∙ Always ask what if?

How can you shift out the PPF?

∙ Always ask what if?

Exam 1 Study Guide Scarcity: all things that are hard to find. ∙ Water, cars, clothing, diamonds ∙ Scarcity is NOT poverty ∙ If it affects at least one of these three, it’s scarce: 1. Financial assets 2. Time 3. Energy Incentives: Positive and negative incentives (grades) - Unintended consequences… if you don’t get the  incentives right - Economists try to do the lowest incentive they canWe also discuss several other topics like chm 152
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 provide to get a certain behavior. - Human action is the goal – designed path isn’t  always right Trade-offs: a balance achieved between two desirable but  incompatible features; a compromise. ∙ Always ask what if? Trade: Trade and Comparative Advantage ∙ Does trade create value? YES, redistribution to match  up with people’s preferences makes the value stronger  (example where the students got random candy then  traded so they all got something they like more). Barter: to trade good rather than through the medium of money. Marginal Thinking: Evaluating whether the BENEFIT of acquiring  one more unit of something is greater than its COST. Endogenous factors: factors built into the model. Exogenous factors: factors outside the model that cause it to work less well.Positive statements are testable while normative statements are  opinion.  Opportunity cost: the highest-valued alternative that must be  given up to engage in an activity. ∙ Example from class: Consider the true costs of traveling from Tucson to San Diego by plane or Bus. Suppose: - The bus ticket cost $80 and takes 20 hours r/t - The plane ticket costs $160 and takes 4 hours r/t - Your value travel time at $8 per hour - Should you take the bus or plane? BUS is cheaper,  but if you upped your value travel time to $10 an  hour the plane would be cheaper/ more efficient. Production possibilities curve: Shows the maximum amount of any TWO products that can be produced from a FIXED amount of  resources. Increasing Opportunity Cost 50 4745 40 33 23 0 A to B = Opportunity cost is only 2 servings of gelato F to G = Opportunity cost is 23 servings of gelato  (Master gelato makers had to stop making gelato and start  making pizza)… big opportunity cost of gelato ∙ Every point on line (PPF) is efficient ∙ a point inside the line is not efficient ∙ a point outside the line is not possible How can you shift out the PPF? 1. More resources  2. Better technology  3. More time Notice: the PPC is non-linear, this is known as the law of  increasing relative cost Comparative advantage: states that you can gain by specializing  in producing what you do well and exchanging that production for  something that you would have trouble making. ∙ Absolute Advantage – able to out-perform your competitors *Absolute Advantage is NEVER the right answer in a test ∙ Table shows that Kim is better at mowing the lawn and doing the dishes than Kanye, but Kanye is a better mower than  dish washer so he should mow and Kim should do the dishes. Law of demand: there exists an inverse relationship between the  price of the good and the amount of it buyers are willing to  purchase. Slide or shift? A movement along a demand curve is a result of a price change  alone, known as a change in the quantity demanded. A shift in the entire curve occurs when something other than the  price changes, this is a change in demand. ∙ A shift on the demand curve can be caused by: 1. Changes in income 2. Changes in tastes3. Price of related goods  4. Expectation 5. # of buyers Law of supply: there exists a direct relationship between the price  of the good and the amount of it that will be offered for sale.  *Lower price, less profit for seller A movement along the supply curve is a result of price change  alone, change in quantity supplied. A shift in the entire curve occurs when something other than the  price changes, this is a change in supply. ∙ A shift on the supply curve can be caused by:  1. Input costs 2. Changes in technology 3. Taxes/subsidies 4. Expectations 5. # of sellers Equations of S and D: Demand: Qd=90-2P  Supply: Qs= -30+P Set Qd=Qs Shortage: when quantity demanded is bigger than quantity  supplied. Not enough supplied. Surplus: when quantity supplied is bigger than quantity  demanded. Not enough demanded. Elasticity of demand: the flexibility of consumers desires for a  product. Three determinants of price elasticity: 1. existence of substitutes 2. share of the budget 3. time allowedCalculating elasticity: % change in Q/ % change in P ∙ midpoint formula: Ep= change in Q/(Q1+Q2)/2/change in P/ (P1+P2)/2 Time and adjustment process: as time passes, consumers and  producers are able to find substitutes Perfectly inelastic- vertical line Relatively  inelastic- steep vertical line Ep=%change in Q Ep=small= 0>Ep>- 1  %change in P Big = 0/Big= 0 Relatively elastic- flat, slightly vertical line Perfectly  elastic- horizontal Ep= Big= -1>Ep>-infinity Ep=Big =  -infinity  Small 0 If demand is elastic… A % rise in price brings a greater % fall in quantity demanded.  TR falls. Price and TR change in the opposite direction. If unitary…  A price change leaves TR unchanged. If demand is inelastic… A % rise in price brings a smaller % fall in quantity demanded.  