×
Log in to StudySoup
Get Full Access to UT - ECO 301 - Study Guide - Midterm
Join StudySoup for FREE
Get Full Access to UT - ECO 301 - Study Guide - Midterm

Already have an account? Login here
×
Reset your password

eco 301

eco 301

Description

School: University of Texas at Austin
Department: Economics
Course: Introduction to Economics
Professor: Schneider
Term: Summer 2015
Tags:
Cost: 50
Name: Introduction to Economics (ECO 301) Study Guide for Midterm 1 (Chapter 1-5)
Description: This is the Ultimate Study Guide for next week's Midterm. This cover guide covers exactly what will be on the exam, which is everything from chapter 1 to chapter 5. Good Luck!
Uploaded: 10/05/2017
18 Pages 10 Views 10 Unlocks
Reviews


Erick Razo MIDTERM 1 Professor Shamoun


What is Capital Goods?



Introduction to Economics (ECO 301)

Midterm 1 Study Guide

Chapter 1-5

Highlight= Important Concept

Highlight= Important Term

Chapter​ ​1​ ​—​ ​Ten​ ​Principles​ ​of​ ​Economics: 

● Scarcity: 

○ “The Idea of how much you want of certain goods and services and how much there is actually available”

○ Having seemingly unlimited human wants in a world of limited resources.

● The​ ​Ten​ ​Principles​ ​of​ ​Economics:

1. Life​ ​is​ ​about​ ​Tradeoffs 

a. There is nothing free.

b. One is always trading off

something

2. Opportunity​ ​Cost 

a. “The highest valued

alternative that you MUST

give up to engage in an

activity”

b. TOTAL COST= Actual cost

+ Opportunity Cost

3. Thinking​ ​at​ ​the​ ​Margin 

a. “To evaluate whether the

benefit of acquiring one


What are the Ten Principles of Economics?



more unit of something is

greater than its cost”

4. Incentives​ ​Matter 

a. “Something that Induces a

person to Act

5. Trade​ ​is​ ​Beneficial 

a. Voluntary trade can make

everyone better off.

6. Markets​ ​are​ ​often​ ​best​ ​at If you want to learn more check out rosalind jeffries

organizing​ ​economic​ ​activity 

a. Adam Smith’s “Invisible 

Hand” guides people’s

self-interest into promoting

7. Rule​ ​of​ ​law​ ​can​ ​improve​ ​Market 

Outcome 

a. Governments can interfere

in the Economy if there is a

Market Failure 

b. Market Power: One

company in control of

market

8. Follow​ ​the​ ​Productivity 

a. Productivity: 

i. “It describes how

much output (goods

and services) that

can be produced in

one man-hour”

9. Prices​ ​rise​ ​when​ ​you​ ​print 


What are the Steps to Scientific Method?



a. Printing more money Don't forget about the age old question of deskinesia

decreases the value of

money

b. Inflation 

10.Short-Run​ ​Tradeoffs​ ​Between 

Inflation​ ​and​ ​Unemployment 

a. When inflation is low,

unemployment increases

and vice-versa

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

society’s economic

well-being

Chapter​ ​2​ ​—​ ​ ​Thinking​ ​like​ ​an​ ​Economist: 

● Scientific​ ​Method 

○ Steps​ ​to​ ​Scientific​ ​Method If you want to learn more check out egyptian civilization quizlet

■ Observation

■ Question

■ Hypothesis

■ Gather Data

■ Test the Hypothesis

● REJECT

■ Fail to Reject

■ Theory

● Positive​ ​and​ ​Normative​ ​Statements: 

○ Positive Statements 

■ It is a statement of fact: it describes how the world IS and one can test it with the scientific method

○ Normative Statements: 

■ “It is a value-judgement: it describes how the world OUGHT to be.

● Macroeconomics​ ​vs.​ ​Microeconomics 

○ Microeconomics: 

■ “The study of how indiv households and firms make decisions and how they interact with the market”

○ Macroeconomics: 

■ “The study of economics-wide phenomenon

● If it talks about government and policy, it is most likely Macro

● Models​ ​of​ ​Economics: 

○ Model: 

■ “A simple representation of some aspect of the world. Models can be graphical, theoretical, or mathematical.”

