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Econ 201 Midterm Study Guide

by: Amy Marks

Econ 201 Midterm Study Guide ECON 201

Marketplace > University of Oregon > Economcs > ECON 201 > Econ 201 Midterm Study Guide
Amy Marks
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Here's an Intro to Economics midterm study guide, covering chapters 1-5 which includes 5 basic foundations, supply and demand, elasticity, trade, and price controls. Hope this is helpful!
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This 7 page Study Guide was uploaded by Amy Marks on Monday April 27, 2015. The Study Guide belongs to ECON 201 at University of Oregon taught by Fitch-Fleischmann in Spring 2015. Since its upload, it has received 367 views. For similar materials see Microeconomics in Economcs at University of Oregon.


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Date Created: 04/27/15
ECON 201 Midterm Review Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants Microeconomics is the study of the individual units that make up the economy Scarcity describes the limited nature of society s resources 5 Economic Foundations 1 Incentives factors that motivate a person to act or exert force encourage action ex endofyear bonuses for yearly hard work also encourage action ex fear of speed ticket makes motorist drive speed limit ex mow my lawn and I ll pay you 50 ex welfare while maintaining incentive to look for jobs ex people who were supposed to use government assistance as a safety net until they can find a job but use it as permanent source of income 2 Tradeoffs giving up one thing in return for another Ex paying for a college education can require spending tens of thousands of dollars that might be used elsewhere instead 3 Opportunity costs value of whatever you sacrificed in order to get alternative Ex 2 invitations hiking or concert for the same time Cost of going to the concert is lost opportunity to be on a hike and vice versa 4 Marginal thinking evaluation of whether the benefit of one more unit of something is greater than its cost is the process of systematically evaluating a course of action breaks down decisions into smaller choices Ex Cleaning bathrooms vacuuming house etc but not dusting under refrigerator because it requires significant effort for small benefit 5 Trade creates value both voluntary participants and both get value bring buyers and sellers together to exchange goods and services is the voluntary exchange of goods and services between 2 or more parties both sides are better off in the end is when someone can produce at a lower opportunity cost than a competitor can it harnesses the power of is when producer requires smaller amount of inputs to produce good For 2 people to gain from trade price of good must lie between the 2 opportunity costs Model Building and Gains from Trade Positive and Normative Statements It is important that we separate our beliefs about what is desirable from what we believe to be true or false Ican be classified as true or false ex The unemployment rate is 8 cannot be classified as true or false usually opinions ex Kanye makes better music than Metallica Economists as Policy Advisors Rarely give straightforward advice because all choices involve tradeoffs The right choice depends what end result you want Production Possibilities FrontierPPF Illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently EXAMPLE Wheat and Tv s in Mexico and the US Ouanitity TV s produced 200 0 US Wheat and TV39s Production 0 Mexico Wheat and TV Production 200 150 1 00 100 50 50 0 0 O O 1 0 Quantity of Wheat produced TV s Wheat US 200 100 Mexico 50 50 US Opportunity Cost of 1 TV is 12 Wheat 100200 Opportunity Cost of 1 200100 Mexico Opportunity Cost of 1 TV is 1 Wheat 5050 Opportunity Cost of 1 Mexico has comparative advantage in Wheat production because Opp Cost is lower US has comparative advantage in TV production because Opp Cost is lower Trade 1 Wheat for If US is at 50100 on graph and Mexico is at 500 WheatTV TRADE 25 Wheat for TV at 15 25 x 15375 TV After Trade US 75 625 Mexico 25 375 Specialization Allows for gains from trade Each will maximize their own consumption by specializing in the task for which they have comparative advantage Law of Increasing Relative Cost Opportunity cost of producing good rises as a society produces more of it Types of goods Consumer goods are produced for present consumption ex food movies Capital goods help in the production of other valuable goods and services in the future ex factory Markets resources are allocated among households and firms with little or no government interference Market Outcomes of interest Quantity Price W of good can affect these outcomes is one with so many buyers and sellers that each only has a small impact on the market price and output no variation in the service or good is where either the buyer or the seller has influence on the market price Demand Demand is when an individual or group wants something so much they pay or trade for it is the amount of a good or service purchased at the current price states that if all else is equal the quantity demanded of a good falls as the price rises table that shows relationship between price of good and quantity demanded sum of all individual