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Econ 101 Midterm Study guide

by: Brianna Fields

Econ 101 Midterm Study guide Econ 101

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Brianna Fields

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Chapters 1-4 in Econ 101 from the powerpoint.
Economic Way of Thinking
Holly Fretwell
Study Guide
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This 15 page Study Guide was uploaded by Brianna Fields on Friday October 7, 2016. The Study Guide belongs to Econ 101 at Montana State University taught by Holly Fretwell in Fall 2016. Since its upload, it has received 5 views.


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Date Created: 10/07/16
ECON 101 CHAPTER 1 Incentives: Something that induces someone to act in a certain way. ECONOMICS: The study of choices Scarcity forces us to choose among alternatives.  Trade-offs must be made Scarcity forces us to allocate goods and services. Rationing, first come, price, queuing (line-up)… Decisions are made at the margin (marginal means additional) *Scarcity: when the amount desired exceeds the amount freely available. *Opportunity cost: Value of the next best opportunity not taken. Guidpost to Economic Thinking  Resources are scarce. Tradeoffs must be made. (Opportunity cost)  Incentives matter  Individuals use economizing behavior to get the most from their limited resources.  Individuals make decisions at the margin.  Information helps us make better decisions but is costly to acquire.  There are consequences to economic actions.  The value of goods and services is subjective.  The test of a theory is its ability to predict. Pitfalls to Avoid  Ceteris paribus: other things constant.  Good Intentions do not guarantee desirable outcomes.  Association is not c  Fallacy of composition. What's true for the individual may not be true for the group. MICROeconomics: Individual standpoint person, firm, market.... MACROeconomics: Aggregate response whole economy; unemployement, income per capita... What is ECONOMICS about? Choices Why do we have to make choices? Scarcity. What motivates choices? Incentives. What does marginal mean? Additional. What is your opportunity cost? Next best alternative foregone. *Exchange and Trade: The voluntary exchange of one thing for another. *Trade is mutually beneficial. ONLY trade if MB is greater than OR equal to MC *Transaction Costs: The cost of negotiating trade between seller and buyer. Gaines from Trade:  Moves goods to people who value them more.  Encourages specialization and mass production Innovation  Comparative Advantage Taking 'Advantage' of Trade  Absolute advantage: ability to produce more with given resources and time.  Comparative advantage: ability to produce at a lower opportunity cost *Opportunity cost: the value of the next best alternative given up. Production Possibilities Frontier or Curve (PPF or PPC)  Assume a country produces -Consumption goods -Capital goods  PPF shows the amount of goods that can be produced give: -a set amount of time -a given set of resources -constant technology PPF assumptions (to be ON the curve)  Can prodice only 2 "goods" (or types of goods) -1 for each axis (or a pool of goods) -one 'good' can be "all other goods"  All resources are fully used  All resources are efficiently used (best technology)  Quantity and wuality of resources is fixed *Change an assumption= shifts the curve Production Possibilities Frontier (PPF) and Long Term Economic Growth Increasing the capacity to produce total goods and services -Gross Domestic Product (GDP)  Investing to increase technology or capital, resource quantity or resource quality, or rules  Outward (rightward) shift of PPF (or if inside, a move onto PPF) What do we know about growth? GDP (gross domestic product)  -Growth: rightward shift of PPF (or movement toward it) *a: little growth potential -(investing to maintain current capital) *b: more growth potential -(investing in new capital for increased future productivity) CHAPTER 2 Slope of PPF  Negative slope -can only increase production of one good if another output decreases.  Slope of the PPF -amount of one good that must be given up to increase another goods one unit IF PPF is NOT linear, Opportunity cost is NOT constant As produce more of one good, the opportunity cost (in terms of another good) increases. Why do we trade? There are MUTUAL GAINS from trade: *value is subjective *specialization *division of labor *comparative advantage CHAPTER 3 What impacts your consumption? Depends on: -Price of the commodity -Consumer income -Price of related goods -Expectations -other facors Demand  Relates the price of that commodity to the quantity purchased.  Price represents how much of other commodities must be given up to consume that commodity.  Price represents the opportunity cost of consuming the commodity. Law of Demand  There is an inverse relationship between the quantity demanded and the price. -As the price increases the quantity demanded decreases. -As the price decreases the quantity demanded increases.  The demand curve is negatively sloped. *Ceteris paribus: everything else constant. *Income constraint: One justification for the negatively sloped demand curve. Downward slopind demand (all related to price)  A price increase decreases your real income (amount you can afford).  Diminishing Marginal Returns  Diminishing marginal utility: as consume more of a good, at some point, additional utility (and willingness to pay) per unit will decrease.  