×
Log in to StudySoup
Get Full Access to UCR - ECON 003 - Study Guide - Midterm
Join StudySoup for FREE
Get Full Access to UCR - ECON 003 - Study Guide - Midterm

Already have an account? Login here
×
Reset your password

UCR / Economics / ECON 003 / What study is microeconomics?

What study is microeconomics?

What study is microeconomics?

Description

School: University of California Riverside
Department: Economics
Course: Introduction to Microeconomics
Professor: Lang b
Term: Fall 2016
Tags: Microeconomics
Cost: 50
Name: ECON003 Exam #1 Study Guide
Description: This study guide covers chapters 1-3 for this upcoming exam.
Uploaded: 10/16/2016
14 Pages 57 Views 2 Unlocks
Reviews


MICRO003  


What study is microeconomics?



Chapter 1: Foundations of Economics  

1.1 What is economics?  

• Economics: the study of how people, firms and organizations allocate scarce resources.  

➡ Economics matter because it is about making the most of what you have.  

• Microeconomics: the study of individual, household and firm decision making  

• Macroeconomics: the study of overall workings of an economy, including inflations, growth, employment and  interest rates.  

1.2 What are the five foundations of economics?  

• The Five Foundations of Economics:  

1. Life is about trade-offs: “There’s no such things as a free lunch”  

 Think about what resources you are giving up to get a good.  


What are the five foundations of economics?



2. Opportunity Cost: the value of the “next best” or highest valued alternative you give up to do (or get)  something.  

 Ex: Cam Newton in 2011  

➡ Option 1: Free year of school at Auburn  

➡ Option 2: Play in the NFL for $5.5 Million  

 Cam chose to play in the NFL for $5.5 Million, so the opportunity cost of   that is the free year of school at Auburn.  

 Ex: UC Riverside Student - An Hour’s Work Tonight  

➡ Option 1: 20 pages of sociology  

➡ Option 2: 40 pages of history  

 The student may consider simply doing the 20 pages of sociology, but   the opportunity cost for that decision would be the 40 pages of history.  Don't forget about the age old question of How to deactivate neurotransmitters?

3. Marginal Thinking  


How do economists study the economy?



 Marginal change: results from doing something one more time.  

 Marginal Benefit (MB): good incremental change  

 Marginal Cost (MC): what you sacrifice, the opportunity cost  

➡ If MB > MC, then do it!  

➡ If MB < MC, then don’t do it.  

 Ex: Moving the couch to vacuum underneath it  

➡ MB: the room will be REALLY clean  

➡ MC: takes too much energy to do it  

 People usually don’t move the couch, so MB < MC.  

4. Incentives Matter  

 Incentives: factors that motivate you to act or exert effort  

(a) Positive incentives: motivates action  

 ex: pay raise, employee of the month, extra credit  

(b) Negative incentives: creates reasons to NOT do something  

 ex: fees, fines, getting fired  

(c) Direct incentives: “Get straight A’s and I’ll give you $500”  

(d) Indirect incentives: unintended byproduct of the direct incentive  

 ex: Student may not get involved in other activities if too focused on studies   Student may start cheating at schoolwork to get straight A’s

Overview of Chapter 1: Foundations of Economics  

✓ Economics studies the decisions about how to allocate scarce resources  Don't forget about the age old question of In chemistry, what is the torsional strain?

✓ The Five Foundations of Economics:  

 (1) trade-offs are everywhere  

 (2) opportunity cost is important  

 (3) marginal thinking will help make the best decision  

 (4) incentives matter  

 (5) trade can help everyone  

Chapter 2: Model Building and Gains from Trade  

2.1 How do economists study the economy?  

• Economists use models to predict outcomes and explain behaviors  

➡ They are, however, simplified versions of reality  

• Economists perform objective analysis, based on facts, not opinions!  

➡ Positive statements (objective): can be tested and validated  

➡ Normative statements (subjective): opinions that cannot be tested  Don't forget about the age old question of What is the function of gel electrophoresis?

