ECO 2013 Study guide Test 1
ECO 2013 Study guide Test 1 Test 101
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This 11 page Study Guide was uploaded by Ivonne Ayala on Sunday October 16, 2016. The Study Guide belongs to Test 101 at Florida Atlantic University taught by Ivonne Ayala in Fall 2016. Since its upload, it has received 99 views.
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Date Created: 10/16/16
Study Guide ECO 2013 Test 1 Chapter 1 Economics: A study of the ways individuals, firms, and society make decisions to allocate (Distribute) limited resources to competing wants. AKA making choices, studies how individuals, firms, and societies make decisions to maximize their well being given limitations. Addresses scarcity. Use limited resources to meet unlimited wants. The study of how people make rational decisions. The rational way of how individuals, firms and society distribute limited resources to unlimited wants. Everyone wants everything but there’s only so many resources that can meet those wants. * DOES NOT FOCUS ONLY ON MONEY, MORE ABOUT DISTRIBUTING RESOURCES * o Economics assumes that people: Rational Self interested Respond to incentives. Incentives: the factors both good and bad, that influence how people make decisions. Rewards/punishments Ex: College admission requirements make it harder for students from high school to get in so that is an incentive to study harder. Scarcity: having too many wants but too few resources to achieve them all, not having enough resources. Everyone faces scarcity on resources. Refers to people having to make choices given the resource limitations she/he faces. o Because of scarcity we face tradeoffs in every decision we make. o Ex: Kylie Jenner Birthday Edition mini lipkits set was sold out 4 times that week and not everybody received it. Everyone wants the limited birthday edition lipkits but there’s not enough lipkits to give to everyone. Tradeoffs: Having to decide between alternatives, which always exist whenever we make a decision. Ex: Because Kylie’s birthday edition lipkit kept selling out you decide between buying Anastasia Beverly Hills lipkits instead Limitations: Money, knowledge, time, work ethic, income, anything that can be used to achieve our goals. Rational: Given the info you have, you’re making the best choice for the moment. Ex: Go to class if it is required. Go to work if you’re on the schedule Behavior Economics: A method of economic analysis that applies psychological insights into human behavior to explain economic decisionmaking. AKA behavioral economics helps explain why people undersave for retirement. A method of analysis that explains why people make decisions. Microeconomics: the study of decision making by individuals, business, industries, and government. Looks at how markets are structured, markets are competitive, offer similar products. Other markets have only 12 large firms offering little choice. Ex: mIcro: The I stands for individuals, not necessarily a 1 person situation. Concerned with issues such as: orange juice to buy, which job to take, where to go on vacation, which items a business should produce, what price should it charge, whether a market should be left on its own or be regulated. Micro Topics: labor laws, environmental policy, health care policy. Macroeconomics: Focuses on the broader issues in the economy, inflation, unemployment, and national output. The big economy, how much can we produce. Looks at policies that increase economic growth, the impact of government spending and taxation, the effect of monetary policy on the economy, and inflation. Looks closely at the theories of international trade and international finance. mAcro: refers to aggregate entities (cities or a nation as a whole) Macro Topics: Business cycles, recession, and unemployment, price level, inflation, economic growth. Ex: People don’t care whether an individual buys Nike or Merrell shoes. People do care whether prices of all goods and services rise (inflation). Inflation: a general increase in prices economy wide, affects all of us because now things are more expensive. Supply and Demand Analysis: used for both Macro and Micro to understand both individual markets. Fiscal policy: How the government spends money within their budget to influence the economy. o Involves 2 things: Gov. Taxes and how businesses are taxed. Monetary policy: Monetary authority or Country A controls the supply of money, often targeting an inflation rate/ interest rate to ensure price stability. o If our economy is not growing, most likely the other party will take over. How we use money in our society. o Current unemployment rate is 5.5 % Ceteris Paribus: going to hold everything else constant. “Everything else” includes all other relevant factors or variables. AKA an assumption used in economics (and other disciplines as well). Where other relevant factors or variables are held constant. o Ex: to determine how many songs you would be willing to download from iTunes in any given month, we would hold your monthly income constant. We then would change song prices to see the impact on the number purchased (holding your monthly income constant). Models: information boiled down to its basic elements used by economists to showcase economic behavior. Crafted from new ideas and tested against real world data. They are created and then tested. o Ex: government when they increase spending and if that will lead up to economic growth. Efficiency Vs. Equity Efficiency: How well resources are used and allocated. We use these resources at the right place at a cheaper cost. Equity: The fairness of different