Substitution effect: price increase motivates the purchase of now relatively less expensive good. *Utility: relative satisfaction *Diminishing marginal returns: At some point the additional benefit will begin to decline. Quantity Demanded  A movement along the demand curve -A response to a change in price (ceteris paribus)  Increase quantity demanded: -rightward movement along the curve.  Decrease quantity demanded: -leftward movement along the curve Demand Curve: The quantity demanded for each possible price (ceteris paribus)  Additional value for the additional unit  Marginal value for 1 more unit  Marginal benefit curve  Marginal utility  Max willingness to pay per additional unit *Law of demand: there exists an inverse relationship between price and quantity. *Quantity demanded: the quantity consumers are willing to buy at a given price, ceteris paribus. *What single factor causes a change in quantity demanded? -PRICE *What other factors impact demand and how? Tastes and preferences Related goods (substitutes and compliments) Income (normal goods and inferior goods) Buyers (number of) Expectations (future prices or economic conditions) Special circumstances (unforeseen events causing a change in demand) What do we know about demand?  Demand curve shows the quantity demanded for each possible price ceteris paribus  Each point on the demand curve is the marginal benefit for that additional unit Change in Quantity Demanded vs Shift in Demand  A change in price causes a change in quantity demanded which is a movement along a demand curve.  Any change that affects the amount consumed (except commodity's own price) results in a shift in demand (TRIBES) Demand Shifters:  INCREASE demand -RIGHT shift -Consume more at any given price DECREASE demand -LEFT shift -Consume less at any given price Changes in consumer income, changes demand (a shift in demand)  Normal good: more purchased at any given price when income rises.  Inferior good: less purchased at any given price when income rises.  Positive relationship: -INCREASE number of consumers=INCREASE DEMAND -DECREASE number of consumers=DECREASE DEMAND Price of Related Goods  Complements: Goods that are consumed together. -If doughnuts are more enjoyable with milk, then milk and doughnuts are complements. -If the price of milk increases (a decrease in quantity demanded) the demand for doughnuts decreases (shifts to the left).  Substitutes: Goods that replace each other. -Many consider muffins as a substitute for doughnuts. -If the price of muffins increases (a decrease in quantity demanded), the demand for doughnuts increases (shifts to the right). Demand Curve Shifters  Related goods: change in price of one good (X) that impacts the demand of another (Y)  Complements: jointly consumed -increase price of X (Px) -Decrease in Qd of X Decrease D of Y (inverse relationship Px and Dy) Other demand shifters:  Change in Preferences -styles, fads, demographics  Political or natural disruption -Storm or hurricane= increase demand for bottled water, batteries, plywood (right shift)  Change in expectations -2016/17 ski pass prices will rise in October -flu vaccine shortage Marginal vs. Total  Marginal benefit: points on the demand -additional benefit per additional unit  Total benefit: sum of marginal benefits received -area under demand curve (up to quantity consumed) -Total expenditure (TE=PxQ) >total amount paid -Consumer Surplus (CS=area under demand, above price paid)> The bargain! Difference between what consumer is willing to pay and what they have to pay The net gains to buyers from market exchange. Demand take-aways  Demand (D) is the buyer side of the equation.  There is an Inverse relationship between Price (P) and Quantity (Q) demanded.  Points on the demand curve are the Marginal Benefit (MB) for the additional unit.  Area below demand (up to the quantity demanded) is the Total Benefit (TB).  Consumer Surplus (CS) is the bargain; or net gains from trade realized by the buyer.  Total Expenditure (TE) is the quantity consumed times price paid per unit. Change in Quantity Demanded -results from a change in price: a movement along a demand curve (or along X-axis demonstrating a change in Quantity). Change in Demand Any change that affects the amount consumed, except the commodity's own price, results in a shift demand. TRIBES. CHAPTER 4 The Role of Business  Market: interaction between buyer and seller. -Free market: decisions left to consumer and producer (no government intervention)  Business: -Coordination of inputs (people and resources) to accomplish production goals, usually to make a profit -specialize in production Can produce at a lower cost Provide greater variety, quality, and quantity of goods and services  Price -signals information  Specialization: Pursuing a specific line of study or work  Productivity: Quantity of output per unit of input This differs from  Comparative advantage: ability to produce at lowest opportunity cost. (who gives up the least) *WHY IS BIG BUSINESS BIG?  Success! -Who do they need to satisfy to be successful?  Markets and private business (corporations, too) encourage: -Production of what consumers desire and are willing to pay for -Competition with other businesses that are doing well *low costs *high productivity *production in area of comparative advantage -Profits and Losses are important signals *Creative destruction *Doing well by doing good"-the economics of supply Firms: Why do they do what they do?  