2.2 What is a production possibilities frontier (PPF)?  

• Production Possibilities Frontier (PPF): a graphical representation of the production possibilities for a society  

• Example of a PPF graph:  

PPF of Disappointment Island  

600

)

P

(

s

e

e

r

T

 

m

la

P

450 300 150 0

0 300 600 900 1200Spices (S)

➡ Values on the blue line demonstrates that all resources were used efficiently  

➡ Values above the blue line demonstrates that there were not enough resources (infeasible)  ➡ Values below the blue line demonstrates that they did not use all its resources (inefficient)  

• PPFs and Opportunity Cost:  

➡ To find the opportunity cost put the other good in the numerator of the ratio  

➡ The opportunity cost of spices is 1/2 palm trees per pound of spice  

➡ The opportunity cost of palm trees is 2 pounds of spice per palm tree  

• Two ways to define productivity  Don't forget about the age old question of What factors predispose a person to stress?
If you want to learn more check out What are the factors involved in u.s. economic inequality?
Don't forget about the age old question of What is the function of the vestibular pathway?

1. Absolute Advantage: the ability of one producer to make more than another producer with the same  quantity of resources (more efficient)  

2. Comparative Advantage: the ability of one producer to produce a good at a lower opportunity cost  

• PPFs with two different societies:  

Palm Trees (P)

Spices (S)

Disappointment (D)

600 P

1200 S

Goodenough (G)

1600 P

1600 S

)

P

(

s

e

e

r

T

 

m

la

P

1600 1200 800 400 0

PPF of Disappointment Island  

0 300 600 900 1200 Spices (S)

 

)

P

(

s

e

e

r

T

 

m

la

P

1600 1200 800 400 0

PPF of Goodenough Island  

0 400 800 1200 1600Spices (S)

➡ Who has the absolute advantage in palm trees?  

 Goodenough Island has the absolute advantage in palm trees (1600 P > 600 P)  

➡ Who has the absolute advantage in spices?  

 Goodenough Island has the absolute advantage in spices (1600 S > 1200 S)  

➡ Who has the comparative advantage for palm trees?  

 Disappointment Island’s opportunity cost for palm trees = 2 S/P  

 Goodenough Island’s opportunity cost for palm trees = 1 S/P  

 So…Goodenough Island has the comparative advantage for palm trees (1 S/P < 2 S/P)  

➡ Who has the comparative advantage for spices?  

 Disappointment Island’s opportunity cost for spices = 1/2 P/S  

 Goodenough Island’s opportunity cost for palm trees = 1 P/S  

 So…Disappointment Island has the comparative advantage for spices (1/2 P/S < 1 P/S)  

2.3 What are the benefits of specialization and trade?  

• A term of trade will only be accepted by both parties if it falls between the two opportunity costs for one good  

• David Ricardo’s Theory of Comparative Advantage: specialization and free trade can benefit all parties  involved in trade, EVEN if one party has an absolute advantage in all productions.  

• Specialization: producing only the good in which you have a comparative advantage  

➡ Disappointment Island’s specialization is in spices  

➡ Goodenough Island’s specialization is in palm trees  

 Ex: G proposed to give 300 palm trees for 400 pounds of spice. Should D accept this offer?  

Opp. Cost of Spices (S)

Disappointment (D)

1/2 P/S

Goodenough (G)

1 P/S

 Does the trade ratio fall in between the two opportunity costs of spices?   1/2 P/S < 3/4 P/S < 1 P/S Yes! Disappointment Island should accept trade.  

 Ex: G proposed to give 100 palm trees for 400 pounds of spice. Should D accept this offer?  

Opp. Cost of Spices (S)

Disappointment (D)

1/2 P/S

Goodenough (G)

1 P/S

 Does the trade ration fall in between the two opportunity costs of spices?   1/2 P/S X 1/4 P/S < 1 P/S No! Disappointment Island should not accept trade.   Only Goodenough Island benefits from this offer.  

Straight PPF?  

• With the PPF graphs we have made so far, we have been assuming that the islands…  

➡ only produced two goods: palm trees (P) and pounds of spices (S)  

➡ do not experience a change in production through technology  

➡ have a fixed number of production resources  

★ With a straight PPF, we assumed that there is a constant opportunity cost.  

• Are these realistic assumptions?  

 No, but it creates a simplified version of reality which makes it easier to product outcomes and explain   certain behaviors in economy.  

• Nonlinear PPF Intuition  

➡ Opportunity cost actually varies because resources will specialize at different tasks, so, realistically,  the PPF line is curved!

Nonlinear PPF of  

Disappointment Island  

600

)

P

(

s

e

e

r

T

 

m

la

P

450 300 150 0

0 300 600 900 1200 Spices (S)

From Point A to Point B: the opportunity cost of spices is 1/4 P/S  

From Point B to Point C: the opportunity cost of spice is 2/3 P/S  

From Point C to Point D: the opportunity cost of spice is 2 P/S  

➡ Law of increasing relative cost: opportunity cost of production for a good increases as you produce more of it!  

