Econ 201 midterm 1 study guide
Econ 201 midterm 1 study guide Econ 201
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This 12 page Study Guide was uploaded by Allison Fike on Friday September 30, 2016. The Study Guide belongs to Econ 201 at Loyola University Chicago taught by A. Reeves Johnson in Fall 2016. Since its upload, it has received 77 views. For similar materials see Economic Principles 1 in Business at Loyola University Chicago.
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Date Created: 09/30/16
Chapters 1-4 Study Guide Chapter one Economy: How societies organize themselves to provide for their material well being Resources: 1. Natural resources (land) 2. Human resources (labor) 3. Reproducible inputs (produced means of production) ex: tools, machines Commodity: anything produced for sale in a market Economic problem: 1. What to produce 2. How to produce 3. How to distribute Traditional societies: Social institutions form Answer economic problem with religious and cultural views Redistribution: similar to reciprocity – crops are distributed throughout community) to elders and children who don’t work for it) Economy “embedded” in cultural institutions Reciprocity: mutual gift giving o Giving a gift imposes an obligation on the recipient to give one back, families accumulate reciprocal obligations that serve as a sort of “insurance system” Command societies: Political institutions determine production and distributions, some central authority (chief, lord, king, etc.) decides who does what and who gets what Economy “embedded” in political institutions Slavery and European feudalism are forms of command Market system (capitalism) Curious means of organizing production and distribution because it has no central organization Appears to be independent and “random” ( although if it really were it wouldn’t have lasted) What to produce? – whatever is more profitable Economy becomes disembedded Mixed systems: No such thing as a “pure” system of any type (except maybe some traditional societies) Labeled depending on dominant type Examples of command and tradition in the modern market: o Price ceilings/minimum wage (any government regulations) o Gift giving on holidays o Taxes and any redistribution (social security) o Tipping o Reciprocity – you fix a friend’s car and they buy you food The economic surplus: Surplus: production above and beyond what it takes to reproduce society, including labor and inputs used up in production *corn model o using surplus to increase size of input is an investment o higher input resulting from more inputs is economic growth o in terms of money the surplus would be profits Surplus is the primary source of growth and development Chapter Two Production possibilities curve: graph showing all combinations of guns and butter that society can produce if all resources are being employed effinciently Straight line PPC means: Constant opportunity costs Resources are perfectly substitutable in both industries Not the normal PPC between two industries Normal PPC: Bowed out from origin Law of increasing opportunity costs: to obtain more of any good over a given period of time, society must sacrifice ever increasing amounts of other goods, ceteris paribus (all other things equal) When moving or operating inside the curve, there is no opportunity cost Operating on the curve means: maximum production efficiency resources are scarce opportunity costs are incurred Resources determine where the curve is If resources increase, curve will shift outward = economic growth Increased resources: Land: new land may be brought into cultivation discoveries, increased stock or renewable resources Labor: population growth new sectors of populations enter workforce (women) For one country, immigration Capital: Machine tool industries Capital goods production Technological advance: Microelectronic revolution Technological innovations Organizational innovations Declining Resources: War Population decline Emigration Natural disaster Technological decline o Outlawing technologies for environmental or health reasons Competitive markets: Perfectly competitive market has many buyers and sellers of the same good or service, none of whom can influence the price Supply and demand model of market is how a perfectly competitive market works Chapter Three Demand curve: shows quantity demanded at various prices Quantity demanded: quantity buyers are willing and able to purchase at a particular price *demand = demand curve quantity demanded = point on axis Demand schedule and demand curve: “change in demand” DOES NOT EQUAL “change in quantity demanded!!! Change in demand – shift of curve Change in quantity demanded – movement along curve Law of demand: a higher price for a good/service leads people to demand a smaller quantity Inverse relationship Negative slope Decrease in demand: leftward shift Increase in demand: rightward shift Demand shifters: 1. Changes in price of related goods or services a. Substitutes: a decrease in the price of one leads to a decrease in the demand for the other (or vice versa). Ex: coffee and tea, cookies and brownies b. Compliments: a decrease in the price of one causes an increase in demand of the other. Ex: hot dogs and hot dog buns, chips and salsa c. What happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases? i. They are substitutes so an increase in price to Mexico leads to an increased demand for travel to Hawaii 2. Changes of income: effect on demand depends on the nature of good in question a. Normal good: demand increases when income increases (and vice versa) Ex: clothes b. Inferior good: demand decreases when income increases (and conversely) Ex: public transportation 3. Changes in tastes/preferences a. Seasonal changes have a predictable effect on demand Ex: boots in October 4. Changes in expectations a. Prices for Xbox expected to drop right before Christmas so demand in November goes down 5. Changes in number of consumers a. Population goes up, demand goes up Market demand: *if me ad you are only 2 people in market Supply Represents behavior of sellers Supply curve: shows the quantity supplied at various prices Quantity supplied: quantity producers are willing and able to sell at a particular price Increase in supply: rightward shift of supply curve Supply Shifters: 1. Input prices a. Decrease in price of an input increases profits and encourages more supply Ex: price of cottons drops, increase of blue jeans supply 2. Prices of related goods or services a. Substitutes and compliments in production processes 3. Changes in technology a. Better technology makes sellers willing to offer more at a given price or sell their quantity at a lower price 4. Changes in expectations a. Expectations of a higher price for a good in the future decreases current supply of the good - if they can store the good (and vice versa) 5. Changes in numbers of producers a. As producers enter and exit the market the overall supply changes i. More producers = more supply Equilibrium: s D Q* = Q = Q When Q = Q at a certain price, market is in equilibrium Amount consumers would purchase at this price is matched exactly by the amount producers wish to sell Occurs when two curves meet Producers produce too many goods: market surplus (temporary) When this happens, lower price to return to equilibrium When quantity demanded > quantity supplied = shortage Curve shifts Increase in demand leads to movement along supply curve Supply decreases, movement along demand curve Simultaneous shifts of supply and demand Graphs and changes in price/quantity demanded depends on supply/demand effect and which one was greater You can’t always conclude price when both curves shift the same way, it depends on how you draw them, we need more information o W h e n curves move opposite ways, we won’t know quantity Chapter Four We can measure a market’s efficiency/benefit to society by measuring: Consumer surplus: the difference between market price and what consumers would be willing to pay o A consumer’s willingness to pay (reservation price): the maximum price at which he or she would buy that good Consumer surplus is the area beneath the demand curve and above the price Consumer surplus rises with a fall in price area increases when price goes down increase in surplus divided between those who will now enter the market and those who would already purchase it Shaded box: change in consumer surplus for customers already in market Triangle: change in consumer surplus for consumers now entering market Producer Surplus: Below price and above curve = total producer surplus Changes in Producer Surplus: Total surplus = consumer surplus + producer surplus maximized at market equilibrium CS and PS after a curve shifts: CS increases with an increase in supply (and vice versa) PS increases with an increase in demand (and vice versa) BUT – we cannot say anything definitive about change in consumer surplus after demand curve shifts OR when supply curve shifts we can’t say anything about producer surplus
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