● Models should fit reality and not vice-versa

● Models are judged by how they predict

○ Tradeoffs​ ​in​ ​Models:

■ Signal: 

● “Pattern underlying the data”

● A model that is better at detecting the signal, is also better at predicting

■ Noise: 

● “Random fluctuationDon't forget about the age old question of what is vicariance?

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● A model that picks up more noise may be better at explaining anecdotes,

but worse at predicting.

● The​ ​Production​ ​Possibilities​ ​Frontier​ ​(PPF) 

○ “It is a graphical representation of the maximum amount of any two products that can be produced from a fixed set of resources.”

○ Opportunity Cost: 

■ “The highest valued alternative that you MUST give up to engage in an activity” ■ Don't forget about the age old question of econ 2001.01 osu

○ Points​ ​on​ ​PPG

■ ON the Frontier are POSSIBLE and EFFICIENT

■ UNDER the Frontier are POSSIBLE and INEFFICIENT

■ OUTSIDE of the Frontier are IMPOSSIBLE for the current economy

○ Translation​ ​of​ ​PPF

■ Outward Shift:

● Increase in means of Production

○ Land, labour, capital, entrepreneurship

Inward Shift

● Decrease in resources

○ Consumer Goods 

■ “Goods used for Personal satisfaction”

○ Capital Goods: 

■ “Goods used to produce other goods”

○ Trade-Off​ ​between​ ​Consumer​ ​and​ ​Capital​ ​goods.

■ If people decide to save and put their

money in the bank in a way that another

person can use it to create something

new.

● This allows for a shift in the If you want to learn more check out bind 305 study guide

Production Possibilities Curve.

● The x-axis on the graphs to the right

represent the Percentage of

consumption of goods and the y-axis the on of capital goods.

● If one starts near the y-intercept, it’s most likely going to shift the PPF to

the right.

Chapter​ ​3​ ​—​ ​Interdependence​ ​and​ ​the​ ​Gains​ ​From​ ​Trade 

● David​ ​Ricardo’s​ ​Great​ ​Insight 

○ Trade can achieve the impossible

○ Having equal abilities is a disaster

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Comparative Advantage 

○ “You can gain by specializing in producing what you do well and exchanging that production for something that you would have trouble making.”

○ Ex.​ ​Friday​ ​and​ ​Crusoe 

■ `Suppose we have Crusoe and Friday stranded on an island. Friday is better than crusoe at plucking apples, whereas crusoe is better than Friday at catching rabbits. Assume 10h work-day

Productivity

Apples

Rabbits

C

10kg/h

2r/h

F

15kg/h

1r/h

Impacts of

DOL

Before

After

50kg; 10r

20r

62.5kg;

12.5r

75kg; 5r

150kg

87.5kg;

7.5r

● FInd the

difference

between TOTAL

after and before

and split that in

half

● Add that to each indiv number

● 150kg-125Kg=25 ● 25/2

● How​ ​do​ ​we​ ​figure​ ​out​ ​who​ ​does​ ​what?​ ​Opportunity​ ​Cost

Crusoe

10a= 2r

5a= 1r

→ Rabbits

Friday

15= 1r

→ Apples

● Friday is Comparatively better at APPLES

● Crusoe is comparatively better at RABBITS

● Production​ ​Possibilities​ ​Frontier

★ It is a straight line because each item is

traded off equally (Opportunity cost is

constant)

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

★ The Economy is the orange line.

★ The red line shows the shift in the

economy's Production possibilities

frontier

● Absolute Advantage: 

○ “The ability to produce a good using fewer inputs than another producer” ● Absolute Equality: 

○ “Everyone is equal in their ability to produce. I.e. they use all the same number of outputs

Chapter 4 — The Market Forces of Supply and Demand 

● Market​ ​and​ ​Competition: 

○ Market: 

■ “A group of buyers and sellers of a particular good or service”

○ Competition: 

■ “The method used under social cooperation to improve one’s welfare”

● Demand 

○ Law​ ​of​ ​Demand: 

■ “Ceteris Paribus, there is an inverse relationship between the price of a good or service and the quality that people are willing to buy of that good and service.” ■ Quantity Demanded is dependent on price

■ Ex. If the price of beer decreases the quantity demanded will increase

● Reasons​ ​for​ ​Downward​ ​Slope

○ Income​ ​Effect/​ ​Scarcity 

■ Holding your income constant, if the price of a good or service increases then you have less money to spend on.