• Change in resources that affect both goods-increase both axes  ➡ Population increase  

➡ New technology for both goods  

800

)

600

P

(

• Change in resources that affect one good-increase  

 

s

e

400

productivity of only one good  

e

r

➡ If only one good improves  

T

 

200

m

l

a

0

P

Change in resources that  affect both goods

0 350 700 1050 1400Spices (S)

Overview of Chapter 2: Model Building and Gains from Trade  

• PPF and trade is a great example of a simple economic model!  

➡ Illustrates trade-offs and opportunity costs  

• Trade allows countries to consume more than they could have produced on their own  ➡ Gives them access to lower opportunity costs of production  

• We can make it more complicated by allowing for growth, technology changes and more than two goods  ➡ It makes the representation more complicated, but the conclusions don’t change!  

Chapter 3: The Market at Work Supply and Demand  

3.1 What are the fundamentals of markets?  

• Market Economy: when resources are allocated among households and firms with little to no government  interference  

• Market: a group of buyers and sellers that exchange of a good or service  

1. (Perfectly) Competitive Market: a market with the following characteristics:  

➡ Many buyers and sellers  

➡ Identical goods being sold  

➡ Low barriers to entry  

★ Sellers have NO CONTROL over price they set  

 Ex: organic vs nonorganic, Pepsi vs Coca-Cola  

2. Monopoly: a market with the following characteristics:  

➡ One seller  

➡ Unique good  

➡ High barriers to entry  

★ Firm can set the price, but trades-off between higher prices and fewer sales  

 Ex: utilities, internet services, Collegeboard  

3.2 What determines demand?  

• Quantity demanded (Qd): the amount of a good a buyer(s) is willing to purchase at a given price  • Demand schedule: table showing the relationship between price and quantity demanded   Ex: Demand schedule for donuts intuition

Price

Bree’s Qd of donuts in a month

$0

30

$0.50

25

$1.00

20

$1.50

15

$2.00

10

$2.50

5

$3.00

0

• Law of Demand: as price go up, quantity demand (Qd) goes down   That’s why Bree only “buys” 30 donuts when they are free.   That’s why Bree only “buys” zero donuts when they are at $3.00.  

Demand Curve for Bree’s Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 10 20 30 Quantity Demanded (Qd)

 Ex: Demand schedule for more than one person  

Price of  

donuts

Bree’s  

Qd

Matt’s  

Qd

Market  

Qd

$0

30

18

48

$0.50

25

15

40

$1.00

20

12

32

$1.50

15

+

9

24

$2.00

10

6

16

$2.50

5

3

8

$3.00

0

0

0

➡ Market Demand: the sum of all the individual quantities demanded by each buyer in a market  at each price  

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Demand Curve for Bree’s Donuts  

0 10 20 30 40 50 Quantity Demanded (Qd)

 

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Demand Curve for Matt’s Donuts  

0 10 20 30 40 50 Quantity Demanded (Qd)

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Market Quantity Demand

0 10 20 30 40 50Quantity Demanded (Qd)

• What caused the quantity demanded to increase?  

 Only a change in price will change the quantity demand (movement along the curve).  

• The five things that shifts demand:  

1. Changes in income  

➡ Normal good: goods in which we buy more of when we get more income  

 Ex: brand names, leisure appliances, etc.  

➡ Inferior good: goods in which we buy less of when we get more income  

 Ex: fast food, ramen, off-brand products  

2. Prices of related goods  

➡ Substitutes: goods that can be used in place of each other  

 Ex: Pepsi and Coca-Cola, Colgate and Crest  

★ If a price of a good increases, the demand for its substitute will increase as well.  

➡ Complements: goods that are used together  

 Ex: hot dogs and buns, milk and cereal  

★ If a price of a good increases, the demand for its complement will decrease.  

3. Changes in tastes or preferences  

➡ Something goes in or out of style  

➡ New information about a good  

★ Economists don’t talk too much about this one because it is opinion-based.  

4. Future expectations  

➡ If future availability will decrease, then current demand will increase.  

➡ If future prices will increase, then current demand will increase.  

➡ If future income will increase, then current demand will increase.  