policies and issues. Should CEO’s of large companies make hundreds of times more money than rank and file workers? Is it fair that some people so little while others have so much? Fair is defined based on your situation. o Both topics conflict with each other Production Efficiency: occurs when goods are produced at the lowest possible cost. Do people get the goods/services they want at the lowest cost? o Allocative Efficiency: occurs when individuals who desire a product the most get those goods and services. Ex: It wouldn’t make sense for society to allocate people who hate cranberries, a large amount of cranberry sauce because they wouldn’t eat it. Positive Question: A question that can be answered using available information or facts, something you can test. Cold, hard fact. Ex: if it’s raining outside you can check by opening the door. Normative Question: A question that is based on society’s beliefs about what should or shouldn’t take place. Someone’s assumption of what might or might not happen. Ex: If it’s raining and Professor says to bring the umbrella its up to you to make that decision. Ex: Recruitment this year was expecting 600 girls since 500 girls went in last fall semester but in reality 300 girls went through this fall. o When making decisions, one must take into account tradeoffs and opportunity costs. Tradeoffs: Having to decide between alternatives, which always exist whenever we make a decision. Opportunity Cost: The value of the next best alternative, what you give up to do something or purchase something. o Used by economists to help weigh the benefits/costs of every decision we make. o Categorized as the discipline that always weighs benefits vs costs. o Applies to individuals and societies as a whole. Opportunity Cost is measured by asking yourself in any situation: What could I be doing right now if I wasn’t _________ (fill in activity)? What could I have bought if I didn’t buy this _______ (fill in the last good or service you bought)? Examples of Opportunity Cost affecting individuals: Ex: Camping out overnight in order to get tickets for a concert. Opportunity cost would be everything you gave up to do that like: cost of the tickets, transportation, time spent, attendance at the concert. Sometimes the costs can outweigh the benefits. Is it really worth it? Ex: If a student didn’t go to class they could have been sleeping, working, watching tv, social life, etc. Opportunity cost would have been giving up going to class, giving up what you could have learned that day, the attendance points, time, etc. Examples of Opportunity Cost affecting societies as a whole: Ex: If a country chooses to spend more on environmental conservation, it must use its resources that could be used to promote other objectives, like education and health care. Specialization: People will work in careers most suited to them, such as cooking or mechanics. o In terms of specialization and exchange, it generally benefits the poorer individual and the richer individual o Ex: You and your roommate cook and clean your own rooms. That takes up more time. Maybe you could cook dinner because you’re better at it and they could clean the rooms because they’re better at it. Saving time and benefiting both parties. Incentives: rewards/punishments. Can be good or bad o People respond to incentives. Ex: Tax policy thrives off of people responding to their incentives. Do we want to encourage people to save for retirement? Then let them deduct a certain amount they can put into a retirement account that does not get taxed. Ex: Do we want kids to go to college? Then give them tax advantages for setting up saving accounts for education (Florida PrePaid). Ex: At an ALLYOUCANEAT Buffet, compare the benefit of one more plate of food to the costs. (bloating, weight gain) Ex: Paying a salesperson more for increased sales Rational people make their decisions on the margin. Not how much you earn or spend but the focus on the good you want and if it will benefit you. o Marginal benefit: Paying a flat rate in exchange for unlimited plates of food. o Marginal costs: in terms of monetary value (how much value people, businesses place on an item) is 0. Health concerns and bloating is a cost. Sunk cost: Money/cost paid and will not get a refund. Shouldn’t affect your decision making. Upfront cost. Ex: Movie tickets Markets are generally efficient; when they aren’t government can sometimes correct the failure. o We need government to protect marketing fears: Copy rights Industries What drives and disciplines markets? o Prices: prices get too high other companies start competition o Profits: drive entrepreneurs provide new products Market failure: when the market fails to create market efficiency and government steps in to fix it. Ex: Consumers have no choice but to buy from one firm like the local water company. o Can result in undesirable outcomes Ex: Pollution if left unregulated, companies often will pollute the air and water. Governments well then step in and fix the market failure. Ex: When information is not readily available or known to only one side of the market, markets fail to produce socially desirable outcomes. Institutions and Human Creativity help explain the wealth of nations o Two factors that influence the wealth of nations are: Good institutions: include a legal system that enforces contracts and laws to protect the right of citizens and the ideas they create while developing incentives to firms and individuals to work harder. o Helps explain the wealth of nations Human creativity: Ideas are the basis for creating new products and finding new ways to improve existing