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CSU / Economics / ECON 202 / What are the usual challenges of production?

What are the usual challenges of production?

What are the usual challenges of production?


School: Colorado State University
Department: Economics
Course: Principles of Microeconomics
Professor: Joshua hess
Term: Spring 2017
Tags: supply and demand, elasticity, consumer surplus, Opportunity Cost, and Econ; Economics; Mircroeconomics; Principles of Economics; Demand; Supply; opportunity cost
Cost: 50
Name: ECON 202: Microeconomics Exam 1 Study Guide Colorado State University
Description: Chapter 1: "Core Issues" Chapter 3: Supply & Demand Chapter 5: Consumer Choice Chapter 6: Elasticity
Uploaded: 01/26/2018
7 Pages 221 Views 3 Unlocks

ECON 202: Exam #1 Study Guide 

What are the usual challenges of production?

Chapter 1:

- Scarcity

o Definition: a lack of enough resources to satisfy all desired uses of  those resources

 This means that someone’s wants will go unfulfilled

 Scarcity forces/requires economic choices to be made

o Factors of Production:

 Land

∙ All natural resources

 Labor

∙ Skills and abilities of all people at work

 Capital

∙ Goods produced for use in further production

 Entreprenuership

∙ Assembling of resources to produce new  

o Limited Resources:

 Requires choices and tradeoffs to be made

Who are the market participants?

 The science of economics helps us to frame these choices

“This tradeoff comes with a cost” 

- Opportunity Cost

o Definition: The most desired goods or services forgone to obtain  something else

 These costs are associated with every decision we make

 The “next best thing” is given up

- Production Possibilities Model

o Illustrates concepts of scarcity, tradeoffs, and opportunity costs - The combination of final goods and services that could be produced  

- Production Possibilities Curve (PPC):

o Points outside the PPC are Unattainable

o Points on the PPC are Attainable AND Efficient

o Points inside the PPC are Attainable but NOT efficient

Which principle refers to the assumption that nothing else is changing?

We also discuss several other topics like Do return strategies truly make consumers happy?

- Economic Growth will cause the PPC to shift outward

- Market Participants:

o Consumers: maximize the utility (satisfactions of unmet wants) then  can get from available incomes

o Businesses: maximize profits by selling goods that satisfy while  keeping costs low

o Government: maximize the general welfare of society

These motives explain most market activity

Chapter 3:

- Specialization and Trade:

o Most of us cannot produce everything that we want to consume:  Time, talent, and resources constraints

o We should specialize and produce what we can at a lower opportunity  cost than others

o Produce more than we need for ourselves and trade the excess for the  goods we want to consume (which are produces by other specialists).  - Locating Markets:

o A market exists wherever an exchange (transaction) takes place. o Every market transaction involves an exchange of dollars for goods  and service (in produce markets) or resources (in factor markets).  In the circular flow, goods and services or resources flow one  way, and dollars flow the opposite way.

- The Circular Flow:

 Two markets (factor market and product market) and four participants If you want to learn more check out Where are microglia produced?

o Consumers:

 They are owners of factors and production (e.g. labor) who  

supply them to business firms in the factor market and earn  


 They purchase goods and services in the product market

o Business Firms:

 The produce goods and services for the product market using  the factors of production they bought from their owners in the  

factor market.

o Governments:

 They acquire resources in the factor market and provide  

services to both consumers and firms.

o International Participants:

 They supply imports and purchase exports in the product  

market and buy and sell resources in the factor market. Don't forget about the age old question of Which racial violence kept blocks from voting?

- Supply and Demand:

o Supply: the ability and willingness to sell specific quantities of a good  at alternative prices in a given time period, ceteris paribus

o Demand: the ability and willingness to buy specific quantities of a  good at alternative prices in a given time period, ceteris paribus. o Ceteris Paribus: the assumption that nothing else is changing. - The Law of Demand:

o In a given time period, the quantity demanded of a good increases as  its price falls, ceteris paribus (and vice versa).