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

○ Diminishing​ ​Marginal​ ​Utility 

■ This law states that as one’s consumption of a product increases, there is a decrease in the marginal utility that occurs when that person consumes

each additional unit of that product.

■ One can see utility as one’s happiness.

■ Ex. How much happiness do you get as the number of ice cream you

consume increase

○ Substitution​ ​Effect 

■ If the price of a good or service increase, then you switch to buying

substitutes.

● Movement​ ​Along​ ​the​ ​Demand​ ​vs.​ ​Shifts​ ​in​ ​Demand 

○ They are NOT the same

○ Movement​ ​along​ ​Demand

■ Results from a price change alone

■ This is known as change in the quantity demanded

○ Shift​ ​in​ ​the​ ​Demand

■ Occurs when something OTHER than price changes

● This is called a Change in Demand

● Determinants​ ​of​ ​Demand 

1. Change in Income

2. Change in Taste (preferences)

3. Change in the price of related goods (substitutes or complementary)

4. Change in the number of buyers

5. Change in Expectations

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Determinants​ ​of​ ​Demand​ ​Explanation 

1. Change​ ​in​ ​Income

i. Ex. If you get a raise you might be able to afford to buy more ice cream

ii. Inferior Goods 

1. You quit your job to go back to College, so there is an increase of demand of inferior goods, such as ramen noodles and vice-versa.

2. Change​ ​in​ ​Preference

i. Ex. If an article came out stating that consuming an Ice Cream a day can reduce your chances of developing colon cancer, then the demand for Ice Cream would increase.

3. Change​ ​in​ ​the​ ​Price​ ​of​ ​Related​ ​goods

i. Substitutes 

1. Ex. If the price of Guinness beer increases (leftward movement), then the demand of Bud Light will increase.

a. This is because people will not want to spend more money on a

Guinness, when they can jut can a cheaper Bud Light.

ii. Compliments 

1. Ex. If the price of strawberries increases, the demand of whip cream will

decrease.

a. This is because typically strawberries go together.

4. Change​ ​in​ ​the​ ​number​ ​of​ ​buyers

i. Ex. If population decreases so will the demand of Diapers

5. Change​ ​in​ ​Expectations

i. “What you expect to happen in the future affects your actions right now.

ii. Ex. Incandescent light bulbs will be banned next year

1. You are going to increase your purchase of light bulbs now,as you

predicted the future.

iii. Ex. When the new IPhone come out, the old one will decrease in price.

● Supply 

○ The​ ​Law​ ​of​ ​Supply 

■ “Ceteris Paribus, there is a direct relationship between the price of a good or a service and the quality that people are willing to supply of that good and service” ■ If you get paid more, you will do more

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Reasons​ ​for​ ​Upward-Slope 

○ As the price of a good or service increases, the producer attains more revenue, incentivizing them to produce more of that good or service, as the main goal of a producer is to make as much profit as they can.”

● Movement​ ​along​ ​Supply​ ​Vs.​ ​Shifts​ ​in​ ​Supply 

○ Movement along Supply

■ Results from a price change

■ Change in the quantity demanded

○ Shifts of Supply

■ Occurs when some thing other than price changes

■ This is a change in supply

● Determinants​ ​of​ ​Supply 

1. Change in Input Cost

2. Change in Technology

3. Change in Government Policy

4. Change in the Number of Sellers

5. Change in Expectations

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Determinants​ ​of​ ​Demand​ ​Explanations 

1. Change​ ​in​ ​Input​ ​Cost

i. Ex. If price of sugar decreases, then the supply of Ice Cream will Increase and Vice-Versa

2. Change​ ​in​ ​Technology

i. Ex. Invention of Ice Cream Scooper Increased the supply of Ice Cream, making it easier to to produce more.

1. Higher productivity means higher supply 

ii. MOSTLY a change in technology implies an increase in supply.