goods and services. Develops incentives for creativity. What’s wrong with this Iphone 5s? How can we make it better and more efficient? Iphone 6s o When countries become richer, their internal problems start to become less and less. They use government policies to speed up the process. Chapter 2 Basic Economic Questions Three basic economic questions that each society must answer: What goods and services are to be produced? Refers to what we are producing. Depends on what goods and services a society wants. Ex: Do we produce more food or luxury restaurants. How are these goods and services to be produced? Refers to how we are offering and producing goods and services. How land, labor, and capital should be combined to produce desired products. Ex: Teachers: how they produce and offer class info and how students take in those goods and services. Who will receive these goods and services? Refers to who gets those goods and services. Relates to allocation (distributing) of resources. Government and market decides how much of goods and services should be distributed. Factors of Production: Land: All natural resources Ex: natural gas, water, oil, mineral deposits. Land payments are called rent Labor: Labor hours/workers. Quality of labor. A factor of production that includes both the mental and physical talents of people. Labor is paid wages. Capital: Tools, number of machines used for production. All manufactured products that are used to produce other goods and services. Capital earns interest. Ex: trucks and automobiles used by businesses, equipment such as drill presses, office equipment such as copiers, computers Ex: In a classroom, the room itself (lecture hall), computers, projector, equipment. Ex: Starbucks frap machine Entrepreneurial Ideas: How to manage and organizers the first 3 sections of production, how you’re running the business. Combining land, labor, and capital to produce goods and services while assuming risks associated with running a business. Money IS NOT capital in economics. Entrepreneurs earn profits Production turns resources like land, labor, capital, and entrepreneurial ability into products and services. Productivity is a measure of efficiency determined by the amounts of output produced given the amount of inputs used. Two Efficiency Concepts of Production 1) Production efficiency: mixed of goods and services are provided at the lowest cost, using goods to the max no waste. 2) Allocative efficiency: mixed of goods and services that are most desired by the economy, what we desire for our society, where goods should go. Are we producing the goods and services that people desire? Ex: Increase in sales for Nike sports wear, produce more Nike sports wear. Production Possibilities Frontier (PPF): A model that shows the combinations of two goods a society can produce at full employment. Assumes that the quantity of resources available and the technology of the economy remain constant and that the economy produces only 2 products. Maps out the economy’s limits. All the points on the PPF are considered attainable and efficient by our economy. Everything to the left and under the PPF is attainable but inefficient because the economy can always do better. Everything to the right is considered unattainable because they cannot be produced right now, can be reached through economic growth. Points inside the PPF are underutitlized Increasing production of one good means sacrificing the other. 2 types concave: (more realistic) happens when opportunity costs rise as more factors are used to produce more than one product. Increases as you specialize. straight Shifts to the right as the economy grows because of: 1) Expanding resources (ex: more immigrants more resources) 2) Improving technologies A PPF answers: 1) How much can be produced? 2) What it will cost to change the production mix? Opportunity cost: cost of a good in terms of another that must be given up. Increases as you specialize Land, labor, and capital most of the time can’t be shifted because some resources are suited to specific sorts of production. Ex: Some people have a talent for music or art and would be miserable working as accountants. Increases of production in specialization and trade occurs between people and nations. The reason for trade: 1) Absolute Advantage: One country can produce more of one good than another country. If you can produce more using the same labor and resources, then you are more productive. Ex: Farmer A produces 20 crops of corn in 3 hours and Farmer B produces 10 in 3 hours, Farmer A has the absolute advantage 2) Comparative Advantage: One country’s opportunity cost is lower than another country’s. Ex: The US’s opportunity cost is higher to produce more goods like plastic toys than China’s opportunity cost, so China produces more goods like plastic toys at a lower cost. China has the comparative advantage. Chapter 3 Markets: institutions that bring buyers and sellers together. Ex: Lemonade stand is a market because it allows people to exchange money for a product. Ex: Amazon, eBay Price System: When buyers and sellers communicate their individual desires by exchanging money for goods and services, accepting some offers and rejecting others. Ex: If buyers value a specific item they will buy it immediately for its asking price. Forever 21 phone case, $8.00. If they don’t buy the phone case for $8 then its not worth its asking price to them. Give buyers a way to compare goods that can substitute for each other (ex: Margarine and butter, Coke and Pepsi) If the price of Coke drops and Pepsi is more expensive then more people will buy Coke because it is