 Inverse relationship between price (P) and quantity demanded  (Qd)

 A downward-sloping curve on a market diagram

- Individual Demand and Market Demand:

Each of us has a demand for a good or service if we are willing and able to pay for it.

 The amount we buy depends on its price

 If the price goes up, we buy less.

 If the price goes down, we buy more.

 Market demand in the collective summation of all buyer’s individual demands

- Quantity Demanded is a single point on the demand curve or schedule - Demand is the entire schedule or curve

*A movement along the demand curve is a change in quantity demanded* - Movements vs. Shifts If you want to learn more check out What problems were created by the developments in the 19th century?

o Change in quantity demanded: movement along a demand curve in response to a change in price

o Change in demand: A shift of the demand curve due to a change in one ofr more of the determinants of demand, but Not in response to a change in price

- Movement along the curve: buyer’s behavior does not change, buyers only  react to a price change  

- Shift the curve: buyers’ behavior does change.

- Law of Supply

o The quantity of a god supplied in a given time period increases as its  price increases, ceteris paribus, and vice versa

o Direct relationship between price (P) and quantity supplied (Qs). o It is an upward-sloping curve on a market diagram.

- Factors that Set Supply Behavior (Determinants of Supply)

1. Technoogy

2. Factor Costs If you want to learn more check out What is the basic idea of psychoanalytic theory?

3. Taxes and subsidies

4. Expectations

5. Other goods

Substitute in production

6. Number of sellers

- If any of these factors change, supply behavior changes. This type of change  is shown by shifting the supply curve.

o Increase in supply: shift the entire curve RIGHT

o Decrease in supply: shift the entire curve LEFT

- Individual Supply and Market Supply  

o Each producer is willing and able to produce a good or service if he or  she can make a profit.  

o The amount produced depends on its price.

o If the price goes up, more will be produced.

o If the price goes down, less will be produced.

o Market supply is the collective summation of all producers’ individual  supplies.

- Movements vs. Shifts

o Change in quantity supplied: movement along the supply curve due to a change in price. We also discuss several other topics like How effectively a population can adapt when the environment changes?

- Change in supply: a shift in the supply curve due to one or more changes in the determinants of supply, but NOT in response to a change in price.  

- Quantity Supplied > Quantity Demanded = Surplus

- Quantity Supplied < Quantity Demanded = Shortage

- Price floors: the lowest price that a good or service could be sold at in a  particular market

o “non- binding price floor” = the price will not exceed equilibrium price  There will be a shortage

o “binding price floor” = the price can exceed the equilibrium price  There will be a surplus

 Minimum wage

- Price ceilings: the maximum that can be charged for a particular good/service o “non-binding ceiling” = the price can exceed the equilibrium price  There will be a surplus

 Rent control

o “binding ceiling” = The price will not exceed equilibrium price  There will be a shortage

Chapter 5:

We refer to people as consumers when thinking about how they spend their income

Everyone is both a producer and a consumer, but we study producer and consumer  choice differently

- Consumer Choice:

o Factors that affect consumer decisions:

 How do we decide how much of any good to buy?

 Why do we feel so good about our purchases?

 Why do we buy certain products but not others?

- Wants vs. Demands

o Why do we want to consume goods?

 Out of necessity

 For enjoyment

 To display status or identity

We can’t buy all the things that we want

As economists we study demand:

Demand = willingness and ability to buy specific quantities of goods at  a given time across a range of prices, all else equal

- Determinants of Demand:

o Four factors determine an individual’s demand for a product:  Tastes – a desire for this and other goods

 Income – of the consumer

 Expectations – of income, prices, and tastes

 Related goods – their availability and prices

- Utility:

o The more pleasure (satisfaction, utility) we get from the product, the  higher the price we’re willing to pay for it.

 Utility – the pleasure or satisfaction obtained from using a good  or service

 Total utility – the amount of satisfaction obtained from the  consumption of a series of products

 Marginal utility – the change in total utility obtained by  

consuming one additional (marginal) unit of a product

- Diminishing Marginal Utility:

o Law of diminishing marginal utility: the marginal utility of a good  decreases as more of it is consumed over a given time period o Additional quantities of a good yield smaller and smaller increments of  satisfactions.

o If marginal utility > 0, total utility increases. When marginal utility  reaches zero, total utility maxes out, and when marginal utility  becomes negative, total utility decreases.