TR rises. Price and TR change in the same direction. Price Controls: government regulation establishing a maximum  price to be charged for certain goods and services. Minimum Wage: the least amount of money you can legally be  paid for a job.Price ceilings: a legally imposed max price, intend to protect  consumers from conditions that could make commodities  prohibitively expensive Price floor: a government or group-imposed price control or limit  on how low a price can be charged for a product. Ex. Minimum  wage Min. Wage: lowest hourly wage rate that firms may legally pay  their workers  ∙ The unintended consequence of a binding minimum wage is  unemployment cause by: 1. ↓ in quantity demanded for labor  2. ↑ in quantity supplied of labor  3. Firms replacing low-skilled jobs with capital, if possible 4. Firm relocation to countries (or other states) with lower wages 5. Shortening hours for workersExam 1 Study Guide Scarcity: all things that are hard to find. ∙ Water, cars, clothing, diamonds ∙ Scarcity is NOT poverty ∙ If it affects at least one of these three, it’s scarce: 1. Financial assets 2. Time 3. Energy Incentives: Positive and negative incentives (grades) - Unintended consequences… if you don’t get the  incentives right - Economists try to do the lowest incentive they can  provide to get a certain behavior. - Human action is the goal – designed path isn’t  always right Trade-offs: a balance achieved between two desirable but  incompatible features; a compromise. ∙ Always ask what if? Trade: Trade and Comparative Advantage ∙ Does trade create value? YES, redistribution to match  up with people’s preferences makes the value stronger  (example where the students got random candy then  traded so they all got something they like more). Barter: to trade good rather than through the medium of money. Marginal Thinking: Evaluating whether the BENEFIT of acquiring  one more unit of something is greater than its COST. Endogenous factors: factors built into the model. Exogenous factors: factors outside the model that cause it to work less well.Positive statements are testable while normative statements are  opinion.  Opportunity cost: the highest-valued alternative that must be  given up to engage in an activity. ∙ Example from class: Consider the true costs of traveling from Tucson to San Diego by plane or Bus. Suppose: - The bus ticket cost $80 and takes 20 hours r/t - The plane ticket costs $160 and takes 4 hours r/t - Your value travel time at $8 per hour - Should you take the bus or plane? BUS is cheaper,  but if you upped your value travel time to $10 an  hour the plane would be cheaper/ more efficient. Production possibilities curve: Shows the maximum amount of any TWO products that can be produced from a FIXED amount of  resources. Increasing Opportunity Cost 50 4745 40 33 23 0 A to B = Opportunity cost is only 2 servings of gelato F to G = Opportunity cost is 23 servings of gelato  (Master gelato makers had to stop making gelato and start  making pizza)… big opportunity cost of gelato ∙ Every point on line (PPF) is efficient ∙ a point inside the line is not efficient ∙ a point outside the line is not possible How can you shift out the PPF? 1. More resources  2. Better technology  3. More time Notice: the PPC is non-linear, this is known as the law of  increasing relative cost Comparative advantage: states that you can gain by specializing  in producing what you do well and exchanging that production for  something that you would have trouble making. ∙ Absolute Advantage – able to out-perform your competitors *Absolute Advantage is NEVER the right answer in a test ∙ Table shows that Kim is better at mowing the lawn and doing the dishes than Kanye, but Kanye is a better mower than  dish washer so he should mow and Kim should do the dishes. Law of demand: there exists an inverse relationship between the  price of the good and the amount of it buyers are willing to  purchase. Slide or shift? A movement along a demand curve is a result of a price change  alone, known as a change in the quantity demanded. A shift in the entire curve occurs when something other than the  price changes, this is a change in demand. ∙ A shift on the demand curve can be caused by: 1. Changes in income 2. Changes in tastes3. Price of related goods  4. Expectation 5. # of buyers Law of supply: there exists a direct relationship between the price  of the good and the amount of it that will be offered for sale.  *Lower price, less profit for seller A movement along the supply curve is a result of price change  alone, change in quantity supplied. A shift in the entire curve occurs when something other than the  price changes, this is a change in supply. ∙ A shift on the supply curve can be caused by:  1. Input costs 2. Changes in technology 3. Taxes/subsidies 4. Expectations 5. # of sellers Equations of S and D: Demand: Qd=90-2P  Supply: Qs= -30+P Set Qd=Qs Shortage: when quantity demanded is bigger than quantity  supplied. Not enough supplied. Surplus: when quantity supplied is bigger than quantity  demanded. Not enough demanded. Elasticity of demand: the flexibility of consumers desires for a  product. Three determinants of price elasticity: 1. existence of substitutes 2. share of the budget 3. time allowedCalculating elasticity: % change in Q/ % change in P ∙ midpoint formula: Ep= change in Q/(Q1+Q2)/2/change in P/ (P1+P2)/2 Time and adjustment process: as time passes, consumers and  producers are able to find substitutes Perfectly inelastic- vertical line Relatively  inelastic- steep vertical line Ep=%change in Q Ep=small= 0>Ep>- 1  %change in P Big = 0/Big= 0 Relatively elastic- flat, slightly vertical line Perfectly  elastic- horizontal Ep= Big= -1>Ep>-infinity Ep=Big =  -infinity  Small 0 If demand is elastic… A % rise in price brings a greater % fall in quantity demanded.  TR falls. Price and TR change in the opposite direction. If unitary…  A price change leaves TR unchanged. If demand is inelastic… A % rise in price brings a smaller % fall in quantity demanded.  TR rises. Price and TR change in the same direction. Price Controls: government regulation establishing a maximum  price to be charged for certain goods and services. Minimum Wage: the least amount of money you can legally be  paid for a job.Price ceilings: a legally imposed max price, intend to protect  consumers from conditions that could make commodities  prohibitively expensive Price floor: a government or group-imposed price control or limit  on how low a price can be charged for a product. Ex. Minimum  wage Min. Wage: lowest hourly wage rate that firms may legally pay  their workers  ∙ The unintended consequence of a binding minimum wage is  unemployment cause by: 1. ↓ in quantity demanded for labor  2. ↑ in quantity supplied of labor  3. Firms replacing low-skilled jobs with capital, if possible 4. Firm relocation to countries (or other states) with lower wages 5. Shortening hours for workers