quantities demanded by each buyer in market at each price Factors that shift Demand Curve Income purchased more as income rises ex designer clothes luxury causes purchased out of necessity ex generic brand public transportation 2 oods used in place of each other ex coke and pepsi Tastes Expectations Number of buyers Supply amount of good or service producers are willing and able to sell at current price states all other things being equal quantity supplied of good rises as price of good rises and falls when price of good falls table that shows relationship between price of good and quantity supplied sum of the quantities supplied by each seller at each price Factors that shift Supply Curve Input Costs Resources used in the production process ex workers equipment TaxesSubsidies Tax makes a firm less profitable and less profits make them less willing to supply product Number of Sellers Technology Allows producer to increase output with same resources or produce given level of output with fewer resources Pnc Snail Cutm 39 0 4 I Quantity Supplied Price is the only thing that causes a movement along the S or D curve Changes in other things shift the curves Equilibrium Occurs at the point where the supply and demand curve intersect price where Quantity SuppliedQuantity Demanded also known as market clearin price i occurs when quantity supplied is less than quantity demanded QsltQd occurs when quantity supplied is greater than quantity demanded QsgtQd Supply and Demand PRlCE Equilbriwn u L 1 08 OUANYITY Price and Quantity when Supply or Demand Change 1 Demand increases but supply doesn t changeDemand curve shifts right and Equilibrium price and quantity increase 2 Supply increases but demand doesn39t changeSupply curve shifts right Equilibrium price decreases and Equilibrium quantity increases 3 Demand decreases but supply doesn39t changeDemand curve shifts left and Equilibrium price and quantity decrease 4 Supply decreases but demand doesn39t changeSupply curve shifts left Equilibrium price increases and Equilibrium quantity decreases Elasticity Measures the responsiveness of buyers and sellers to changes in price or income Price Elasticity of Demand Measures the responsiveness of quantity demanded to change in price Ed Change in Qd Change in Price Determinants Demand is more elastic over time Immediate no time to adjust Short Run partially adjust Long Run fully adjust Elasticity and Demand Curve price doesn39t matter Ed 0 price is less important than quantity purchased 0 gt Ed gt 1 price and quantity are equally important Ed 1 price is more important than quantity purchased 1 gt Ed gt 00 price is everything Ed gt 0 Total Revenue Amount that consumers pay and sellers receive for good Price X Quantity IF lEdl gt1 Demand Elastic IF lEdl lt1 Demand Elastic Income Elasticity of Demand Measures how a change in income affects spending EI Change Qd of X Change in Income of X El gt O for Normal goods 0 to 1 for necessities gt 1 for luxuries El lt 0 for Inferior goods CrossPrice Elasticity of Demand Measures the responsiveness of quantity demanded of one good to change in price of related good Ec Change Qd of X Change in Price of Y Ec gt O for substitutes Ec lt O for complements Ec 0 if no relationship Price of Elasticity of Supply Measures responsiveness of quantity supplied to change in price Es Change in Qs of X Change in Price of X Determinants ex spare production capacity extra inventory Price Controls An attempt to set prices through government involvement in the market Price Ceilings Le ally established maximum prices for goods or services h when a price ceiling is above the equilibrium price unusual because usually no compelling reason to set price filing above equilibrium price when a price ceiling is below the market price it creates a binding restraint that prevents supply and demand from clearing the market this establishes the black market Consequences of Price Ceilings are illegal markets that arise when price controls are in place Shonage Customers waiting in line Reduced quality Binding Price Ceilings in the long run Increased elasticity on part of both producers and consumers Shortage larger than in the short run Consumers adjust demand to lower price and want more product Producers adjust supply and make less of unprofitable product Products become harder to find Price Ceilings and Economic Activity price ceiling that applies to housing market Local government caps the price of apartment rentals to keep housing affordable Causes instead of affordable living places temporary ceiling on prices that sellers can charge during times of national emergency until markets function normally again Shifts demand curve to the right and causes new equilibrium price to rise above legal limitshortage Price Floors A legally established minimum price for a good price is re ulated by supply and demand creates o eliminate the glut of the product and Consequences of Price Floors is the lowest hourly wage rate that firms may legally pay workers Minimum wage and because only wa es above it are legal Ex sugar cheaper in Canada where they don39t grow sugar Binding Price Floors in the long run Supply and demand become more elastic Larger surplus Black market develops


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