ECON Study Guide
ECON Study Guide ECON 201
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This 10 page Study Guide was uploaded by Lori Richardson on Thursday September 24, 2015. The Study Guide belongs to ECON 201 at Louisiana Tech University taught by Hung Nguyen in Fall 2015. Since its upload, it has received 173 views. For similar materials see Economic Principles and Problems in Economcs at Louisiana Tech University.
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Date Created: 09/24/15
Economics 201 lis Chapter 1 The 10 Principles of Economics 0 Introduction I Economy from Greek oikonomos meaning one Who manages the household I Scarcigy When a society has limited resources and therefore cannot produce all the goods and services people Wish to have I Economics The study of how society manages its scarce resources 0 How people make decisions 0 Economists analyze forces and trends that affect the economy as a Whole 0 11 How People Make Decisions I People Face Tradeoffs 0 Making decisions requires trading off one goal against another 0 Ef ciency Society is getting the maximum benefits from its scarce resources 0 Egaali Those benefits are distributed uniformly among society s members I The Cost of Something is What You Give Up to Get It I Opportunity Cost The cost of something you give up to get something else I Rational People Think at the Margin I Economists assume people are rational I Rational People Group of individuals Who systematically and purposefully do the best they can to achieve their objectives given the available opportunities I Marginal Change A small incremental change to an existing plan of action 0 Rational people often make decisions by comparing marginal bene ts and marginal costs I A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost I People Respond to Incentives 0 Incentive Something that induces a person to act such as the prospect of a punishment or reward 0 When policymakers fail to consider how their policies affect incentives they often end up With unintended consequences 0 Auto Safety Laws Seat belt requirement 0 12 How People Interact I Trade Can Make Everyone Better Off 0 Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services I Markets are Usually a Good Way to Organize Economic Activity I Market Economv The decisions of a central planner are replaced by the decisions of millions of firms and households 0 Wealth Of Nations Adam Smith 1776 invisible hand I Governments Can Sometimes Improve Market Outcomes I The invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy I Market Failure A situation in which the market on its own fails to produce an efficient allocation of resources I Externali The impact of one person s actions on the wellbeing of a bystander 0 Le Pollution I Market Power The ability of a single person to unduly in uence market prices 0 13 How the Economy as a Whole Works I A Country s Standard of Living Depends on Its Ability to Produce Goods and Services 0 Almost all variation in living standards is attributable to differences in countries productivity 0 The amount of goods and services produced from each unit of labor input I The growth rate of a nation s productivity determines the growth rate of its average income I Prices Rise When the Government Prints too Much Money 0 In ation An increase in the overall level of prices in the economy I In almost all cases the culprit of in ation is growth in the quantity of money I Society Faces a ShortRun Tradeoff between In ation and Unemployment 0 Business Cycle The irregular and largely unpredictable uctuations in economic activity as measured by the production of goods and services or the number of people employed 0 In ation and Unemployment are inverse in a way quotlis Chapter 2 Thinking Like an Economist 0 21 The Economist as a Scientist Try to address subject with a scientist s objectivity Devise theories collect data and then analyze the data Scientific Method relevant to everything testable Theory followed by observation Sometimes experiments are difficult or impossible to achieve 0 Have to make due with the world around them 0 They work to solve this by looking at the natural ow of history Making Assumptions 0 Simplify the complex world making it easier to understand Economic Models 0 Simplify reality to make it easier to understand Circular ow Diagram Model where the economy is simplified to include only tow types of decision makers firms and households 0 Firms Produce goods and services using inputs 0 Households Own factors of production and consume goods and services M EETS Revenue FDR Vi Span ding EDIE HINDI EEWIEEE Ends 39 F39rmg 53 Ganja and and EEWiCEE 39 H umh ld b grammar Eld Emu gh i FIRMS H IJSEHEIiLIZFE I Premium and SEquot I Buyand consume godg and EEWiEEE ngE and semireg I Hire and USE flattan I and Sell fartan f prod urtiun of pmducftjin Labtnland Fartrg of r pruducftjnn T5 and capital F ETHE F PHDUETIIHI wagei rent I Households 5E lncme and pm t 39 Firm 39339 Flow uf inputg and output Fluwuf dllarg I The Production Possibilities Frontier I Shows all efficient combinations of goods that can be produced I Movements along the frontier require tradeoffs 0 More computers less cars 0 Points inside frontier are inefficient I The bowedout shape of the frontier indicates that the opp cost of producing a good increases as more of that good is produced I Micro V Macro I Microeconomics Study of how households and firms make decisions and how they interact in specific markets I Macroeconomics study of economyWide phenomena 0 22 The Economist as Policy Adviser I When Economists try to explain the world scientists When they try and help improve it they re policy advisers I Positive Statements descriptive they make a claim about how the world is I Normative Statements prescriptive they make a claim about how the world ought to be 0 23 Why Economists