Micro Midterm 1 Study Guide
Micro Midterm 1 Study Guide 2001.01
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This 22 page Study Guide was uploaded by annehohler on Thursday September 24, 2015. The Study Guide belongs to 2001.01 at Ohio State University taught by Dr. Ida Mirzaie in Summer 2015. Since its upload, it has received 379 views. For similar materials see Microeconomics in Economcs at Ohio State University.
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Date Created: 09/24/15
MICRO MIDTERM l l Chapter 1 Key Terms Economics study of how people manage resources tangible and intangible Macro economics of regional national and international scales Micro economics of individuals and rms Scarcity condition of wanting more than is available LIMITS Trade off between costs and bene ts where bene t always outweighs cost sacri ce Rational Behavior idea that people make decisions based on achieving their goals NOT PERFECT ASSUMPTION Opportunity Cost value of what you give up in order to do something else everything we do comes at a cost Marginal Decision Making idea that rational people compare the additional bene ts of a choice against additional costs Sunk Costs initial cost costs that have already been spent and cannot be recovered Marginal Costs additional costs following sunk costs Incentives something that causes people to behave certain ways by changing the trade offs incentive people more likely to do something example lowering prices gt buy more incentive people less likely to do something example raising prices gt buy less Collateral possession pledged by borrower to lender if loan cannot be repaid lender keeps said possession Group Responsibility when physical collateral isn t available lender only loans money to a group if one in the group cannot repay loan the lender never loans to everyone in the group ever again Correlation when a consistent relationship between two events or variables is observable Positive Correlation both events or variables tend to occur at the same time or same direction MICRO MIDTERM l example wearing raincoats and rain Negative Correlation when one variable or event deviates from another increase or decrease opposite relationship example high temperatures and people wearing jackets Uncorrelated no consistent relationship two events or variables have nothing to do with each other Causation one event brings about another Correlation without Causation odd coincidences Omitted Variables underlying factors in relationship overlooked Reverse Causation does A lead to B or Vice versa Determined by timing Model simpli ed representation of a complicated situation concentrates on important factors relationships Circular Flow Model simple representation of how economy s transactions household and rm work together Households supply labor and land buy goods and services and invest in capital Firms hire buy land and labor sell goods and services Factors of Production land and labor Inputs land labor capital Outputs goods and services Positive Statement factual claim about how the world works cause and effect Normative Statement claim about how the world should be opinion Questions to Ask in Microeconomics 1 2 3 4 What are the wants and constraints What are the tradeoffs What will the response be Why isn t anyone else already doing it What de nes cost eXpenses MICRO MTDTERM 1 3 time opportunity to do something else opportunity cost Trade Off Assumptions You can t have it all 1 People respond to incentives 2 There is no action without a reaction Something is valuable if someone wants it A resource is anything that can be used to make something of value natural resources human resources etc Why isn t everyone already doing it 1 No one has thought of it yet 2 The idea has been thought of but no one 1 Took advantage of it 2 Had the means to start it 3 You misjudged the answers to the rst 3 questions and it d be catastrophic Or one of these NOT normal circumstances of the economy occurred 1 Innovation explanation you re hoping is correct but it is too new to have eXisted prior the idea is too new 2 Market Failure failure to take advantage of an opportunity instead of pursuing additional bene ts pursues additional costs 3 Intervention The government stuck it s head in and said nah 4 Goals Other than Pro t Idea that won t provide pro t like creating art or social justice Which is cool and all but the economy runs on the circulation of money and goods so MICRO MlDTERM i 4 Example of Circular Flow Model Goods and servces Consumer expenditure H H H H El I III III I El El El El I El E1 I I El Wages rent dividends D E D D D D D Households Firms Factors for product0n Requirements of a good model 1 Should predict cause and effect 2 Should make clear assumptions 3 Should describe the real world accurately Markets for goods and services Households spend wages from labor and income from land and capital rms earn money from selling goods and