ECON200 Midterm Study Guide
ECON200 Midterm Study Guide ECON 200
Popular in Introduction to Microeconomies
Popular in Economcs
This 14 page Study Guide was uploaded by Aaron Jin on Saturday May 2, 2015. The Study Guide belongs to ECON 200 at University of Washington taught by Melissa Knox in Spring 2015. Since its upload, it has received 674 views. For similar materials see Introduction to Microeconomies in Economcs at University of Washington.
Reviews for ECON200 Midterm Study Guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 05/02/15
ECON 200 Midterm Study Guide Constructed by Aaron Jin Note Exams are graded on clarity and accuracy if it is not clear concise and legible you risk loss of credit State any and all assumptions up front Remember that only a simple calculator is allowed This study guide compiles information from class notes lectures homework assignments practice exams and the textbook The notes and the Panapto recordings are resources that are also available to you on the website as well as the practice exams I would highly recommend looking at some of the exams to get a sense of the type of questions you will likely be answering calculation graphing and explanationbased Production Possibilities Frontier Production Possibilities Frontier PPF shows the maximum attainable combination of two products that may be attained given current resources and technology Cars vs Tanks PPF Production Possibilities Frontier Quantity of Tanks Quantity of Cars Economic growth improvement in economy s ability to produce more goods and services in general both sides increase Cars vs Tanks PPF Effect of Economic Growth on PPF Quantity of Tanks Quantity of Cars Technological change in one industry improvement in ability to produce one type of good one side increases other sideproduct unaffected Cars vs Tanks PPF Effect of Technology Change in One Industry on PPF gt Quantity of Tanks Quantity of Cars Use PPFs to consider the benefitpayoff in one produce against the costnecessity of another 0 Opportunity costs highestvalued alternative that must be given up in order to engage in an activity 0 Marginal costs the cost of producing one additional unit of a product Comparative Advantage and Specialization Trade is the act of buying and selling Even if one producer can produce higher quantities of both products both producers still benefit from specializing and trading Distribution of Time Person A Person B Apples Cherries Apples Cherries All time to apples 120 0 108 0 All time to cherries 0 120 0 36 The opportunity cost for Person B picking one cherry is three apples Although Person A has the absolute advantage in both situations Person B has the comparative advantage in picking apples opportunity cost is 13rel cherries for Person A is 1 cherry Quantity of Apples Obtained Apples and Cherries PPF A Apples and Cherries PPF B Combined PPF through comparative m m 120108 208 I advantage I I E E 1 lt lt 103 120 quot5 108 quot5 gt gt 60 60 E E C C g 28 24 g d d m Quantity of Cherries Quantity of Cherries Quantity of Cherries Apples and Cherries without Trade Apples and Cherries with Trade Apples Cherries Apples Cherries A without trade 60 60 A with trade 82 74 B without trade 28 24 B with trade 38 34 I Combined without trade I 88 I 84 I Combined with trade I 120 I 108 0 Absolute Advantage ability of an entity to produce more of a goodservice than its competitors using the same amount of resources 0 Comparative Advantage ability of an entity to produce goodservice at a lower opportunity cost than its competitors 0 The basis for trade is the comparative not absolute advantage Demand and Supply Demand schedule a table that shows the relationship between the price of a product and the quantity demanded Demand curve is the graphical representation of this 0 Quantity demanded the amount of a product that consumers are willing and able to purchase at a given price Law of demand holding everything else constant a decrease in the price of product causes the quantity demanded to increase and a raise in price will cause quantity demanded to decrease o This happens because the product will become cheaper relative to other similar goods so consumers will substitute towards it the substitution effect 0 Could also be that consumer has greater purchase and therefore elects to buy more normal goods overall the income effect I May also be the opposite for inferior goods earn more so purchase less Changes other than price lead to shifts of the demand curve 0 Demand curve shifting to the right signifies an increase in demand D19D2 0 Demand curve shifting to the left signifies a decrease in demand D19 D3 Changes in Demand Representation Price lt gt Quantity 0 Notice that as the demand changes the quantity purchased also changed even if the price does not change Factors that may lead to a shift of the demand curve change in income change in the price of related goods interests and tastes population and demographics eg new generation 0 Substitutes are goods or services that are used for the same purpose Increasing the price lowering demand of Product A will raise demand for the Substitute for A o Complements are goods or services that are used together Increasing the price of Product B will decrease the demand for Complement of B Note the difference between change in demand and change in quantity demanded o A change in price causes a shift along the demand curve change in quantity demanded Change in