cheaper. Send signals in free market economies. Buyers What to buy? How much? Sellers What to sell? How much? What method? Provide information for buyers and sellers (ex: If the prices in tennis rackets go up then sporting stores like Dick’s Sporting Goods will order more since more people are buying them) Things that factor what we must buy: Wants/needs (do I need it or do I just want it?) Personal budget Overall price How much for comparative products? (ex: Pb and J, hot dogs and hot dog buns) How long it can keep its value Buying in bulk (buying in quantities. How much you buy of one product) Inflation Inflation: a general increase in prices economy wide, affects all of us. Demand: The max amount of a product that buyers are willing to purchase over some period at various prices, holding all other variables constant (ceteris paribus) Entire relationship between price and quantity demanded. Will not be changed by the prices of items. Ex: How much you like pizza isn’t changing if the price goes up. How much you want to buy will be less if the price goes up. Ex: Buying 5 Forever 21 dresses Quantity Demanded: How much people are want of that product. Points on a demand curve. As prices increase the quantity demanded falls (people will pay less if things get too expensive) If prices of goods and services decrease quantity demanded increases. (ex: Day after Thanksgiving, all the turkey and cranberry sauce is a little cheaper giving incentive for people to buy it) Ex: The price of 5 Forever 21 dresses is $80, are you willing to pay 80 dollars for 5 dresses? Law of demand: Shows negative relationship between price and quantity demanded. The lower a products price, the more of that product consumers will purchase during a given time period. Consumers can afford more goods when prices are lower Ex: Dawn dishwashing soap is cheaper by $2 than Palmolive dishwashing soap $4 so more people will buy Dawn. Ex: Publix Advil is on sale for $4, Advil brand is $6. More people will buy Publix brand. Horizontal Summation: Adding the # of units of the product that will be provided at each price. (check market demand curve) Nonprice factors aka Determinants of demand: affect demand, held constant for drawing a demand curve Include: Taste/preferences: demand for products that come into fashion will increase and vice versa. Ex: organic food in Boca Raton. So if organic eggs cost $7 the quantity will increase. Ex: Boyfriend Jeans come into style so everyone is buying them so demand increases and quantity increases. Income Prices of related goods # of buyers expectations about future prices. Graph will shift right if price is affected (increase) When one of these determinants changes the entire demand curve changes. Normal Goods: Demand increases as income rises. Products that are positively linked to income. When income rises, demand for products rises. Things that you need Ex: Once you get more money you’re more inclined to spend more Ex: Get a raise, you will buy more clothes, food. (shifts to the right) Things that are normal to you that you regularly buy. Inferior goods: Demand decreases as income rises (curve shifts left). A good for which an increase in income results in declining demand. You’re more inclined to go buy more expensive things as opposed to cheaper things. Ex: College students after they graduate are more inclined to buy nice steak dinners or go out to eat instead of ramen noodles. Ex: When you are getting a better income you will be more inclined to buy things like a car as opposed to riding the bus. The price is no longer something you have to pay attention to in order to watch your personal budget because you have more income so you can afford to buy branded milk instead of Publix brand. Prices of Related Goods Substitute goods: Goods consumers will substitute for one another depending on their relative prices. When the price of one good rises and the demand for another good increases, they are substitute goods and vice versa. Basically the same product but prices are similar and people will buy the cheaper one Ex: Prices in Red bull increases by $1, Monster is cheaper by $2. People will buy more Monster because they still want an energy drink but this one is just cheaper. Ex: Coke prices increase people will buy more Pepsi because its cheaper but still soda. Ex: 7up decreases and Sprite increases more people will buy 7 up because it is still a lemon lime soda. Price of Complements: Complementary Goods: If the price of a complement decreases, the demand for the original good increases (vice versa). Goods that are typically consumed together. Ex: Movies and popcorn Ex: Hot dogs and hot dog buns Ex: Gas and Cars Ex: Peanut butter and Jelly # of Buyers As more consumers enter a market, demand increases Ex: Nursing homes, old people Ex: Medicare, old people Ex: Pain Pills, old people Ex: More people enter Universities, demand for textbooks increases. Expectations: If future price increases, today’s demand for that good will increase. If consumers thing there will be a shortage of products or increases in prices in the near future they will buy more today before that happens, increasing present demand for the products. A change in consumers’ expectations about: 1) Future prices 2) A good’s availability 3) Their own income. Ex: If gas goes up to $10 tomorrow, people will purchase more today. Ex: If you’re getting a raise tomorrow you will spend more today. Ex: Hurricane season large storms begin moving closer and people will buy more water, batteries, shutters for houses. Demand curve shifts right (increase)
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