5. Number of buyers  

➡ Simply adding or subtracting more demand curves  

➡ Aging, immigration, war, birth rates  

• Change in Demand: Increase - shift curve to the right  

Demand Curve Increase for Bree’s Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 10 20 30 40 Quantity Demanded (Qd)

• Change in Demand: Decrease - shift curve to the left  Demand Curve Decrease for Bree’s Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 10 20 30Quantity Demanded (Qd)

3.3 What determines supply?  

• Quantity Supplied (Qs): the amount of a good firms are willing and able to sell at a given price.  • Supply Schedule: a table that relates quantity supplied and price.  

 

 Ex: Supply schedule for donuts intuition  

Price

Donut Truck Quantity Supplied  (Qs)

$0

0

$0.50

0

$1.00

3

$1.50

6

$2.00

9

$2.50

12

$3.00

15

• Law of Supply: as price go up, quantity supply (Qs) goes up  

 That’s why the supply is zero when the price is below $1  

 That’s why the supply is 15 when the price is $3  

★ Supply is upward sloping  

Supply Curve for Donut Truck Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 4 8 12 16Quantity Supplied (Qs)

Ex: Demand schedule for more than one person  

Price of  

donuts

Truck’s  

Qs

Shop’s  

Qs

Market  

Qs

$0

0

0

0

$0.50

0

0

0

$1.00

3

9

12

$1.50

6

+

18

24

$2.00

9

27

36

$2.50

12

36

48

$3.00

15

45

60

➡ Market Supply: the sum of all the individual quantities supplied by each firm in a market at  each price  

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Supply Curve for Donut Truck

0 12 24 36 48 60 Quantity Supplied (Qs)

 

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Supply Curve for Donut Shop

0 12 24 36 48 60 Quantity Supplied (Qs)

)

P

(

e

c

ir

P

$3.00 $2.00 $1.00 $0.00

Market Quantity Supply

0 12 24 36 48 60Quantity Supplied (Qs)

• What caused the quantity demanded to increase?  

 Only a change in price will change the quantity supply (movement along the curve).  

• The five things that shifts demand:  

1. Changes in the cost of inputs  

➡ Inputs: resources used in the production process (paper, bread, labor)  

★ When the cost of inputs goes up, supply decreases  

2. Changes in technology  

➡ Technology: the ability to produce something at a certain rate/level  

★ When technology improves, supply increases  

3. Taxes or subsidies  

➡ Tax: money paid to government when a good is produced or purchasedWhen government  places a tax on a producer, supply decreases  

➡ Subsidy: money earned from the government to make the goods  

★ When a government subsidizes a producer, supply increases  

4. Number of sellers  

★ If there are more individual sellers, then supply increases.  

5. Price expectations  

★ If future prices increase, then supply increases.  

• Change in Demand: Increase - shift curve to the right  Supply Curve Increase for Donut  

Truck Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 6 12 18 Quantity Supplied (Qs)

• Change in Demand: Decrease - shift curve to the left  Supply Curve Decrease for Donut  

Truck Donuts  

$3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 4 8 12 16 Quantity Supplied (Qs)

3.4 How do supply and demand shifts affect a market?  

• Both supply and demand curves work together to determine:  

➡ Equilibrium Price (P*)  

➡ Equilibrium Quantity (Q*)  

• Market Equilibrium: the market price at which Qs = Qd, the intersection of supply and demand.  $3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 10 20 30Quantity (Q)

• Bree’s Definition of Equilibrium: a situation where no party has an incentive to change their behavior  

 Ex: Market supply and demand equilibrium schedule  

Price of Donuts

Market Demand

Market Supply

$0

48

0

$0.50

40

0

$1.00

32

12

$1.50

24

24

$2.00

16

36

$2.50

8

48

$3.00

0

60

 

 A situation forces the market to sell their donuts at $2.50. What becomes the result?  $3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 20 40 60 Quantity (Q)

 The blue line represents the demand curve of donuts.  

 The green line represents the supply curve of donuts.  

 Where they intersect is the market equilibrium of donuts.   The yellow line represents the adjusted price that they need to sell their donuts.  

 So…when the price of donuts is now at $2.50:  

1. The supply of donuts is at 48.  

2. The demand of donuts is at 8.  

3. There is a surplus of 40 donuts.  

★ Surplus: when quantity supply is greater than quantity demand; occurs at any price above the market  equilibrium; (Qs > Qd)  

 Now, the situation forces the market to down to $1.00. What becomes the result?  $3.00

)

P

(

e

c

ir

P

$2.00 $1.00 $0.00

0 20 40 60Quantity (Q)

 The blue line represents the demand curve of donuts.  