Quantity Demanded Price l Quantity o Other changes cause a shift of the entire demand curve change in demand Changes in Demand Representation Price Quantity I Much of what applies for demand applies for supply as well Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied Supply curve is the graphical representation of this Law of supply holding everything else constant an increase in the price of a product causes an increase in the quantity supplied and a decrease in price causes decrease in quantity supplied 0 Implication is that the supply curve slopes upward Increase or decrease in supply causes supply curve to shift 0 Supply curve shifting to the right signifies an increase in supply S19S2 0 Supply curve shifting to the left signifies a decrease in supply S19S3 Changes in Supply Representation Price Quantity 0 Notice that as the supply curve shifts the quantity supplied also changes even if the price itself is not changed Factors that may lead to a shift in the supply curve change price of input better technology changing prices of substitutions number of firms in markets expectations for future prices 0 Inputs are resources used in production of goodservice Increasing prices of inputs lead to lower profitability and decreases supply Market equilibrium a situation in which quantity demanded equals quantity supplied Market Equilibrium Market Equilibrium Price E Quantity 0 Areas above the equilibrium will result in surplus Areas below result in shortage Think about how situations influence the supply or demand curves and then translate it to the graph to see how the equilibrium is affected 0 Eg Amazon enters the cellphone market the supply curve of Samsung phones will shift right quantity increases equilibrium price decreases and equilibrium quantity increases 0 Eg increase in income demand curve shifts right equilibrium price increase equilibrium quantity also increases Elasticity Price elasticity of demand is a way to measure responsiveness of demand to price in terms of percentage changes Percentage change in quantity demanded Price elasticity of demand 2 Percentage change in price 0 Demand is elastic when percentage change in quantity demanded is greater than the percentage change in price greater than 1 in absolute value Inelastic if less than 1 0 Will be a negative number since demand has a negative slope quotmore negative larger magnitudeabsolute value is called larger or quothigherquot Because the percentage change from A93 is not necessarily the negative percentage change from Difference of Q Difference of P Average of Q I Average of P 39A we use the midpoint formula price elasticity 2 1 P2 P1 price elastLCLty m Remember to use the mIdpomt formula T T A vertical demand curve quantity demanded does not change as price changes is perfectly inelastic A horizontal demand curve quantity demanded changes infinitely in response to price change is perfectly elastic Determinants of elasticity of demand availability of close substitutes passage of time luxury vs necessity narrowness of market definition and share of good in a consumer s budget Pricing decisions if a product is price inelastic then decreasing the price will only gain a few more customers and total revenue decreases o If a product is price elastic then decreasing the price will gain many more customers and the total revenue increases Market Equilibrium Price Quantity 0 Total revenue is calculated by multiplying the number of customers by the price Price elasticity of demand is estimated using historical data and market experiments percentage change in quantity demanded of one good Crossprice elasticity of demand 2 percentage change in price of another good 0 Used to measure the strength of a substitute or complement relationship between goods o If negative products are complements o If positive products are substitutes Percentage change in quantity demanded Incomeelasticity of demand 2 percentage change in incom 0 Measures the strength of effect of income on the quantity demanded 0 Normal goods have positive income elasticity greater than 0 I Positive and less than 1 normal good and necessity I Positive and greater than 1 normal good and luxury 0 Inferior goods have negative income elasticity less than 0 Percentage change in quantitiy supplied of a good Price elasticity of supply Percentage change in price of same good 0 Time is the main determinant of the price elasticity of supply usually not able to change much in the short term also by ability and willingness of firms to change quantity offered as the price changes I Price elastic magnitude greater than 1 I Price inelastic magnitude less than 1 Consumer and Producer Surplus Consumer surplus the difference the highest price consumer is willing to pay and the price consumers actually pay Total benefit minus total price paid Producer surplus the difference between the lowest price producers are willing to accept and the price producers actually receive Total revenue minus total cost Economic surplus is the sum of the consumer surplus and producer surplus Chai Tea Example Consumer Highest Price Willing to Pay Theresa 6 Tom 5 Terri 4 Tim 3 Actual Price 35 Demand Curve for Chai Tea Consumer Surplus Price Quantity Consumer surplus is calculated by taking the area of the space above the market price and below the demand curve 0 Net benefit How much the consumerproducer benefit from a transaction 0 Theresa is willing to pay 6 so the value is 6 to her