services Market for the factors of production Households supply labor land and capital and rms hire the labor and purchase or rent the land MICRO MIDTERM W Chapter 2 Key Terms PPF Constant Costs Invisible Hand Adam Smith coordination mechanism where global production line is a natural outcome of people where acting i their own self interest Specialization Spending all resources producing a particular good perfecting the good Gains from Trade Improvement in outcomes that occurs when producers specialize and exchange goods and services Production Possibilities Frontier PPF a line or curve PPC that shows all the possible combinations of two outputs that can be produced using all available resources also represents constraints only assume two products are being produced Ef cient Points points that lie on the PPF use all available resources Inef cient Points points that lie inside the PPF Unattainable Points points that lie beyond the PPF not possible because they use more resources than what are available Absolute Advantage ability to produce more of a good service than others with amount of resources Comparative Advantage when a producer can make a good at a lower opportunity cost than another producer ConveX Curve Increasing Costs Opportunity Costs V MICRO MTDTERM l 6 Inef cient Points BLUE Ef cient Points BLACK Unattainable Points RED PPF CANNOT tell which point on the frontier will be the best option for the economy that depends on the tit tat the country wants with other and on whether trade with another country is possible Poimf Slope form Y al9X fofal resourcesl9 39ab SLOPE OPPORTUNITY cosrs Products tend to be created by the country company or person with the lowest opportunity cost for producing that product When transportation and communication increase trade increases WANTS drive desire to TRADE If there s no trade countries that specialize will only have the product they specialized in to work with and that is not how a society properly functions Trade increases total production bene tting everyone which is why trade is not exclusively local No producer has CA at everything BUT losing a CA in a good is a success it allows for the country to focus on creating a CA for another product giving them more opportunity to expand MICRO MTDTERM l 7 The opportunity cost for producing one good is the INVERSE of the opportunity cost for producing another good it s just not possible when it comes down to the numbers Countries are able to consume more when they specialize in the good they have a comparative advantage with and then trade with another country There is room for trade as long as the two countries trading differ in their opportunity costs to produce a good and they set a trading price that falls between those opportunity costs What is lost in global trading 1 National Heritage ie losing USborn familyowned farms and businesses to another country 2 Security trade weekend a country if it goes to war with a country it s dependent on 3 Quality Control and Ethics harder to control ethical production standards 4 Outsourcing losing Americanbased jobs to foreign workers What causes economic growth 1 Invenstment in capital goods 2 Trade off capital and consumption 3 Society s choices today MICRO MIDTERM W When resources or tech increases for both goods 75 t3 8O 60 40 lt of v 20 o When tech improves for only one good MICRO MIDTERM W Chapter 3 MOST IMPORTANT CHARTER Key Terms Invisible Hand private individuals control the economy by their decisions and not a centralized planning authority creating a market economy Market buyers and sellers who trade a particular good or service allows communication between buyers and sellers with price as indicator Competitive Market fully informed pricetaking buyers and sellers easily trade a standardized good or service Demand how much of something people are willing and able to buy under certain circumstances THE BUYERS IN THE MARKET Quantity Demand amount of a particular good that buyers in a market will purchase at a given price during a speci ed period Law of Demand when Price DECREASES the Quantity Demanded INCREASES inverse relationship why people love a good sale amirite a 7 u Ceteris paribus all other things held equal allows simplicity in observing relationships between price and quantity Supply amount of a particular good service producers will offer for sale at a given price during a speci ed period SELLERS IN THE MARKET Law of Supply when Price INCREASES the Quantity Supplied INCREASES and vice versa move same direction they move together because price in uences a producer s trade off if the price increases the bene t of production increases so quantity supplied increases Market Equilibrium the place where supply and demand intersect on a graph MICRO MIDTERM l l0 Demand downward line on the graph D demand and down Supply upward line on the graph U supply and upward I tried Parts of a Competitive Market 1 Standardized goods