most  decisions  happen  in  incremental  changes   Ø This  means  they  are  not  “all  or  nothing.”  People  stop   when  the  additional  cost  is  greater  than  the  additional   benefit  of  an  action.   o What  is  the  benefit  of  getting  an  additional  unit?     Ø For  example:  You  are  hungry  and  eat  a  piece  of  pizza.  The   first  slice  is  great,  and  the  second  slice  is  also  good.  On  the   third  slice,  you  get  full.  Is  there  any  benefit  in  eating  the   fourth  slice?  After  every  slice  of  pizza,  your  satisfaction  of   the  next  unit,  or  your  marginal  benefit,  started  to   diminish.     o Your  optimal  decision  point  is  where  the  Marginal  benefit  =   the  Marginal  Cost     MB=MC     5. Trade  increases  total  value   o Trade  is  beneficial  to  all  parties  involved!   o People  decide  who  they  want  to  compete  with  and  who  they   want  to  cooperate  with     o Trade  makes  us  interdependent   o People  are  better  off  when  they  specialize  in  what   they  are  best  at  and  then  trade  that  skill/product   with  others               Study  Guide  test  1     • What  are  markets?   o A  market  is  a  place  where  buyers/sellers  meet  to  buy/sell  goods  and   services   o Markets  make  us  better  off  because  we  end  up  with  more  stuff!   Ø Everyone  focuses  on  their  comparative  advantage   o Markets  focus  on  the  relationship  between  competition  and   cooperation   o Law  of  Beneficial  Specialization:   § Workers  do  whatever  involves  the  lowest  opportunity  cost   compared  with  other  tasks     • Comparative  advantage     o Comparative  advantage  deals  with  the  differences  in  opportunity   costs  between  producers.  This  is  the  basis  for  specialized  production   and  trade!   o Who  is  the  low-­‐cost  producer  of  a  good?     § Who  has  the  lowest  opportunity  cost  of  producing  a  good?     • Absolute  advantage     o The  ability  to  produce  more  of  a  good  in  comparison  to  someone  else   *Just  because  a  producer  may  have  absolute  advantage,  does  not   mean  they  have  comparative  advantage!!!     For  example:       Hotdogs   Buns   Murr   20   10   Sal   90   30     Sal  has  absolute  advantage  in  the  production  of  both  hotdogs  and  buns  because  he  can   produce  the  most.  However,  Murr  has  the  comparative  advantage  in  the  production  of   buns  because  he  has  the  lowest  opportunity  cost.  For  every  1  bun  he  produces,  he  only   gives  up  producing  2  hamburgers,  while  Sal  gives  up  3:       Murr:     20  Hamburgers  =  10  Buns   1  Bun  =  2  Hamburgers         10     10     Sal:     90  Hamburgers  =  30  Buns     1  Bun  =  3  Hamburgers         30     30     On  the  other  hand,  Sal  has  comparative  advantage  in  the  production  of  hamburgers.   For  every  hamburger  he  produces,  he  only  gives  up  1/3  of  a  bun,  while  Murr  gives  up   1/2  a  bun:      Murr:     20  Hamburgers  =  10  Buns   1  Hamburger  =  1/2  Bun   Study  Guide  test  1           20     20     Sal:     90  Hamburgers  =  30  Buns     1  Hamburger  =  1/3  Bun       Study  Guide  test  1     Chapter  2:  Model  Building  and  Gains  from  Trade     • Ceteris  paribus  –  “Other  things  the  same”   o This  term  is  used  to  describe  static  analysis  of  markets   o In  a  theoretical/perfect  market  where  everything  holds  constant,   what  will  we  observe?       • De  qustibus  non  es  disputandum  –  “To  each  his  own”   o This  term  means  there  is  no  accounting  for  tastes/preferences  of   individuals   o Every  person  has  their  own  likes  and  dislikes     • Law  of  Increasing  relative  cost:   o Opportunity  cost  of  producing  a  good  rises  as  a  society  produces  more   of  it       • PRODUCTION  POSSIBILITIES  FRONTIER  (PPF)   o Economist  use  the  PPF  to  show  combinations  of  outputs  in  an   economy  given  the  available  factors  of  production  and  the  production   technology   o The  PPF  demonstrates  that  the  economy  is  constrained  by  the  ability   to  produce   § One  product  must  be  given  up  in  order  to  produce  a  different   product.       • At  point  A,  more  units  of   Good  A  are  being   produced  than  Good  B.     • Point  B  is  not  on  the  PPF   curve.  There  are  not   enough  resources  in  this   market  to  obtain  this   output.       • Point  C  displays  that  the   market  is  under  producing   and  not  maximizing  their   resources.           • At  point  D,  more  of  Good  B   is  being  produced.     