- Choosing among products:

o As consumers, we face a budget constraint

 We don’t have enough income to consume everything that  would give us positive MU

o To get the most utility from our limited income, always buy the good  that gives us the highest marginal utility per price (MU/P)

- Utility Maximization Rule:

o As we consume successive unit, the MU/P between our two options  equalizes

o Why does this maximize utility?

 If MU/P of pizza > MU/P of tacos, we could do better by  

consuming pizza rather than tacos.

o What are some factors that might cause a consumer to fail to follow  the u-max rule?

- Individual Demand:

o To recap, the quantity demanded by an individual depends on:  The price of the good

 The utility the consumer gets from the goo

 Other factors such as the consumer’s income

o If the price of the good goes up, the MU/P goes down, so the consumer  will buy less

o If the price goes down, the MU/P goes up, so the consumer will buy  more

- Price and Quantity

o The individual demand curve slopes downward because of diminishing  marginal utility

o To justify buying more, the price must be lower

The willingness to pay diminishes along with marginal utility

- Individual and Market Demand

o The market demand curve is the sum of the individual demand curves  for all consumers in the market for a particular good/service

o Willingness to pay:

 The market demand curve tells us the maximum amount each  consumer in the market is willing and able to pay for a good

∙ We call this their willingness to pay (WTP)

o Remember, this depends on factors such as income, preferences,  demand, utility

- Consumer Surplus

o At any price, there will be some consumers for whom:

 WTP > p

 WTP = p

 WTP < p

Consumer Surplus: the difference between what a consumer is  willing to pay and what they actually paid for the good (WTP – Price  = Consumer Surplus/ How much money they have left after the  purchase)

Chapter 6:

Determinants of Elasticity:

1. Necessities vs. Luxuries

2. Availability of Substitutes

3. Relative Price to Income

- Demand for low-priced goods is relatively inelastic

- Demand for high-priced goods is relatively elastic

4. Time

- The more time you have to adjust to a price change, the more elastic is  your response

o No time to adjust? Highly inelastic demand.

The goal of sales it to receive total revenue:

- Total revenue = Price x Quantity Sold

- If Demand is elastic, price increase the price the total revenue will  decrease

- If demand is inelastic, price increase = total revenue increase - If demand is unitary elastic, total revenue won’t change

Price Effect & Quantity Effect

- Price Effect = the change in revenue due to change in price

- Quantity Effect = the change in revenue due to a change in quantity Elasticity on the Demand Curve

Cross-Price Elasticity:

- Cross-Price Elasticity of demand = the % change in quantity demanded of  X divided by the % change in price of Y

- New-Old/Average

- Substitute Goods: goods that can replace each other; when the price of  good X rises, the demand for good Y increases

o Cross-Price should positive (same direction)

- Complementary Goods: goods frequently consumed in combination o Cross-Price should be negative (opposite directions)

Income Elasticity:

- As income increases, people have more money to spend. Demand for  goods will shift rightward

- Income elasticity of demand: %change in quantity demanded divided by  %change in income.

o Your income rises by 10%. You go to the movies more and buy 20%  more popcorn.  

 Icome elasticity of demand for popcorn is 20%/10% or 2.0.

- Normal Goods and Inferior Goods:

o An increase in demand for a good when income rises is true for a  normal good. Most goods are normal goods.

o For some goods the demand decreases as income rises. They are  inferior goods.

 For example, Ramen Noodles. As income increases, people  

upgrade to higher quality substitutes for inferior goods such  

as ramen noodles.

Elasticity of Supply

- The law of supply: an increase in price causes an increase in quantity  supplied. But how much more will be produced as the price rises? - Elasticity of supply: the % change in quantity supplied divided by the %  change in price.

o If it is highly elastic, producers are very responsive to a price  change.

o If it is highly inelastic, producers do not have much of a response to a price change

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