3. Change​ ​in​ ​Government​ ​Policy

i. Ex. A new tax exempts all organic Ice Cream producers from paying taxes (Increase in Supply)

1. Organic Ice Cream producers will now have more money to produce their product

ii. Ex. If the Government requires Ice Cream companies to provide nutritional facts (Decrease in Supply)

1. Ice Cream companies will now have to spend money on the making of

nutritional Facts labels, which means that they will have less money to

produce Ice Cream.

4. Change​ ​in​ ​Numbers​ ​of​ ​Sellers

i. Ex. More people opt to sell their organs (Increase in the supply of Organs) ii. Ex. Uber and lyft leave the market for ride-sharing (Decrease in supply) 5. Change​ ​in​ ​Expectations

i. Ex. The Economy is going to bust and housing prices will decrease (Supply Will Increase)

1. One is going to want to sell your house NOW)

ii. Ex. If the Economy sucks right now, but housing prices should pick up next year (Supply will decrease)

1. People are going to wait to sell their houses.

● Supply​ ​and​ ​Demand​ ​Together 

○ Supply

■ Determines producers side of the equation

○ Demand

■ Determines the consumer side of the equation

○ Market Equilibrium: 

■ The place where the quantity demanded and the quantity supplied are equal and the market is balanced

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

■ The Price at the Equilibrium is the Market Price (Equilibrium Price) and the quantity at the Equilibrium is called the Equilibrium Quantity.

● Analysing​ ​Change​ ​in​ ​Equilibrium ○ Three​ ​Steps:

★ Quantity Demanded is higher than

quantity supplied before the equilibrium. ★ When you are at equilibrium, the quantity demanded and quantity supplied are

equal.

★ Prices are constantly adjusted to reach equilibrium.

1. Decide which curve shifts (Demand, supply, both) 2. Determine the direction of the shift

3. Use the Diagram to determine what happens to the equilibrium price/equilibrium quantity

● Ex. Hidsucker Proxy (1994)

○ Context:

■ Nobody wanted to buy Hula-Hoops so a store owner that sold hula-Hoops began decreasing the price until he reached $0.

■ A small kid began playing with the Hula-hoop and attracted the attention of all of his friends, so everybody headed to the store-owner’s store to buy hula-hoops.

■ Seeing all of this new clientele, the store owner increased the price of the hula-hoops from free to $3.94

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

Chapter 5 — Elasticity 

● Elasticity​ ​of​ ​Demand 

★ Steps 

1. The Craze= change in

preference= Demand Curve

Shifts

2. The Craze causes Demand to

Shift out

3. The Equilibrium Price and

quantity increase after the craze

○ Refers to the responsiveness of the quantity demanded of a good to a change in: ■ Price of that good (Price Elasticity)

■ Income (Income Elasticity)

■ The price of another good (Cross Elasticity)

○ Price​ ​Elasticity​ ​of​ ​Demand

■ Ex. Why does Royal Blue Groceries get customers, when their prices a so much higher than competitors.

● Because of the convenience of their location (Downtown Austin) and how much people need these goods

■ Determinants​ ​of​ ​Price​ ​Elasticity 

1. Substitutes 

a. If there is availability of close substitute

i. It's is easier to ESCAPE a price increase to the good that

has the substitute

ii. Which means that the demand is more elastic

b. Ex. Eggs and Butter

i. Demand is more elastic for butter than for eggs because

butter is has more substitutes

2. Necessities​ ​vs.​ ​Luxuries 

a. Luxury good= easier to ESCAPE from when their price rises.

i. More elastic demand

b. Necessities are difficult to Escape from when their prices rise

i. More Inelastic Demand

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

c. Ex. Yachts Vs. Cars

i. A Yacht is easy to escape = Elastic

ii. Car is more difficult to escape = Inelastic

iii. In other words, because one needs the car more than the

Yachts, a change in price in cars won’t make your demand

change that much in comparison to if a Yacht’s price

increase.

3. Time​ ​Horizon 

a. Longer time Horizon= More time to adjust to (Escape) price

changes

i. More elastic Demand

b. Shorter Time Horizon= Less time to adjust (Escape) price change)

i. More Inelastic demand

ii. Ex. When you’re on “empty’ in your car tank, then you have

a short time horizon meaning that you won’t really care too

much about the cost of gas and you’ll go to the first one you

find = the demand is Inelastic

iii. The future is always more elastic than the present

4. Definition​ ​of​ ​the​ ​Market 

a. Narrowly defined markets are easier to escape

i. More elastic demand

b. Broadly defined markets are more difficult to escape

i. More Inelastic demand

c. Ex. If the market is defined as “The market for IPhone 8 phones”

people can escape easier than if it's the market for phones in

general.