Study  Guide  test  1     o A  PPF  shows:   § Efficiency:  Optimal  use  of  resources   § Trade-­‐Offs:  Constraints  to  what’s  possible,  forcing  a   substitution  of  one  thing  to  attain  another   § Opportunity  cost:  highest  forgone  alternative   § Economic  growth:  Increase  in  output     • Consumer  good:   o Any  good  that’s  produced  for  present  consumption   o Satisfies  wants  now     • Capital  goods:   o These  goods  help  in  the  production  of  other  valuable  goods/services   in  the  future   o For  example:  roads/trucks/computers/factories/education     • Investment:   o Investing  is  where  someone  uses  their  resources  to  create/buy  new   capital     • Endogerious  factors:   o Factors  that  we  can  control   o Example:  wind  speed     • Exogenous  factors:   o Factors  that  are  beyond  our  control   o Example:  air  pressure,  wind       Graphs  in  Economics:       • Casual  variable:   o Occurring  when  one  variable  influences  the  other     • Reverse  causation:   o Occurs  when  causation  is  incorrectly  assigned  among  associated   events   o Occurs  when  relationships  are  not  properly  understood   o Example:  Cars  that  mechanics  work  on  regularly  break  down.   People  who  visit  the  dentist  are  more  likely  to  get  a  cavity.                 Study  Guide  test  1     • Omitted  Variable:   o A  model  that  incorrectly  leaves  out  one  or  more  important  factors   o Causes  two  variable  to  appear  to  be  directly  related  when  they  are  not   o Example:  People  become  tired  when  they  wear  athletic  clothes.   Drinking  a  lot  of  water  leads  to  sunburn.     • One  variable  graphs:   Ø Bar  graph:  compares  size/quantity     Ø Pie  chart:  displays  proportions   Ø Time  series:  displays  single  variables  across  time     • Two  variable  graphs   Ø Scatter  plots:  shows  correlation  between  variables   o Positive  correlation:   When  two  variables  move  together  in  the  same   direction   o Negative  correlation:   When  two  variables  move  in  opposite   directions             Study  Guide  test  1     Chapter  3:  The  Market  at  Work:  Supply  and  Demand     • Monopoly:   o Exists  when  a  single  company  supplies  the  entire  market  for  a   particular  good  or  service     • Imperfect  market:   o Either  the  buyer  or  seller  has  an  influence  on  the  market  price     • Competitive  market:   o There  are  so  many  buyers/sellers  that  each  has  a  negligible  impact  on   the  market   § This  means  that  because  there  is  such  a  large  quantity  of   people  in  the  market,  if  one  person  decides  not  to  buy  or  sell  a   product,  it’s  not  going  to  make  a  difference.  The  market  will   continue  on  unaffected   o There  are  little  to  non  transaction  costs   § Transaction  costs  are  the  time/money/effort  spent  before   buying  a  good   o All  information  is  known  by  both  groups     • Equilibrium  price:   o The  quantity  supplied  equals  the  quantity  demanded   o No  shortage  or  surplus  exists   o Also  known  as  the  market  clearing  price   § Shortage:  the  quantity  demanded  exceeds  the  quantity  supplied   § Surplus:  the  quantity  supplied  exceeds  the  quantity  demanded     • Law  of  Demand:   o Ceteris  paribus   o As  prices  decrease,  quantity  demanded  of  a  good  will  increase   o As  prices  increase,  quantity  demanded  of  a  good  will  decrease   § This  is  an  inverse  relationship!!   o ONLY  a  change  in  PRICE  causes  a  change  in  QUANTITY  DEMANDED     • Quantity  Demanded:   o The  amount  of  a  good  buyers  are  willing  and  able  to  purchase   § You  must  be  willing  AND  able  to  be  apart  of  this  market   § Quantity  demanded  is  different  from  Demand!           Study  Guide  test  1     What  causes  a  change  in  DEMAND?   Everything  EXCPET  the  price  of  the  product!     1. Consumer  income   • Normal  Goods:   When  income  increases,  demand  increases  (shifts  right)   • Example:  You  enjoy  steak.  When  your  income  increased,   you  began  to  buy  more  steak.       Market  for  Steak       • Inferior  Goods:   As  income  increases,  demand  for  a  good  decreases  (shifts  left)   • Example:  You  usually  buy  a  lot  of  spam  when  you  are   tight  on  money.  As  your  income  increases,  instead  of   buying  spam,  you  choose  to  buy  more  steak.           Study  Guide  test  1     2. Prices  of  related  goods  (substitutes/compliments)     • Compliments   o A  good  that  goes  along  with  another  good   o For  example:  You  always  eat  peanut  butter  and  jelly  together.  If  the   price  of  peanut  butter  increases,  then  the  demand  for  jelly  decreases.           • Substitutes   o These  are  goods  that  are  pretty  much  the  same  and  can  be  substituted   o As  the  price  for  one  good  increase,  the  demand  for  its  substitute   increase   o For  example:  As  the  price  for  Pepsi  increases,  the  demand  for  Coke   increases     Study  Guide  test  1       3. Consumer  tastes   • Marketing  can  change  consumer  tastes.  People  may  prefer  one  brand   over  another.       4. Expectations  of  future  events   • If  consumers  expect  the  price  to  be  lower  in  the  future,  they  will  wait   until  later  to  by  a  good.   • If  consumers  expect  prices  to  rise  in  the  future,  they  will  by  the  good   now     5. Number  of  buyers  in  the  market         Study  Guide  test  1       • Law  of  Supply:   o The  higher  the  price  of  a  good,  the  greater  will  be  the  quantity   supplied   o This  is  a  direct  relationship   o Change  in  QUANTITY  SUPPLIED  not  SUPPLY     What  causes  a  change  in  SUPPLY?   Everything  EXCPET  price  of  the  product!   1. INPUT  PRICES   • What  goes  into  creating  the  product?   • If  input  prices  increase,  less  of  the  product  is   going  to  be  made  because  it  is  now  more   expensive  to  produce.  Supply  will  shift  left   2. TECHNOLOGY   • What  technology  is  used  to  create  the  product?   • If  technology  used  to  create  a  particular  product   improves,  more  or  the  product  can  be  made.   Supply  will  shift  right     3. EXPECTATIONS   4. NUMBER  OF  SELLERS     • Quantity  Supplied:   o The  amount  of  a  good  that  sellers  are  willing  and  able  to  sell   o If  a  firm  isn’t  willing  AND  able,  it  is  NOT  part  of  the  market                       Study  Guide  test  1     Chapter  4:  Price  Controls   • Price  controls:   o Usually  enacted  to  ease  perceived  burdens  on  society   o Usually  do  more  harm  than  good   o Usually  do  not  help  the  people  they  were  intended  too   o Binding  price  control:   § Price  floor/ceiling  that  impacts  the  market   o Black  markets:   § Illegal  markets  that  can  arise  because  of  price  controls   § There  is  no  rule  that  black  market  prices  rise/fall  in  the  long  run     Types  of  Price  Controls:   • Price  floor:   o The  price  floor  is  the  lowest  allowed  price  that  a  product  can  be  sold   at   o Price  floor  can  be  binding   § This  means  that  the  set  price  is  above  the  equilibrium  price     o An  example  of  a  price  floor  is  the  minimum  wage   § Most  minimum  wages  are  non-­‐binding       P   Supply       B   C   Price  floor       A       Demand       QD         • This  figure  depicts  a  binding  price  floor…  it  is  a  price  set  above  the   equilibrium  point   • Point  A  was  the  original  equilibrium  point  for  the  labor  market  without  the   minimum  wage  price  floor.   • There  is  now  a  surplus  of  labor  in  the  market  (unemployment)  between   points  B  and  C   • There  are  more  people  demanding  jobs  versus  willing  employers       Study  Guide  test  1     • Price  ceiling:   o A  set  price  that  the  market  cannot  exceed   o An  example  is  Rent  control   § Rent  control  is  ineffective  for  helping  low-­‐income  residents   § It  usually  subsidizes  higher-­‐income  residents’  living   § It  does  not  incentivize  land  lords  to  keep  their  apartments  in   good  living  condition       Supply     P       A       B   C   Price  ceiling     Demand     QD     The  figure  above  depicts  a  binding  price  ceiling  in  rent  control   o The  equilibrium  price  A  is  above  the  set  price…  the  market  cannot   obtain  equilibrium   o The  distance  between  point  B  and  C  represent  the  shortage  in  the   housing  market   § The  quantity  demanded  for  housing  in  point  C  far  exceeds  the   quantity  that  is  being  supplied  at  point  B     • Price  gouging  laws:   o Temporary  ceiling  on  prices  that  sellers  can  charge  during  times  of   national  emergency   § Typically  happen  after  natural  disasters   § In  most  states,  this  is  illegal         Study  Guide  test  1     Chapter  5:  The  Efficiency  of  Markets  and  the  Costs  of  Taxation     • Welfare  economics:   o How  the  allocation  of  resources  affects  economic  well-­‐being     • Equity:   o The  fairness  of  the  distribution  of  benefits  among  the  members  of   society     • Willingness  to  pay   o The  value  the  consumer  is  willing  to  purchase  a  good/service  for     • Willingness  to  sell:   o The  value  that  the  seller  is  willing  to  sell  their  good/service  for     • Total  surplus   o Also  