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MOHO / Economics / ECON 110 / What are the four fundamental principles of economics?

What are the four fundamental principles of economics?

What are the four fundamental principles of economics?

Description

School: Mount Holyoke College
Department: Economics
Course: Introductory Economics
Professor: Gunjan sharma
Term: Fall 2016
Tags: monopolies, supply, demand, and perfect competition
Cost: 50
Name: Econ Midterm Study Guide
Description: Study Guide for intro to Econ-- covers firm productivity, definitions, labor markets, monopolies.
Uploaded: 10/26/2016
11 Pages 108 Views 1 Unlocks
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MIDTERM REVIEWWe also discuss several other topics like What is mhc? why is needed in the immune system?

We also discuss several other topics like What is an inventory system where companies manufacture or purchase goods only when needed for use?

Section 1: Definitions and Terms

I. CHAPTER 1

If you want to learn more check out What idea is discussed in behavioral allocation view?

Four Key Principles of Economics

  1. Everything involves costs

Opportunity cost is the highest valued alternative that must be sacrificed in order to get something else

  1. Marginal thinking: important decisions aren’t yes/no but how much (quantity)
  2. Incentives matter
  3. Trade occurs

Trade is the voluntary exchange of goods/ services between 2+ partiesDon't forget about the age old question of What is the definition of the calvin cycle?

Specialization occurs when someone in a particular area.Don't forget about the age old question of What is america’s most popular band even after the beatles arrived?

        Specialization              trade

Don't forget about the age old question of What is the refrigeration cycle?

II. CHAPTER 2

  • Production possibilities frontier is defined as a curve or a frontier that shows the maximum possible quantities of all goods that can be produced given technology and resources.
  • Model: 2 goods, labor as only factor of production
  • Assume: technology is exogenous/ constant
  • Technology is a way that factors of production are converted into products
  • Autarky: no trade

  • Comparative advantage refers to the situation in which an individual, business or country can produce at a lower opportunity cost than a competitor
  • Relative, not absolute
  • Double comparison: goods, then competitor

  • Absolute advantage refers to the ability of one producer to make more than another producer with the same quantity of resources

III. CHAPTER 3

Market: an interaction between a set of economic agents who have something to sell and a group of economic agents who want to buy

Demand curve: shows the maximum quantity a consumer is willing to consume of a good at each price level

Canvas perilous: all else constant

Complements: two products are complements if the increase in price of one decreases quantity demanded of the other

  • PB and J, wine and cheese

Substitutes: if increase in price of 1 means an increase in quantity demanded of the 2nd

  • Beer and wine

Elasticity of Demand: is defined as the % change in the quantity demanded when price changes by 1%

        =   %∆QD   → 

             %∆P     → 

  • Have to say WHERE we are calculating

Supply curve is the minimum price at which a firm is willing to sell each quantity

Equilibrium occurs if QS = QD

  • Tatonnement: whenever the seller/  buyer aren’t at the equilibrium point, economic forces act on them to bring them to that point

Welfare analysis

Total welfare = Σ welfare of consumers (surplus) + Σ Welfare of producers (surplus) + govt. welfare

Consumer surplus is the difference between the max the consumer was willing to pay and what they actually paid

→ ½ bh

Producer surplus is the difference between the eq. price in the market and the minimum price the producer is willing to sell qty at

        → ½ bh

Section 2 – Firms: Definitions and Terms

IV. CHAPTER 4

  • Profits are the positive difference between expenses (cost) and revenues
  • Signed whether or not to enter market

  • Resource allocation signal that tells us that profitable firms have high value products (resources are being used well)
  • Explicit costs contribute to economic cost but it is
  • Implicit cost which differentiates it from accounting costs

  • Economic profit is defined as revenue minus the sum of the explicit and implicit costs
  • Explicit costs are tangible, out of pocket expenses
  • Implicit costs are the opportunity costs of doing business

  • Entry Rule: a firm will to enter/continue production if economic π > 0

  • Marginal Revenue is defined as the extra revenue that is generated upon 1 extra unit of output

        ∆Rev

          Q

  • Marginal cost is defined as the extra costs generated by one extra unit of output
  • ∆cost
  •  ∆Q

  • Average Cost = Total Cost
  • Q

  • Output rule: choose the profit maximizing quantity where MC=MR

V. CHAPTER 5:

Markets

Perfect competition is defined as a market with an infinite number of sellers and buyers all buying/ selling one homogeneous product with free entry/exit for producers

Market equilibrium occurs where Ecoπ = O

Industry – a group of firms that sell similar products

Market power refers to the control that any individual firm has over the price that it can change

  • Perfectly competitive firms have little market power
  • Pc firms are also price takers

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