● Calculating​ ​Elasticity​ ​of​ ​Demand

(Q −Q ) 2 1 

(Q +Q ) 212 1 

Midpoint formula → ElasticityP= εp=

P −P 2 1 

212 1

(P +P )

|Elasticity| < 1

|Elasticity| = 1

|Elasticity| > 1

● Inelastic

● **Raise price

● Unitary Elastic

● **Sweet Point**

● Elastic

● *Reduce

Price*

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Ex. Relationship between Tuition cost and Enrollment at UT

Academic

Year

Undergraduate

Enrollment

Undergraduate

Enrollment

2014-2015

9,930

$39,523

2015-2016

10,064

$39,00

ElasticityP=

(39,000−39,523)

(39,000+39,523) 21 

εp= .052

= − 0

$10,064−$9,930

($10,064+$9,930) 21 

★ Inelastic Demand

★ Negative Captures the

Law of Demand

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Elasticity​ ​and​ ​Revenue 

○ Revenue 

■ “When you multiply the price of a good or service by the number of sells, that is your revenue”

■ Changing the price

● If elastic

○ You lose revenue

● If inelastic

○ You gain revenue

○ INcrease for INelastic. 

■ Ex. Seinfeld

● Jerry Seinfeld found a jacket that he liked so much that he did not care

how much money he had to spend on it (For him, the product had Inelastic

demand). His friend George, disagreed with the purchase (Elastic

Demand)

● The​ ​Different​ ​Demand​ ​Curves 

○ Perfectly​ ​Inelastic

★ One would be able to pay anything to get this product.

★ This illustrates that regardless of cost, the quantity demanded stays constant

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Relatively​ ​Inelastic 

● Relatively​ ​Elastic

★ The responsiveness to a change of price is not extreme

★ Ex. Cigarettes

○ If the price of cigarettes

increases, most of it’s

consumers will keep buying

them, but not as much as

before

★ A change in Price will make a

response on the public

★ Things that have substituted

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Perfectly​ ​Elastic 

● Price Elasticity of Supply 

★ Even a minimal change price, will alter the Quantity demanded dramatically ★ Ex. Dollar Bill

★ Ex. The price of Gas at different gas stations only differs by cents

○ “Refers to the Responsiveness of the quantity supplied of a good to a change in the price of that good’

○ Time​ ​Horizon

■ Is the most important determinant to the elasticity of supply

■ Physical limitation of time = physical limitation of supply

● Ex. One cannot extend the number of hours a day, one can only work for a certain amount of time

● The​ ​Different​ ​Supply​ ​Curves 

Perfectly​ ​Inelastic Relatively​ ​Inelastic

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

Relatively​ ​Elastic Perfectly​ ​Elastic 

● Calculating​ ​Income​ ​Elasticity​ ​of​ ​Demand 

○ “Income Elasticity of demand for good “x” as a result of a change in the income from I1 to I2is:

(Q −Q ) 2 1 

(Q +Q ) 212 1

Midpoint formula → ElasticityI= εI=I −I 2 1 

212 1

(I +I )

● Income​ ​Elasticity​ ​of​ ​Demand

|Elasticity| < 1

0 < |Elasticity| < 1

|Elasticity| > 1

● Inferior Good

● Normal -- Necessity

● Normal -- Luxury

Erick Razo MIDTERM 1 Professor Shamoun

Introduction to Economics (ECO 301)

● Calculating​ ​Cross-Price​ ​Elasticity​ ​of​ ​Demand 

○ “Cross-price Elasticity of demand for good “x” as a result of a change in the price of good “y”

(Q −Q ) x2 x1 

(Q +Q ) 21x2 x1 

Midpoint formula → ElasticityC= εc=

P −P y2 y1

21y2 y1

(P +P )

● Cross​ ​Price​ ​Elasticity

|Elasticity| < 0

|Elasticity| = 0

|Elasticity| > 0

● Compliments

● Not Related

● Substitutes

Page Expired
5off
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here