Disagree I Economists disagree about the validity of alternative positive theories about how the world works I Economists may have different values and therefore different normative views about what policy should try to accomplish Chapter 3 Interdependence and the Gains from Trade 0 31 A parable for the Modern Economy I Trade allows greater variety I Cattle rancher V Potato farmer I Everyone benefits from SpecializationTrading all he Faifn39i ii a Fmdum mn and Enmmmmii mz 1b Ihe d i d Fmdu im and EmsWinn HEM Email Meat nunm gm p u IEJL 32 mi 12 H135 3 Pattitum tourism Palate Emmi 13 Gains mm Trade A Euma l farmer Famine Edimm Heat mum With new Prudmr m and Eunaumlm 1 oz 16 21 ii 12 2 o Willi trundle ill a 3 15 23 ns 13 ii ii Trade 69135 m film 15 u E 1 Gets HS or Emmile 5 DE 1 I12 HE Eli 2 115139 GHIM S FIRDMI TE DE39 Increase In Emmwtpthm 1 m 1 12 1 u 3 u 0 32 Comparative Advantage The Driving Forces of Specialization I Absolute Advantage whomever has a smaller quantity of inputs to produce a good I The opportunity cost measures the tradeoff between the two goods that each producer faces I Economists use the term comparative advantage when describing the opportunity cost of two producers The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing this good and is said to have a comparative advantage in producing it 0 The farmer has a lower opportunity cost of producing potatoes than the rancher and vice versa with the rancher and producing meat 0 Thus the farmer has a comparative advantage in growing potatoes and the rancher has a comparative advantage in producing meat 0 It is impossible for one person to have a comparative advantage in producing both goods 0 Because the opportunity cost of one good is the inverse of the opportunity cost of the other The gains from specialization and trade are based not on absolute advantage but on comparative advantage Trade can bene t everyone in society because it allows people to specialize in activities in which they have a comparative advantage For both parties to gain from trade the price at which they trade must lie between the two opportunity costs 0 33 Application of Comparative Advantage Tom Brady mowing his lawn Populations of people can also benefit from specialization and trade 0 Imports 0 Exports Trade allows all countries to achieve greater prosperity lis Chapter 4 The Market Forces of Supply and Demand Supply and Demand are the forces that make market economies work 0 41 Markets and Competition Market A group of buyers and sellers of a particular good or service 0 Buyers determine the demand for a product 0 Sellers Determine the supply for a product Price and quantity are determined by all buyers and sellers as they interact in the marketplace Competitive Market Market in which there are so many buyers and so many sellers that each has a negligible impact on the market place Perfect Competition 0 Goods offered are exactly the same 0 Buyers and sellers are so numerous that no single byer or seller has any in uence over the market price 0 42 Demand Quantity Demanded Amount of a good buyers are willing and able to purchase Law of Demand The relationship between price and quantity demanded Demand Schedule A table that shows the relationship between the prices of a good and the quantity demanded I Demand Curve The downwardsloping 1ine relating price and quantity demanded I Graph showing a shift in Demand 4 1 MM 2M Demand 7 mm Demand puma 311 Demand mm 33 I Variables that can shift a demand curve 0 Income Demand fallingrising depending on a fallrise in one s income I Normal G00d Any good that demand falls for When income falls I Inferior Good Any good Where the demand rises When income falls 0 Bus rides 0 Prices of Related Goods Strahale o Tastes Substitutes When a fall in the price of one good reduces the demand for another good 0 Ice cream and Yogurt Complements When a fall in the price of one good raises the demand for another good 0 Hot fudge and ice cream 0 Expectations For future 0 If you expect your income to rise you will be more willing to spend money today instead of saVing Ethane in The irriaiele Priee hi the genrl iteeli Iheerhe Prieee ei reletetl geetle T etee Eeeeetetiehe Humher ei hueere 43 Supply epreeehte rneeerheht Inhg the elemehtl euree Shiite the Elemehel euree Shiite the elemehel euree Shiite the Elemehel eur39ire Shiite the Elemehel euree Shiite the elemehrl eurere 0 Quantity Supplied The amount that sellers are wiling and able to sell 0 High price Quantity Supplied is high Low price Quantity Supplied is low Law of Supply When the price of a good rises the quantity supplied of the good also rises when the price falls the quantity supplied falls as well Supply Schedule A table that shows the relationship between the price of a good and the quantity supplied Supply Curve The curve relating price and quantity supplied Market Supply The sum of the supplies of all the sellers Shifts in the Supply Curve Any change that raises quantity supplied at every price such as a fall in the price of sugar shifts the supply curve to the right increase in supply tt39rettale e Ehange n The 1titerettale 0 4 Priee ef the ged itself Ftepreeehte a movement elhg the eueehr EUWE Input erieee Shiite the eupply three 4 7 It Supply and Teehnelgy Shifte the eupply turtre Demand Eeeettatihs Shiite the eupply turtre Together Member i SEHEFS Shiite the eupplyj three I 31 um Where supply and demand curves intersect 0 Equilibrium Price 0 Equilibrium Quantity 0 Market Clearing Price Price 1 O Surplus leeEreem Eighththem Edethhttthe 1 EE SEEEWHHH 4 Quennt ity leeeEreenrn Eenee Excess tittt tet tit ih o Shortage I Excess demand 0 Law of Supply and Demand The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance supply WM rH H IilleJIIIEILILIhFlil II lulillllll r L FI1Irlnalrllaal A
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