ECON 221 Midterm Study Guide

what are Ten Principles of Microeconomics?

____________________________________________________________________________ Chapter 1: Ten Principles of Microeconomics

Economics:The study of using limited resources to satisfy unlimited wants and needs

∙ Everyone everywhere faces scarcity (which is not the same as poverty)

Tradeoffs: Making decisions requires trading off one goal against another

∙ Should you spend your free time studying, sleeping, eating etc.

∙ Society faces tradeoff between efficiency and equality

Resources: Land, labor, capital (machinery not monetary)

Opportunity Cost:The highest value forgone alternative

∙ Opportunity cost does not just include money; beware of double counting

∙ Value is subjective

Positive statement: What is (describe the world as it is)

Normative statement: What should be (prescribe how the world should be)

what are the three question in production?

People Choose at the Margin: Choice is deliberate even when we leave it to chance

∙ We make choices by comparing marginal benefits and marginal cost

Benefits: Utility, value, how much we like something

Costs: opportunity cost what we must give up

Marginal benefit: the extra benefit from one more unit

Marginal cost: the extra cost for one more unit

Incentives Matter: If the benefit or cost of something increases (decreases), all else constant, people will be more (less)  likely to do it

Ceteris Paribus: other things equal or all else constant

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Chapter 2: Production

Three Questions: 

∙ What to produce?

∙ Efficient means we don’t waste resources; we produce at the lowest possible cost

∙ How to produce?

∙ Efficient means we don’t waste resources; we produce at the lowest possible cost

what is Economic Growth?

∙ For whom to produce?

∙ Efficient means we produce the things that are worth it

Assume the following: 

∙ Simple economy with only two goods

∙ Factors of production are fixed

∙ Methods of production are fixed If you want to learn more check out fin555

Production Possibilities Frontier: shows the combinations of output that the economy can possibly produce ∙ Under the curve: Inefficient (possible)

∙ On the curve: Efficient (possible)

∙ Outside of the curve: Impossible

Calculating Marginal Cost: Use the Production Possibilities Frontier (change in cost / change in quanity) Calculating Marginal Benefit: Think about what value people place on additional units

Law of diminishing marginal benefit: As the consumption of a product increases, the marginal utility of that product  decreases for each additional unit

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Chapter 2: Economic Growth & Trade

Economic Growth: Occurs when we have an increase in the production possibilities frontier (ppf) ∙ Increase in technology

∙ Increase in resource base We also discuss several other topics like any model is based on making assumptions because

∙ Increase in human capital

∙ Increased improvement in the rules governing the economy

Shifts in the production possibility frontier 

∙ Outward swing from the X axis (Improvement only affects the production of good X)

∙ Outward swing from the Y axis (Improvement only affects the production of good Y)

∙ Change in the production of both good X and good Y

Trade: Lets us consume outside of our production possibilities frontier

∙ If trade is voluntary, the goods go to the people who want them the most

∙ It creates value from nothing

Absolute advantage: the ability to produce a good using fewer inputs than another producer Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer ____________________________________________________________

Chapter 3: Allocating Goods

Force (Stealing) 

∙ Goods go to the strongest or most powerful

∙ If you must forcibly take something, you could not offer anything for a mutually beneficial trade ∙ Decreases incentive to produce

∙ Least efficient

∙ Incentive to produce and conserve is higher Don't forget about the age old question of limbourg brothers october

Competition Don't forget about the age old question of mat 1033

∙ Goods go to whoever has spent the most time practicing, studying, has the most talent, etc. ∙ Can be efficient in the sense that the people who value it the most will also be the people willing to sacrifice the  most time and effort practicing, studying, etc.

∙ Allocating all goods by footrace or exam would be extremely inefficient

∙ Have very little incentive to be productive or conserve resources

First come first serve 

∙ Goods go to whoever gets there first

∙ Can be efficient when you have a large number of similar items that people only occasionally value ∙ Generally inefficient for allocating most consumption goods

∙ Incentive is to do nothing but wait in lines, unless being productive will somehow move you to the front of the line  you have no need to produce anything

Personal Characteristics 

∙ Goods go to the people the producers like the best

∙ Can be efficient when allocating time and personal energy

∙ Incentives are to make yourself likable

Price 

∙ Goods go the people willing to sacrifice the most If you want to learn more check out ciachef

∙ Can be efficient if other goods and resources are also allocated by a price mechanism

Random Drawing 

∙ Goods go to the luckiest, not the person who values it the most

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Chapter 21: Demand

Budget Line: Slope is the relative price of each good

Demand Curve: Shows the relationship between price and quantity of which a consumer is able to purchase Changing the Demand Curve 

∙ Change in preferences or utility

∙ Change in expectations

∙ Change in income

∙ Change in normal goods

∙ Change in compliments

∙ Change in inferior goods

∙ Change in substitutes

Law of demand: All else constant, as the price of a good increases the quantity consumers are willing and able to purchase  (quantity demanded) falls and as the price of a good decreases the quantity demanded rises

Shifting the Demand Curve 

Normal good Substitutes

↑Income ↑Demand; ↑Price of Substitute ↑Demand;

↓Income ↓Demand ↓Price of Substitute ↓Demand

Inferior good Compliments

↑Income ↓Demand; ↑Price of Compliment ↓Demand;

↓Income ↑Demand ↓Price of Compliment ↑Demand;

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Chapter 4: Markets

Price is too low: Shortage; Qs > Qs

∙ Consumers bid prices up

Price is too high: Surplus; Qs > Qd

∙ Suppliers bid prices down (sales) We also discuss several other topics like machine learning for trading gatech

Price is just right: Qd = Qs

Market equilibrium: market price has reached the level at which quantitysupplied equals quantity demanded ∙ If either supply or demand changes, market prices will adjust and a new equilibrium will emerge Increase in demand: Increase in P* and increase in Q*

Decrease in demand: Decrease in P* and decrease in Q*

Increase in supply: Decrease in P* and increase in Q*

Decrease in supply: Increase in P* and decrease in Q*

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Chapter 6: Price Controls

Rent control: price ceiling for rented housing

Price ceiling: a legal maximum on the price at which a good can be sold

∙ Results in shortage

∙ Give power to producers

Price floor (price support): a legal minimum on the price at which a good can be sold

∙ Results in surplus

∙ Give power to consumers

Consumer surplus: the amount a buyer is willing to pay for a good – the amount the buyer actually pays for it Producer surplus: the amount a seller is paid for a good – the sellers cost for providing it

Dead weight loss: the fall in total surplus that results from a market in distortion, such as tax

Minimum wage: goal of minimum wage is to increase consumer surplus;  

∙ ↑Minimum wage ↓jobs