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Exam 1 (ch 1-3) Study guide

by: Kelsey Voelker

Exam 1 (ch 1-3) Study guide Econ 201

Marketplace > Towson University > Economics > Econ 201 > Exam 1 ch 1 3 Study guide
Kelsey Voelker

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This is an exam study guide for the first three chapters, for the first exam. Covers all the important information covered in class and in the textbook. Other problems/information located in the ...
Professor Baejter
Study Guide
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This 6 page Study Guide was uploaded by Kelsey Voelker on Tuesday September 20, 2016. The Study Guide belongs to Econ 201 at Towson University taught by Professor Baejter in Fall 2016. Since its upload, it has received 101 views. For similar materials see Microeconomics in Economics at Towson University.

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Date Created: 09/20/16
Microeconomic Principles 9/18/16 Exam 1 Study guide (chapters 1-3)  Value is subjective o We value something based on what it is worth to us o Trade creates value  People will trade something of less value to them in order to get something of more value  Invisible hand principle o Individuals are led by this hand because they are pursuing self- interest but also have to think about what others want & would purchase o Excreating the iphone  Wealth o Not fixed, must be created o Money is not wealth but rather a unit of trade for exchanging What is Economics about?  Scarcity o The choices we have to make because our desire for goods and services is greater than their availability from nature o Present whenever there is less of a good resource freely available from nature than people would like o Not rare or due to being poor  Ex. Bill gates face scarcity not in money but in time (cannot use all his money to do everything he possible can before his time passes) o choice: the act of selecting among alternatives, is the logical consequence of scarcity o resources: ingredients, or inputs, that people use to produce goods & services  3 categories human, physical, natural resources o scarcity is an objective concept (factual) ; poverty is an Subjective concept (opinion)  Rationing o Scarcity makes rationing a necessity  Some criterion must be used to determine who will receive it & who will go without it o In market economy Price is used to ration goods & resources  Competition o Is inevitable except with random selection o A natural outgrowth of scarcity & desire of human beings to improve their conditions Economic Way of Thinking  Economic Theory o Establishes reference points indicating what to look for & how economic issues are interrelated  Opportunity Cost o Highest valued alternative sacrificed o Actions having costs  cost to whom? Of what? o Use of scarce resources is costly—must make trade-offs  Choose purposefully o Choose the best options that advance desires (economizing behavior) o Utility: benefit/satisfaction that an individual expects from the choice of a specific alternative o *economics assumes selfish motives  Incentives matter o Changes in incentives influence human choices in a predictable way  If personal cost of an option increases, people will be less likely to choose it (both monetary & non monetary incentives matter)  Individuals make decisions at the margin o Focus on the difference in costs & benefits between alternatives (marginal decision making) o Ex.  why did you not take one extra class this semester? o Info can help make better choices, but is costly to acquire o Secondary effects (most forget to think about)  Private property rights o Use, control, and disposal o Carry incentives:  To serve others, care for property, conserve property, avoid damage  Importance of Property Rights o 3 things:  right to exclusive use of property  legal protection against invasion from others  the right to transfer, sell, exchange, or mortgage  Private Ownership o Basic legal institutions are essential o Legal system must:  Protect property  Enforce contracts  Prevent fraud  Determine liability  Positive & Normative Economics o Positive  Attempts to determine “What is”  Ex.  if price of gasoline rises, people will buy less o Negative  Attempts to determine “What ought to be”  Pitfalls to avoid in Economic Thinking o Ceteris Paribus:  “other things constant”  association is not causation o Fallacy of Composition:  What is true for one, might not be true for all  Two Systems of Economic Organization: o The market process  Decentralized decision-making by property owners  Limited role of government: rule maker and referee o The political process  Centralized decision-making by political bodies  Active role for government: owner and planner  Production Possibilities (Curve) o People try to get the most from their limited resources by making purposeful choices & engaging in economic behavior o Shows the maximum amount of any two products that can be produced from a fixed set of resources, and the possible trade- offs in production between them. SUPPLY & DEMAND  Demand o The amount that one is willing to pay for one more  Law of demand o At lower prices more will be sold, at high prices