 The green line represents the supply curve of donuts.  

 Where they intersect is the market equilibrium of donuts.   The yellow line represents the adjusted price that they need to sell their donuts.  

 So…when the price of donuts is now at $1.00:  

1. The supply of donuts is at 12.  

2. The demand of donuts is 32.  

3. There is a shortage of 30 donuts.  

★ Shortage: when quantity supply is less than quantity demand; occurs at any price below the market  equilibrium; (Qs < Qd)  

• Incentives within Markets  

➡ Incentives will always draw the market outcomes toward equilibrium  

➡ Adam Smith (1759): If people make decisions in their own interest, the economic system can benefit  everyone (under certain conditions)  

➡ Invisible Hand  

• Changes in the Market  

➡ Shifts in supply and/or demand changes the equilibrium price (P*) and equilibrium quantity (Q*)   Ex: What happens to the donut market if the price of flour increases?  

Original Graph

$3.00

$2.00

)

P

(

 

e

c

i

r

P

$1.00 $0.00

0 10 20 30Quantity (Q)

 

 The blue line represents the demand curve of donuts.  

 The green line represents the supply curve of donuts.  

 Where they intersect is the original market equilibrium of donuts.   The yellow line represents the shifted supply curve of donuts.  

 Where the blue and yellow lines intersect is the new market equilibrium of donuts.  

 So…when the price of flour increases:  

1. The supply of donuts will decrease because it becomes harder to produce donuts.  

2. There would then be a shortage at the original equilibrium price because the demand  

would be greater than the supply.  

3. They would have to raise the prices in order to meet the new market equilibrium.  

3A Changes in both demand and supply  

 Ex: What happens if the price of flour increases and if a medical journal reports that people who eat donuts will   live longer than people who eat ice cream? What are the results of each curve?  

 

 If price of flour increases… If donuts are healthy…   The equilibrium price (P*) increases The equilibrium price (P*) increases   The equilibrium quantity (Q*) decreases The equilibrium quantity (Q*) increases  

 The overall effects:  

 Equilibrium price (P*) will increase because both circumstances increase.   Equilibrium quantity (Q*) is ambiguous because it we don’t know what will happen exactly.  

 

)

P

(

 

e

c

i

r

P

 

$3.00 $2.00 $1.00 $0.00

The Combined Graph

0 10 20 30 Quantity (Q)

 The blue line represents the demand curve of donuts.  

 The green line represents the supply curve of donuts.  

 Where they intersect is the original market equilibrium of donuts.   The yellow line represents the shifted supply curve of donuts.  

 Where the blue and yellow lines intersect is the new market equilibrium of donuts.   We cannot graph the shifted equilibrium quantity (Q*) because it is an ambiguous value.  

 Ex: Small supply shift, big demand shift  

$3.00

$2.00

)

P

(

 

e

c

i

r

P

 

$1.00 $0.00

0 10 20 30Quantity (Q)

 The blue line represents the original demand curve.   The green line represents the original supply curve.   Where they intersect is the original market equilibrium.   The yellow line represents the shifted supply curve.   The orange line represents the shifted demand curve   Where they intersect is the new market equilibrium.  

 So…when there is a small supply decrease and big demand decrease:  1. The market had to decrease quantity  

2. The market had to decrease prices  

 Ex: Big supply shift, small demand shift  The Combined Graph

$3.00

$2.00

)

P

(

 

e

c

i

r

P

$1.00 $0.00

0 10 20 30Quantity (Q)

 The blue line represents the original demand curve.  

 The green line represents the original supply curve.  

 Where they intersect is the original market equilibrium.  

 The yellow line represents the shifted supply curve.  

 The orange line represents the shifted demand curve  

 Where they intersect is the new market equilibrium.  

 So…when there is a big supply increase and small demand increase:  1. The market had to increase quantity  

2. The market had to increase prices  

Overview of Chapter 3: The Market at Work - Supply and Demand  

• Market consists of buyers (demand) and sellers (supply)  

• Their interaction determines market equilibrium  

• Know the difference between:  

➡ A movement along a curve (the change in Qs or Qd)  

➡ A shift in a curve (the change in supply or demand)  

• We can predicts what will happen in a market by thinking about supply and demand.  

• This provides the foundation for how we will think about how incentives, decisions, and behaviors affect the  economy.

Page Expired
5off
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here