Purchases for 3509net benefit is 250 Tom benefits 150 Terri benefits 050 Tim doesn t buy because it s not worth that much to him Producer Surplus lowest price producers are willing to offer a product determined by marginal cost 0 Marginal cost the additional cost to a firm to produce one more unit of a goodservice o Marginal costs increase as quantity produced increases because use of resources will be less productive except in economies of scale Sample Supply Curve Price Producer Surplus Quantity Producer Surplus is calculated by taking the area of the space below the market price and above the supply curve Economic efficiency market is efficient when marginal benefit exceeds marginal cost 0 Market also efficient when maximizes economic surplus Market Equilibrium Output Inefficiently Supplv marginal cost per cunl Low M BgtMC Price Output Inefficiently high MCgtM B Demand marginal benefit per cup Quantity 0 Output is inefficiently low when marginal benefit exceeds marginal cost left of equilibrium 0 Output is inefficiently high when marginal cost exceeds marginal benefit right of equilibrium If the market is not in equilibrium there will likely be a deadweight loss which is a measure of the economic inefficiency of a market Price ceiling legallydetermined maximum price sellers can charge Price floor legallydetermined minimum price sellers may charge Price Ceiling Price E Shortage I A Consumer Surplus Price Quantity Price Floor Surplus Quantity B Deadweight Los s C Producer Surplus I Surplus with price ceiling shortage with price floor When government imposes price controls some benefit some lose and deadweight loss generally occurs 0 Deadweight loss the change usually loss in economic surplus o Imposed because equity effects are more important than efficiency losses Trade and Taxes Taxes are the most important method by which government funds activities 0 Our focus is on perunit taxes as opposed to percentage tax 0 Taxes are always a burden to consumers who actually pay I Sometimes taxes are imposed to affect consumer behavior Suppose 010 gas tax on producers supply curve shifts up by 010 S19S2 Government tax revenue Price 010 Gas Tax on Producers 2 7a Supply curve shifts up 010 Quantity 0 Consumer price raises from 3509358 and producer price from 3509348 358 minus the 010 tax 0 Consumers pay 008 per 010pergallon tax and producers pay 002 I OR consumer tax burden is 80 of the tax I OR consumer tax burden is 010 x 140 billion gallons Suppose 010 tax imposed on consumers demand curve shifts inwards Dl DZ 010 Gas Tax on Consumers Government tax revenue I Paid by 8 Demand curve L consumers a A shifts inward tax is 010 Paid by Producers Quantity I Government tax revenue is calculated by multiplying the taxperunit by the quantity sold 0 Consumers still pay 358 including tax and producers paid 348 0 Tax incidence is still the same as when producers were paying the tax even though consumers may believe that they have a discount I Tax incidence the distribution of the burden of a tax between buyers and sellers in the market 0 Tax incidence is not determined by who pays the taxes but rather by the relative slopes relative elasticities of the demand and supply curves I Steep relatively inelastic buyers not responsive to price changes I Shallow relatively elastic buyers very responsive to price changes Taxes are efficient if there is a small deadweight loss relative to the tax revenue 0 Taxes reduce consumer surplus because of the higher price and reduce consumer surplus because the price received falls International trade has become very important to world economy in past 50 years Countries typically impose high tariffs on imports to encourage consumers to support national firms and producers Comparative advantage is still being able to produce at a lower opportunity cost than someone else Country Output per Hour Opportunity Costs Cell Phones Tablets Cell Phones Tablets Japan 12 6 05 Tablets 2 Phones United States 2 4 2 Tablets 05 Phones 0 Japan has lower cost of producing cell phones and tablets However US has the comparative advantage of producing tablets 0 Calculate amount produced by multiplying output per hour by the number of hours Autarky a state when country produces all goods no international trade 0 Exact distribution of production hours depends on consumer preferences and relative prices Terms of trade ratio at which a country trades its exports for imports from other countries o No country accepts terms of trade that are worse than opportunity cost Reasons we do not have complete specialization 0 Not all goods may be traded internationally 0 Production of many of the same goods causes high opportunity costs 0 Different tasksneeds between countries Comparative advantage may come from climatenatural resources relative abundance of labor or technological differences Note that international trade is only good at the international level which harms national firms and consumers so governments may impose tariffs or quotas When trade is not allowed all domestic consumption will be met by domestic production f trade is allowed and the world price is cheaper then consumers will import ethanol US consumers benefit and US producers suffer Price Floor Price H Jl Price Floor l Quantit 0 US consumption is 9 billion US production is only 3 billion and the remaining 6 93 billion are imported I Also note that the economic surplus includes area A if trade is allowed Voluntary Export