less will be sold  Slopes downwards on graph  Ex.  stores put things on sale in order to sell more  Making Sense of a Demand Curve o Price goes on vertical axis Quantity goes on the horizontal  *Think of vertical axis as measuring willingness to pay or value to buyers o Market Demand shows how much some buyer is willing to pay for each additional unit  the value for the quantity given o When read across from some price, a demand curve gives the Quantity at that price o When read upward from some (marginal) quantity, a demand curve gives, for that additional unit, the price/value  Consumer Surplus o The difference between what the people in the market are willing to pay, and what they actually pay for the market price  On graph: the area of consumer surplus for all the people in the market the top above the price line  Demand vs. Quantity Demanded o Quantity Demanded: at some particular price; can be increasing or decreasing  Changes in this are along a particular demand curve o Demand  Are shifts of the whole curve the whole set of relationships  Shifts:  up & out (right & upward) at any price there is an increase of quantity demanded, value has increased  down & left  at any price there is a decrease in quantity demanded, value decreased  Supply o Reflects the opportunity cost of production; all production involves using scarce resources that have alternative uses.  The sum of the producer’s cost of each resource used to produce a good will equal the opportunit cost of production  Law of Supply o Everything else being equal at higher prices, sellers will sell supply & sell more  Supply Curve o Price on vertical axis, quantity on horizontal  Vertical axis measuring cost/opportunity cost/value o A set of points representing sellers, willing & able to sell that one more (marginal) unit of the good for that price o When read across from some price, the curve gives the quantity o When read upward from some quantity, a supply curve gives, for that additional unit, the cost/value willing to pay  Producer Surplus o The difference between the amount a supplier actually receives (based on the market price), and the minimum price required to induce the supplier to produce the given units (marginal cost)  Changes in supply (factors) o Changes in resource prices o Changes in technology o Elements of nature and political disruptions o Changes in taxes  Supply vs. Quantity supplied o Quantity supplied at some particular price o Supply the quantities supplied at a range of prices  Questions o when the demand for new housing increases what happens to the demand for lumber? Increases o when price in a market falls, what should happen to consumer surplus? Increase o whats one thing that can cause demand for a good to increase? Number of consumers, etc. o if grocery store checkout people become more expensive to hire, what would happen to the demand for self-checkout machines? Increase o as gasoline prices come down, what has probably happened to the quantity demanded of gasoline? Increase o suppose better technology brings down the price of gasoline, what effect on demand? Stays the same (curve doesn’t move, there is movement along the curve) o as the price of gasoline changes, what happens to the demand? Stays the same o the price lowered can increase the QUANTITY DEMANDED o as tens and millions of people in china and india have come out of poverty and are able to buy a car, what would happen to the demand of gasoline? Increase at any price so the whole demand curve shifts o *an increase in demand, is an increase in the quantity demanded at EVERY price o Working with Supply curves  Elasticity of Demand o Responsiveness of the buyers in a market o Depends on the availability of resources  Elasticity of Supply o Similar to elasticity of demand: same mnemonic applies o Time is a key determinant  Market pricing o Market: not a physical location but an abstract concept that encompasses the forces generated by the decisions of buyers and sellers o Equilibrium: a state in which the conflicting forces of demand and supply are in balance  When a market is in equilibrium, the decisions of consumers and producers are brought into harmony with one another, and the quantity demanded will equal the quantity supplied. o Economic efficiency: when a market reaches equilibrium, all the gains from trade have been fully realized  Social Security o “Pay as you go” system o you pay money for the currently retired/retiring social security checks o stocks and bonds  stocks are investments in shares of a company  bonds are “IOUs”-you pay a certain amount and later get the same amount back plus interest o demographic problem  not enough current young workers to pay for the baby booming generation of retired now o trust fund  federal government takes money from ss for other things— they give them special bonds to replace it for the time being which has become known as the trust fund. EXTRAS:  Re-read the homework articles to refresh memory (online)  Do problems in back of textbook—the work book section chs.1-3  Practice problems online at  Read over textbook chapter outlines, or read through textbook chapters again


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