Microeconomics Study Guide (Lectures 1-14)
Microeconomics Study Guide (Lectures 1-14) ECON 2010
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This 7 page Study Guide was uploaded by Rachael Carrington on Thursday September 22, 2016. The Study Guide belongs to ECON 2010 at University of Colorado at Boulder taught by Dr. Phil Graves in Fall 2016. Since its upload, it has received 166 views. For similar materials see Principles of Microeconmics in Economics at University of Colorado at Boulder.
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Date Created: 09/22/16
Principles of Microeconomics – Exam 1 Study Guide (Lectures 1-14) Market: goods exchange hands at voluntarily-agreed prices Resource Market: Households resources Firms Payment Goods Market: Householdsgoods Firms Payment Micro vs Macro: Micro= Small o Start with decisions of many small agents (households and firms), see how these come together to determine what happens Macro= Big o How total levels of output, unemployment, inflation, and trade- levels are related Eleven (Ten) Big Ideas: 0. Things are Scarce (Resources are limited but people’s wants are unlimited) 1. People face trade-offs 2. Cost of something = what you give up to get it (opportunity cost) 3. When making decisions it’s useful to think “at the margin” o Ex: don’t have to decide between “never eat out” and “always eat it” but “do I want to eat out one more time” 4. People respond to price changes 5. Trade can make everybody better off 6. Markets with many buyers and sellers are a good way to organize economic activity 7. Government can sometimes improve on the market income o Equity concerns: market gives too much to one group o Market power: only few sellers o Externality: smoke, there is no market 8. Conceptual difference between benefit of a good and it’s price 9. Production and consumption decisions coordinated through prices 10. Econ is about prediction, guessing the future Normative: About ranking outcomes How we “want the world to look” Need to know value judgements Ex: “Drug use needs to be fixed by this policy” Positive: About linkages, need to know the process About how the world actually looks Ex: “75% of teens 17-23 use drugs” *Make sure you understand the Circular Flow Model of Economy Production Possibility Model Model to understand connections between ideas of scarcity, trade-off, opportunity cost If you are: o Above the PPF line: Impossible o On the PPF line: Product Efficient o Below the PPF line: Inefficient *Review history of Mercantilism from Lecture 4 Trade: Stresses the mechanism by which trade allows each country to consume above its ppf A country acting alone CANNOT consume above its ppf Trade causes job losses and gains o Jobs are shifted from contracting sectors to expanding sectors Each country must have lower opportunity cost in one product Together countries can reorganize to get more output Comparative advantage vs. Absolute advantage Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer Absolute advantage: the ability to produce a good using fewer inputs than another producer Always export whichever good has a lower opportunity cost (making more than you consume) Gain from trade= increase in goods consumed (long-term or recurring) Cost of trade= workers in contracting sectors lose jobs (but can be rehired, cost is short-term) *Review Specialization and Outsourcing Price Taking: Buyers and sellers in perfectly competitive markets must accept the price the market determines Standardized Product: not much quality difference between goods Movement Along vs Shift of Demand Curve Quantity demanded depends on: o Price: price goes up, value on one axis changes, quantity demanded goes down, all equal a move along the demand curve o Tastes: something not on axis changes, quantity demanded goes up, demand curve with shift to the right Movement Along vs Shift of Supply Curve Quantity firm wants to supply depends on: o Price: price goes up, quantity supplied goes up = move along supply curve o Technology: As technology improves, costs decrease, ore profitable to produce, increase output = supply curve shifts to the right o Input prices: as they raise, cost increases, less profitable to produce, decrease output = supply curve shifts to the left Equilibrium Balance between opposing forces – no net force pushing for change Equilibrium price by two forces o Eagerness of households to buy o Eagerness of firms to sell o Need to include both effects- demand and supply curve o Equilibrium happens when quantity demanded = quantity supplied (Law of Demand and Supply) Surplus System is unbalanced, gives rise to a “force” lowering price Leads to lowering price to get rid of inventory Shortage System is unbalanced, gives to a “force” raising price Leads to raising prices without losing sales Quality will go down Magic of the Market Magic 1: prices coordinate