good or service for which any two units are interchangeable Full information no mystery on prices and stuff No transaction cost no wholesale retail taX middleman 4gtsIv Price takers participants SO MANY that one cannot alter the price for the whole Nonprice Determinants of Demand 1 Consumer preferences predetermined by the individual Prices of related goods substitutes or complements Incomes normal goods or inferior goods 4gtsIv Expectations of future prices people more willing to buy now if they think prices will increase later and vice versa 5 Number of buyers in the market MANY increase of buyers increase of demand Substitutes goods that serve similarenough purposes that a consumer might purchase one in place of another ie rice and pasta when item A s price increases demand for item B increases because demand for item A decreases Complements related goods hat are consumer together so bough together ie peanut butter and jelly when price for item C increases demand for item D decreases because demand for item C decreases Normal goods necessities increase of income increase of demand MICRO MIDTERM W W W Inferior goods luxuries fantasies income increases demand decreases Increase in demand and increase in quantity demanded are literally not the same thing Increase in demand means the curve shifts completely a nonprice determinant was chan ed g A Q Q o E D 02 D1 11 q 2 Quantity q On the other hand an increase in quantity demanded means that the point on the PPF moves down the line in price Change in Quantity Demanded P1 Price P2 D or demand curve 0 Q1 Q2 Quantity MICRO MIDTERM I I2 Nonprice Determinants of Supply 1 Price of related goods affect opportunity cost 2 Technology improved 3 Prices of inputs factors of production 4 Expectations determines if more of a good Will be supplied or not at a time 5 Number of sellers also varies A change in nonprice determinant gt increase or decrease in supply ie curve shifts A change in price gt increase of decrease in quantity supplied ie point moves on curve Equilibrium Price price at market equilibrium marketclearing price Equilibrium Quantity quantity at market equilibrium Both reached through trial and error Surplus excess supply When quantity supplied is higher than quantity demanded price has to decrease Shortage excess demand When quantity demanded is higher than quantity supplied price has to increase Positive Incentive Demand Curve shifts Right Negative Incentive Demand Curve shifts Left Production Costs decrease Supply Curve shifts Right Production Costs increase Supply Curve shifts Left Supply Change Demand Change Price Change Quantity Change Decrease Decrease Decreases Decrease Increase Increase Increase Increase Increase Increase Decrease Decrease MICRO MIDTERM i i3 Chapter 4 Key Terms Income Elasticity of Demand ALWAYS NEGATIVE how much the quantity demanded reacts to a change in consumer s incomes expressed as absolute value Price Elasticity of Demand NEGATIVE size of change in quantity demanded of a good service When the price changes answers how much Measure of consumer sensitivity Total Revenue amount that a rm receives from the sale of a good or service calculated as the quantity sold multiplied by the price paid for each unit how much money the sellers are making by selling Tofal gmJame Q x Pu Price Elasticity of Supply POSITIVE size of the change in quantity supplied of a good or service When its price changes measures producers responsiveness to change in price CrossPrice Elasticity of Demand How Will others respond describes how the quantity demanded of one good changes When the price of a different good changes Determinants of Price Elasticity of Demand 1 mews Availability of substitutes Degree of necessity Cost relative to income Adjustment time long run vs short run Scope of the market Price Elasftctfy of DQVMaVlo Z Chamgc m Quamfl fy Q2 Q1 Z X Chamgc m Price P2 P7PZ P1 2 MICRO MIDTERM I I 4 Determinants of Price Elasticity of Supply 1 Availability of inputs needs very high prices for anything to happen 2 Flexibility of production process long run versus short run 3 Adjustment time long run means more elasticity xed numbers inelastic in short run Chamge m Quantity Q2 Q1 2 Price Efasficify 075514999 2 l X l Chamge m Price P2 PTPZ P1 2 Elastic gt 1 gt very responsive sensitive to price change outweighs price Inelastic lt 1 gt not phased by price change outweighs quantity Unit elastic 1 total revenue is at maximum low price to make a pro t D Perfectly Elastic demand curve is HORIZONTAL price constant D Perfectly Inelastic demand curve is VERTICAL quantity demanded constant S Perfectly Elastic quantity supplied can be anything at a given constant price S Perfectly Inelastic quantity supplied is the same regardless of price CrossPrice Elasticity of Demand chatage m quamfify dehmmleal of item A chamge IV Price of item B MlCRO MlDTERM l l 5 Substitutes positive crossprice elasticity the closer the