ECON 2000 Study Guide EXAM 1 yellow = terms pink = important blue = person
ECONOMICS IS the study of how any society best allocates its scarce economic resources among many competing uses.
1. Labor human capital (ex. education) >> teachers, admins
2. Land natural resources
3. Capital physical capital (ex. Factory, equipment, tools, etc.) >> classroom space 4. Entrepreneurship risk takers
1. a. Productive Fully utilizing scarce economic resources; not wasting anything b. Allocative (need productivity first to have this) implies the productive combination of goods and services is optimal from society’s POV.
THREE FUNDAMENTAL ECONOMIC QUESTIONS Who has Power: 1. What goods/services to produce? Individuals consumer sovereignty 2. How will these goods/services be produced? Firms
3. For whom to produce? (Distribution mechanism) Individuals with $
If you want to learn more check out gatech inta
Assumption: The economic players act rationally and in their own selfinterest when making decisions on the margin.
∙ Individual max happiness/satisfaction/benefit
∙ Firms max profit
∙ Gov. max society’s wellbeing
Opportunity Costs foregone benefits of the next best alternative
Ex. attending class vs. working/sleeping/eating/hobbies
Group work from the first day of class
∙ What info might be useful to help determine how to spend $50 billion? o Who is suffering the most? World issues?
o Who is already getting money/help
o What banks have best interest rates to hold that money
o How we will be able to communicate with those we’re trying to help
∙ How would you spend the $50 billion to help humankind?
o Infrastructure – provides jobs, helps minimize damage from natural disasters Values: efficiency, security
We also discuss several other topics like math 031
o Poverty – allows room for worrying about other things than basic human survival, like focusing on jobs/education, creates positive cycle
Values: generosity, comfort, equal opportunity
o Malnutrition – growth and survival of children and others
Values: generosity, peace, collective responsibility
o Rehab Efforts – gives people a second chance at life, can get back into society and contribute
Values: individual responsibility, economic growth
o Cancer Research – increase in chances of finding a cure
o Basic Education for Underdeveloped Nations – creates people with better skills and knowledge to be more well off in society
Values: economic growth, equal opportunity.
Production Possibilities Curve (PPC) illustrates maximum production combinations that a nation can produce given its stock (amount) of economic resources, the quality of those resources, and institutional constraints (gov. rules and regulations).
∙ Points inside the curve can be produced by a nation
∙ Points on a curve can be produced, but typically the points more in the middle of the curve line are better options
∙ Points outside the curve are not obtainable
o “Z” = how to obtain the future blue = “economic growth” Improve the quality of existing resources
Discover new resources (quantity)
Relax governmentplaced constraints
Trade this one does not create economic growth
o How to Achieve the PPC: Don't forget about the age old question of leitmotivos
Follow guidelines and rules
∙ REMEMBER: Productive efficiency fully utilizing scarce resources
∙ REMEMBER: Allocative efficiency optimal combination of goods and services being produced
o If something isn’t productively efficient, it can’t be allocatively efficient
∙ Summary of the PPC:
o There’s a PPC due to scarcity
o The PPC is always downward sloping because of Tradeoffs/Opportunity Costs o Specialization (the law of the Increasing Opp. costs holds) the PPC is concave
∙ Scientific Method:
o Identify the problem #1
o Make assumptions #2 ceteris paribus
o Develop a model #3 Don't forget about the age old question of cmu matrices and linear transformations
o Make a prediction #4
o Test the model #5
Pure Capitalism little to no government here
∙ Individuals control resources
o What? >>> controlled by individuals
o How? >>> firms
o For whom? >>> individuals with $
∙ See ‘Circular Flow of Capitalist Markets’
Characteristics of Pure Capitalism
∙ Private property and freedom of choice
∙ Self interest
∙ Markets and prices
∙ Limited government intervention
Strengths and weaknesses of Pure Capitalism (recall Group activity we did in class): ∙ Strengths: individuals can choose; uneven distribution of wealth/income (encourages indiv. improvement); encourages innovation
∙ Weaknesses: uneven distribution of income/wealth/goods/services (resulting in no safety net); no gov. Intervention; Consumer sovereignty causes resources to be used on fads (ex. Silly bands); no rules (leads to corruption)
Distribution of income is more even in a capitalist society. If you want to learn more check out fn310
Adam Smith (1776) “father of economics” wrote the Wealth of Nations and came up with the invisible hand theorem, which states, that how people do what’s best for them, will lead to what’s best for society.