quantity demanded to quantity supplied o Need to coordinate people’s buying with lower quantity available o Either advertise problems and ask for voluntary restraint (not effective) or raise price so people want less (immediate effect) o Price rises on its own, “magic of the market” Magic 2: better technology = lower costs o Effects supply curve o Ultimately consumers benefit because price goes down Demand: Demand curve shows relationship between the price of x and the quantity of x demanded by consumers, assuming that all of the determinants of demand are held constant An increase in demand can be illustrated by a shift in the demand curve to the right Factors that Determine Demand: Price of a related good (complement or substitute) Income of consumers Tastes of consumers Number of consumers Expectations of consumers Helpful Example: If the price of hamburgers changes, the result is a movement along the demand curve from the old price to the new one. If a change occurs in any of the factors that determine demand -(such as the price of hot dogs which is a substitute, the price of buns which is a complement, or the income of hamburger consumers)-the result is a shift of the demand curve *See section: Shifts in the Demand Curve Supply: Supply curve shows relationship between the price of x and the quantity of x supplied by producers, assuming that all of the determinants of supply are held constant Factors that Determine Supply: Price of inputs Production technology Number of producers Expectations of producers Helpful Example: If the price of gasoline changes, the result is a movement along the supply curve from the old price to the new one. However, if a change occurs in any of the factors that determine supply, such as the discovery of a large new reserve of crude oil, the result is a shift of the supply curve. If supply increases, equilibrium price goes down. *See sections: Shifts in the Supply Curve; and Equilibrium Slope of Demand and Supply Curve Flat = Elastic As price goes down, quantity demanded increases a lot (elastic band) Price Sensitive= Changes in price cause big change in quantities Steep= Inelastic Price Insensitive= Changes in price cause little change in quantities In= Negative Substitutes: When a fall in the price of one good reduces the demand for another Ex: DVDs and Movie Tickets, as price of DVDs increases, demand for MT increases Complements: When a rise in the price of one good reduces the demand for another good Ex: Coffee and sugar, if the price of coffee rises, quantity of coffee demand falls and demand for sugar decreases Inferior Good: If the demand for a good rises when income falls Ex: The demand for off-brand corn rises when the recession hits Price Ceiling: Legal maximum on the price at which a good can be sold Binding: Price ceiling that is set below the equilibrium price o Ultimately causes a shortage Non-Binding: Price ceiling that is set above the equilibrium price o Causes no effect on equilibrium price and quantity Example: Cap on wages (No more than $9/hr) Price Floor: Legal minimum on the price at which a good can be sold Binding: Price floor that is set above the equilibrium price o Ultimately causes a surplus Non-Binding: Price floor that is set below the equilibrium price o Causes no effect on equilibrium price and quantity Example: Minimum Wage (at least $8.31/hr) Law of Supply: The quantity supplied of a good rises when the price of the good rises (should everything else be “ceteris paribus”) Law of Demand: The quantity demanded of a good falls when the price of the good rises (should everything else be “ceteris paribus”) Household Decision Making: Individual Evaluation of an Outcome Traditional measure of well-being, “scale”, “utility” Each person has his/her own scale Scale is not objective, cannot be measured by somebody else or verified Benefit Measure how much well-being gained by an individual from x by the dollar gift which gives individual the same gain in well-being Willingness to pay Net benefit from buying (consumer surplus)= net increase in well-being from buying the good Net benefit= benefit – cost To make net benefit as large as possible, continue to buy until: o Distance between benefit and cost curves is greatest (Net benefit is maximized) o Slope of benefit line equals slope of cost line (Marginal benefit = Marginal cost) o *see example curves drawn in Lecture 13 Objective: Rational Economists believe when an individual chooses what to buy, he/she is trying to do something Not: “any quantity will do” But: “I want to organize my buying so that the increase in my joy/well- being is as high as possible” This is the objective, “rational” OTHER MATERIALS TO REVIEW Recitation Problem Sets Chapters 1-7 in textbook Past Midterm Exam (Posted on D2L) Past APLIA problems Past lecture notes
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