substitute the larger the elasticity because it s easier to replace the closer the sub it is Complements negative crossprice elasticity the closer the complement the larger the elasticity the closer the two items are to being OTPs the more people are going to not buy one if the other is pricey Income Elasticity of Demand chat1942 m quamfify dermalIdeal of item A chat19 m motwe Normal goods positive income elasticity larger elasticity if the normal good has a fancy close substitute ie normal coffee s fancy sub is a Starbucks frapp normal coffee would be an inelastic normal good because you can nd it anywhere honestly Inferior goods negative income elasticity it s elastic when it s a unique necessary item ie original Picasso paintings MICRO MIDTERM i i6 Chapter 5 Key Terms Surplus way of measuring who bene ts from transactions and by how much the bonus value of a good sale when you were willing to pay full price Customer Surplus the net bene t that a consumer receives from purchasing a good or service measured by the difference between willingness to pay and the actual price inverse relationship Formwia drumMIL willing f0 Pay acfuai Price Producer Surplus net bene t that a producer gets from the sale of a good service measured by the different between the producers willingness to sell and actual price not inverse relationship ForkMia ahOMVHL willing f0 5e acfuai Price Total Surplus measure of combined bene ts that everyone receives from participating in an exchange of goods services basically the value created by the existence of the market CANNOT BE LESS THAN ZERO Ef ciency when the market equilibrium is a winwin situation both consumer and producer are receiving gains either in pro t or savings Deadweight loss loss of total surplus that occurs because the quantity of a good that is bought and sold is BELOW the market equilibrium quantity ForkMia fora SurPfus affer a Marker imfervemfiom surPM5 af Marker ediuifibrium before imfervemfiom MICRO MIDTERM i i 7 Price 600 500 400 Deadweight loss 300 200 gansactions t I a eWaggga he 100 new price I D l l l O 5 10 1520 2530 354045 50 556065 Quantity of cameras millions The equilibrium in a perfect competitive well functioning market maximizes total surplusquot MICRO MIDTERM I I8 Chapter 6 Key Terms Price Control regulation that sets a maximum or minimum legal price for a particular good holds the price so a new equilibrium price cannot be met if the market changes curve shits holds price consistent Price Ceiling MAXIMUM legal price at Which a good can be sold used on staple foods gasoline and electricity among things keeps necessities affordable Price Floor MINIMUM legal price at Which a good can be sold agricultural goods mainly because it helps farmers in hard times and not Three Reasons the Government Intervenes 1 To correct market failures 2 To change distribution of surplus 3 To either encourage or discourage consumption of a certain good MICRO MIDTERM W W9 Price Ceiling Supply Price Price ceiling39 Shortage Demand 1 l l l l l l I I l l I I l Quantity Decrease Price Increase Quantity Demanded BUT Decrease Quantity Supplied Surplus is transferred to consumers not producers and total surplus decreases so consumers buy more MICRO MIDTERM I 20 Price Floor Price SUTDIUS gu I A pp I I I I P I I I I Demand I I I l 0 Quantity Q O Increase Price Decrease in Quantity Demanded but Increase in Quantity Supplied Surplus is transferred to producers not consumers MICRO MlDTERM l Ql TAXES 1 used to discourage production and consumption of good taxed 2 raises government revenue through the fees paid by those Who keep buying or selling the good TaX on sellers gt Supply decrease Because it increases the cost of production TaX on sellers gt Decrease DOESN T CHANGE taX doesn t affect any nonprice determinants though quantity demanded might change DOES NOT CAUSE CURVE TO SHIFT TaX on buyers gt Supply DOESN T CHANGE taX doesn t change incentives producers face nor nonprice determinants of supply TaX on buyers gt Demand decrease because the price increases and demand and price are inverse related Effect on Market Equilibrium TaX on buyers Equilibrium Price and Equilibrium Quantity FALL TaX on sellers Equilibrium Price RISES Equilibrium Quantity FALLS MICRO MIDTERM l 22 w the reverse of a taX requirement that the government pay an extra amount to producers or consumers of a good used as encouragement also used as alternatives to price controls to bene t certain groups With generating shortage or surplus Subsidy to seller gt Supply increase Increase price increase supply that s the laW of supply Subsidy to seller gt Demand doesn t change Subsidy to buyer gt Effect on Market Equilibrium Sellers receive more money and buyers pay less money government pays the outstanding difference Equilibrium Quantity increases Elasticity and Time Period relationship Long Run Super Elastic Short Run Inelastic
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