Make products they believe help people (social responsibility)  Owners and managers enjoy what they do (personal satisfaction)  Produce commodities that meet regulatory standards in ways that also meet legal requirements (obey laws and regulations)  Earn income (male profits) Supply curve:  Shows the quantity supplied (Qs) for each possible price, ceteris paribus  Opportunity cost to produce 1 more unit  Additional cost to produce an additional unit.  Marginal cost (MC) for one more unit.  Marginal cost curve  Minimum willingness to accept produce one more unit 'Law' of Supply: There exists a direct relationship between price and quantity Upward sloping Quantity supplied: the quantity producers are willing to sell at a given price, ceteris paribus. Supply: How much will be produced?  Increase Price, ceteris paribus, increase Quantity Supplied (Qs)  Decrease Price, ceteris paribus, decrease quantity supplied (Qs) Events that affect output  Change in quantity supplied -When output increases (or decreases) because price has increased (or decreased), there has been a change in quantity supplied.  If only P has increased, ceteris paribus, then profits will also increase. 'Other' Events that affect profits and output will 'change' supply (a shift)  Price of inputs  Number of firms  Technology  Taxes and regulations  Disruptions and expectations (political, weather) Supply Shifters Subsidies and taxes (regulations) Technology Other related goods prices (opportunity cost) Resource costs Expected future prices Size of the market (number of firms) *Other events that affect profits and output -change in Input prices Events that affect output  Change in PRICE impacts quantity supplied Increase P= increase quantity supplied Decrease P= decrease quantity supplied *a movement ALONG the supply curve  A CHANGE in supply (responding to any other factor) is a Shift of the curve Demand (by consumer)  Relates how much will be purchased at various prices.  Demonstrates the maximum willingness to pay (opportunity cost) of an additional unit.  Law of demand: Demand curves are Downward, or negatively sloped. Supply (by producer)  Relates the price and the quantity produced.  Demonstrates the minimum willingness to accept.  Demonstrates the opportunity cost of production.  Supply curves are upward sloping. Total expenditure  The dollar amount consumers pay (P) times the quantity purchased (Q): PxQ What do producers earn?  The dollar amount producers receive (P) times the quantity purchased (Q): PxQ *Total revenue (TR): Firm (or market) revenue earned=Price x Quantity sold *TE = Price x Quantity BOUGHT *TR = Price x Quantity SOLD *TR = TE (area of a rectangle= bxh) *Supply curve: minimum willingness to accept to produce. *Price: Dollars per unit actually received. *Producer surplus: the difference between. *Area above the supply curve but below actual market price: (area of a triangle= ½xbxh) *Net gains to producers from market exchange. *Producer surplus (PS): gains to all parties that contribute to production. *Profit: revenues>opportunity costs that accrue to firm owner. What are Profits? Profit = Total revenue (TR) - Total Cost (TC) Total Costs (TC) = All costs incurred in producing a product = Area under supply (to Qs)  For our purposes here, profits are the same as producer surplus. -In reality, producer surplus is the gains from trade for ALL involved in providing a product.  Producer Surplus: net gains to producers and resource suppliers from trade. -Difference between actual price and the minimum price producers are willing to accept. Recall the supply curve is:  Opportunity cost to produce  Marginal cost of production  Minimum willingness to accept to produce 1 more unit Recall the demand curve is:  Opportunity cost to buy  Marginal benefit of consumption  Maximum willingness to pay for 1 more unit Market Equilibrium  Market: an exchange for buying and selling goods and services  Free market: markets function without government intervention  Equilibrium: harmony of production and consumption decisions  Market Equilibrium: tendency of price (without intervention) to move toward the point where quantity demanded equals quantity supplied.  Market clearing price: where Qd=Qs  Economic efficiency: when all the gains from trade have been realized. -Sum of the benefits are greater than or equal to the sum of the costs -Max 'economic surplus' (CS + PS) Equilibrium:  How much will be consumed and produced?  The upward sloping supply curve and the downward sloping demand curve's intersection is the equilibrium. -Supply = Demand  At the equilibrium price, quantity supplied equals the quantity demanded. -Qs = Qd *Shortage= Qd-Qs *Surplus= Qs-Qd Invisible Hand  Supply: Producer – profit maximizing behavior  Demand: Consumer- economizing behavior (max benefit at lowest cost)  Market: transmits information -To consumers (the opportunity of production) -to producers (consumer desire and willingness to pay) -through the supply and demand curves -moving toward equilibrium (where quantity consumed equals quantity produced)  Firms satisfy the wants of consumers  Through the 'magic' of markets and price  No government planning is necessary The value of PRICE (in a free market economy)  Market action (using price signals) determines what to produce, how to produce it, and for whom -people realize the opportunity cost of their choices -people are free to choose what to produce, if to produce, and what to buy  Voluntary trade creates wealth  Success AND failure (profit and loss) are valuable in the market economy  Efficient use of resources (on PPF) is a high goal 5 ways to change a price  Increase demand  Decrease demand  Increase supply  Decrease supply  Government mandate (price controls)


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