Restraints VERs are quotas negotiated between countries suppose tariff used World Price and Tariffs Increase in Quantity Supplied by US Producers Price World Price plus Tariffs World Price Quantity Decrease in US ethanol consumption 0 Economic surplus falls by the yellow areas Government tariff revenue is the area The increase in producer surplus is the orange area I If a quota is imposed instead of a tax the government will not have tax revenue Opposition to World Trade Organization o Antiglobalization forces lesserdeveloped countries have less strict regulations which creates a perception of unfairness national employees unable to compete other country being taken advantage of etc I Globalization the process of countries becoming more open to foreign trade and investment 0 Protectionism restricting trade saves nationa jobs and protects high wages use trade barriers to shield domestic firms from foreign competition Dumping stragtegy where product is sold for a price below marginal cost cost of production 0 Usually used to harm domestic markets potentailly for longterm market power Externalities Externalities are benefitscosts that affect someone who is not directly involved in the production or consumption of a product eg pollution 0 Need to increase cost to incorporate the marginal social cost Cost plus pollution 5fo SocialCost Private Cost E mar Deadweight Loss Quantity Price Optimal level of production for society is Qefficient where the marginal cost to society is equal to the marginal benefit 0 Pmarket is too low and Qmarket is too high cost to society outweighs the benefit to society Externalities may also be positive socialgtprivate benefits eg college education 0 Private benefit benefit received by consumer of good or service 0 Social benefit benefit received by consumer plus externalities Negative externalities tend to result in overproduction or overconsumption Positive externalities tend to result in underproduction Benefit plus College Eeff Social Benefit Price Deadweight Loss Private Benefit Quantity 0 If there are positivenegative externalities then the market equilibrium will not result in the efficient equilibrium it would result in deadweight loss Market failure situation where the market fails to produce the efficient level of output 0 The greater the magnitude of the externality the greater the size of the deadweight loss is likely to be and the greater the extent of the potential market failure Externalities may arise from incomplete property rights or from difficulty enforcing property rights 0 Ex Farmer and paper mill share a stream If no one owns the stream then the paper mill will be free to discharge waste into the stream and render it unusable for the farmer o If farmer owns the stream he may choose to prevent the stream from discharging or choose to allow the paper mill to discharge at a fee that is still beneficial to the farmer 0 Either way good property rights help avoid market failure I Property rights rights that entities have to exclusive use of property including the right to buysell it Coase theorem theorem that private parties can solve externality problems and reach socially efficient output through private bargaining provided property rights are assigned and enforced and that transactions costs are low 0 According to Coase externality problems will be resolved regardless of who owns property rights Two wrongs making a right taxes can cause inefficiencies which can cancel out externality effects 0 Corrective taxes government may impose tax equal to pollution cost utility internalizes the externality supply curve shifts up and market equilibrium will fall to an economically efficient level 0 Taxes work to solve negative externalities because negative externalities cause too much to be produced and taxes reduced the level of output Subsidies amount paid to producers and consumers to encourage production or consumption of a good are used to fix positive externalities Taxes and subsidies that correct the externality problem Pigovian taxes and subsidies 0 Popular because they increase efficiency while bringing in tax revenue which allows inefficiencycausing taxes in other markets to be reduced double dividend of taxation Another solution is commandandcontrol government imposes quantitative limits on amount of pollution or install specific pollutioncontrol devices Attributes of Goods and Services Rivalry one person s consumption of a unit means no one else can consume it Excludability anyone who does not pay for a good cannot consume it o Rival excludable private goods Big Macs running shoes 0 Rival nonexcludable common resources tuna public pasture land 0 Nonrival excludable quasipublic goods Cable TV toll road 0 Nonrival nonexcludable public goods national defense court system Markets tend to be good at providing efficient levels of private goods because only the preferences of the person purchasing matter whereas with the others 0 Little incentive to preserve common resources so often overconsumption tragedy of the commons common resource overused o Profitmarginalization excludes some from quasipublic goods 0 People may enjoy benefits of public goods without paying for them Common resources tend to be overconsumed because they are not exclusive but rival and only able to be consumed by one person negative externality o Ideally people would pay for consumption eg Pigovian taxes
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'