Pure Command Socialism
∙ Central Authority (gov) control resources
o What? >>> Gov.
o How? >>> Gov.
o For whom? >>> Gov.
o Command and directive
∙ See Pyramidshaped market flow chart
Characteristics of Pure Command Socialism
∙ Public ownership
∙ Centralized decision making
∙ Economic planning
∙ Allocation by command
Strengths and Weaknesses of Command Socialism:
∙ Strengths: even distribution of wealth (no conflict between social classes, less personal risk, minimizes poverty); economic planning (reach goals quickly)
∙ Weaknesses: lack of competition > low quality of goods and services; Even distribution of income (discourages indiv. improvement); Central authority can be dictatorial
Ex. of production process of Honey (on a graph) Don't forget about the age old question of mat101 uga
∙ Production Side: Buying Side:
∙ Current production (X) Final consumption (Y)
∙ Inventory (V) Interindustry (XX1, XX2,...XXn)
∙ Imports (M)
Values connected to the two Pure Economies
Pure Capitalism: Pure Command Socialism:
∙ Creativity Equal opp
∙ Ind. responsibility Collective responsibility
∙ Ambition social stability
∙ Competition order
∙ Courage peace
Demand the amount of a good/service that consumers are both willing and able to buy at every possible price.
Quantity Demanded the amount of goods/services that consumers are both willing and able to buy at a specific price.
∙ Law of Demand Price (up), Quantity (down)
Price (down), Quantity (up)
Rationale behind Law of Demand:
∙ Substitution effect ceteris paribus; when the price of pizza goes up, consumers turn away from buying pizza and towards less expensive alternatives (like, hot dogs). Therefore, Qd of pizza decreases.
∙ Income effect ceteris paribus; when the price of pizza goes up, consumers feel poorer because their money doesn’t buy as much anymore.
o Price y axis (since it’s on y axis, this allows us to study demand and supply side on one graph, the point where they intersect is the EQUILIBRIUM point) o Quantity x axis
Change in Demand:
∙ (the entire curve SHIFTS)
o Increase = moves right
o Decrease = moves left
∙ Determinants (that cause shifts right or left)
o Change in consumers’ income
Normal good/service when demand of good increases if income
increases, and vice versa.
Inferior good/service when demand decreases on a good if income increases.
o Change in consumers’ taste/preferences
o Change in the price of a related good/service
Substitute good/service when an increase (or dec.) in $ of one good causes demand curve of another to shift left (or right).
Complementary good/service when increase (or dec.) in $ of one good causes the demand curve of another good to shift right (or left).
Change in consumers’ future expectations (ex. Hurricane coming = demand of water will go up now)
Change in # of consumers
Change in exchange rate:
100 Japanese Yen = $1 U.S.
BGSU tuition is $10,000 a semester
Japanese Yen = 1,000,000 Yen
$1 over 120 Yen = $10,000 over X
X = 1,200,000 Yen
∙ So $1 U.S. in this case would = 120 Yen, decreasing the value of
the Yen, causing a decrease in Japanese Exchange students.
Change in Quantity Demanded (Qd):
∙ (MOVEMENT along the existing curve)
Law of Supply – the quantity of a good or service supplied which varies directly with its price, ceteris paribus.
P , S ↑ ↑
P , S ↓ ↓
Supple Curve – graph of the positive relationship between price and quantity supplied (remember there are individual curves and market curves).
Supply Schedule – table of the positive relationship between price and quantity supplied.
Change in QUANTITY Supplied – a change in a good’s price leads to a change in quantity supplied; MOVEMENT along curve
Determinants of Qs:
∙ Change in price of good
Change in Supply – a change in one of these factors listed below SHIFTS the entire supply curve: ↓
Determinants of Supply:
∙ Input prices
∙ prices of related products
∙ # of suppliers
∙ MARKETS ALWAYS MOVE TOWARDS EQUILIBRIUM.
∙ WHEN PRICES FALL, THIS DISCOURAGES PRODUCERS TO SUPPLY QUANTITY >>> results in movement along the curve.
∙ WHEN TWO CURVES SHIFT AT THE SAME TIME, ONE ELEMENT OF EQUILIBRIUM CANNOT BE DETERMINED.
6 Steps of moving to a new equilibrium:
1. Demand decreases (shifts Left).
2. At the original (equilibrium price) Pe = $8, a SURPLUS exists.
3. Due to the surplus, there is a downward pressure on price.
4. Price down, Quantity demand rises (Law of Demand).
Price down, Quantity supplied goes down (Law of Supply)
5. As Qd and Qs change, there’s a movement along D & S curves.
6. Movement stops when Qd = Qs (surplus is over).
Consumer Surplus (aka – profit): A dollar measurement of how much consumers benefit when engaging in trade with a seller.
∙ Mathematically, Consumer surplus = value – price.
Producer Surplus (aka – profit): A dollar measurement of how much producers benefit when engaging in trade with buyers.
∙ Mathematically, Producer surplus = price – cost.
Price Floor – legally established minimum prices; by law prices cannot fall below a set price floor.
∙ Only binding/effective if set ABOVE Pe (equilibrium price).
∙ Creates artificial shortage.
Price Ceilings legally established max prices; by law, price cannot go above the price ceiling o Only binding/effective if set below equilibrium price
o Creates and artificial SHORTAGE.
PRICE IS ALWAYS THE PRIMARY RATIONING DEVICE, but a second one is needed.