known  as  social  welfare   o Economist  use  this  to  measure  the  benefits  that  markets  create     • Consumer  Surplus:   o The  difference  between  the  willingness  to  pay  for  a  good  and  the  price   that  is  paid  to  get  it     • Producer  surplus:   o The  difference  between  the  willingness  to  sell  a  good  and  the  price   that  the  seller  recieves     • Elasticity:   o Measures  how  much  one  variable  responds  to  changes  in  another   variable   o Is  a  numerical  measure  of  the  responsiveness  of  Quantity  Demanded   or  Quantity  Supplied  to  one  of  its  determinants   o Elastic  good:   § A  good  that  is  price  sensitive     § Absolute  value  of  Elasticity  of  demand  >  1   o Inelastic  good:   § A  good  that  is  not  price  sensitive   § Quantity  demanded  decreases  slower  with  an  increase  in  price   • Example:  cigarettes   § 1>  Absolute  value  of  Elasticity  of  demand  >  0     Factors  of  Elasticity:   1. Number  of  substitutes   • Goods  with  fewer  substitutes  tend  to  be  more  inelastic     • Price  elasticity  is  higher  when  close  substitutes  are  available   Study  Guide  test  1     2. Time   • Price  elasticity  is  higher  in  the  long  run  than  in  the  short  run   3. Budget  share   • Price  elasticity  is  higher  for  luxuries  than  for  necessities   • People  can  put  off  buying  “wants”  longer  than  “needs”         • Excise  tax:   o Taxes  levied  on  one  particular  good/service   o The  government  favors  excise  taxes  on  goods  that  are  highly  inelastic   § There  is  less  Dead  Weight  Loss  on  inelastic  goods   § Dead  Weight  Loss:   • A  decrease  in  economic  activity  caused  by  market   distortions,  such  as  taxes     • Taxes  chase  out  demand  and  reallocate  resources  from   their  most  productive  use     • Incidence  of  taxation:   o The  burden  of  taxation   o Who  does  the  tax  affect  the  most?  Consumer  or  seller?           Study  Guide  test  1     Chapter  7:  Unemployment     • A  misconception  is  that  an  economy  should  aim  for  zero  unemployment.     o A  growing  economy  has  some  unemployment     o Some  unemployment  is  natural   o Natural  rate  of  unemployment:   § Typical  rate  of  unemployment  that  occurs  when  the  economy   is  growing  normally         • Labor  force:   o Someone  who  is  already  employed  OR  actively  seeking  work   Employed  +  Unemployed  =  LF     • Labor  force  participation  rate:   § The  portion  (percentage)  of  the  population  that  is  in  the  labor   force   (LABOR  FORCE  /  ELIGIBLE  POPULATION)  X  100       • Discouraged  workers:   o Those  who  are  not  working   o Have  looked  for  a  job  within  the  past  year   o Are  willing  to  work   o Have  not  sought  employment  in  the  past  4  weeks     • Underemployed  workers:   o Workers  who  have  part-­‐time  jobs   o Want  a  full-­‐time  job     • Unemployed  workers:   o Someone  not  working  but  is  actively  looking  for  work   o Types:   § Structural   § Frictional   § Cyclical   Unemployment  Rate:     (UNEMPLOYED  WORKERS/  LABOR  FORCE)  X  100     • Creative  destruction:   o Occurs  when  the  introduction  of  new  products  and  technologies  leads   to  the  end  of  other  industries  and  jobs   o Some  jobs  become  obsolete   o This  causes  Structural  Unemployment:   § Caused  by  changes  in  the  industrial  makeup  of  the  economy   Study  Guide  test  1     § Tastes  as  well  as  technology  change…  so  do  jobs   § Learning  new  skills  may  take  a  long  time  or  no  time  at  all   § A  natural  disaster  can  also  cause  this   § Structural  and  Frictional  unemployment  will  always  exist  to   some  degree  in  society     • Frictional  Unemployment:   o Caused  by  delays  in  matching  available  jobs  and  workers   o The  time  spent  in  between  jobs  for  people  who  have  a  skill  set  that  the   economy  needs   o Another  type  of  natural  unemployment   o Causes:   § Information:  Lack  of  information  on  what  firms  are  hiring…  it   can  take  time  to  find  a  job   § Government:  Unemployment  insurance  programs  and  other   job  security  programs  don’t  always  incentivize  people  to  find   work     • Cyclical  Unemployment:   o Changes  in  the  economy  will  influence  the  number  of  workers  hired   o Caused  by  recessions   o This  type  generates  the  greatest  concern  among  economists  and   policymakers       • Full  employment  output:   o When  the  unemployment  rate  is  equal  to  its  natural  rate   o There  is  no  cyclical  unemployment    


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