Econ 251 Study Guide
Econ 251 Study Guide
Popular in Course
verified elite notetaker
Popular in Department
This 5 page Study Guide was uploaded by an elite notetaker on Sunday October 12, 2014. The Study Guide belongs to a course at a university taught by a professor in Fall. Since its upload, it has received 46 views.
Reviews for Econ 251 Study Guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/12/14
Econ 251 Economics Cetaris Parabis Scarcity Scarce resources-4 major ones Not scarce resources Rational choices Economic cost = opportunity cost "Free goods" Sunk Costs Marginal Benefits and Marginal Costs As quantity increases, MB decreases, MC increases MB/MC vs. Demand and Supply Costs vary across individuals Absolute Advantage - Faster Comparative Advantage - Cheaper Rules for Comparative advantage (2) If one person has comparative advantage in one task, the other person must have comparative advantage in the other task. It is impossible to have comparative advantage in everything Flatter slope = Comparative Advantage in "x" Production Possibility Frontier (PPF) Always Negative Slope Magnitude of slope reflects the marginal cost of "x" "When you increase "x" by 1, how many "y" doesn't get made? Economy Wide PPF Negative slope magnitude of slope reflects MC of "x" As X increases, slope gets steeper always. MC of X rises as X increases. As more people get added, PPF looks like a quarter circle. Below the line = Inefficient Above the line = Infeasible/unattainable On the line = Efficient Production efficiency - Production of a combination of goods as cheaply as possible - Any point on the PPF Line Allocative Efficiency - Resources used where they are most highly valued - Single point for maximum value at that time. Shifts in PPF - any change in the level of resources or their productivity Demand - Maximum quantity that consumers are willing and able to purchase at various prices Law of Demand - As price increases, quantity demanded decreases. Changes in Demand - Increase in Demand - Shift to the right, Decrease in D - Shift to the left 1. Income Normal goods - demand+ when income+ Inferior goods - demand- when income+ 2. Prices of related goods in consumption Substitutes in consumption - goods used in place of one another Oreo price increases then thin mint demand increases Complements in consumption - goods used together (price of one affects other) Milk price increase, then thin mint demand decreases Cars vs. hybrid car + gasoline example 3. Changes in expectations (about price) I expect price to rise, increase current demand. 4. Change in # of buyers more buyers, more demand. Market demand, not individual 5. Change in tastes and preferences "Catch all category" advertising Supply - Maximum quantity a seller is willing and able to sell at various prices Law of supply - as price increases, quantity supply increases Changes in supply - Increase in supply - shift to the right, Decrease in supply - shift to the left. 1. Change in prices of Inputs ex) Increase in wages = increase cost of production = decrease in supply. 2. Changes in price of related goods in production substitutes - goods that can be produced with the same resources Increase price of corn = increase supply of corn = decrease supply of soy complements in production - goods that are produced together. (By- products). +Price of beef = +supply of beef = +supply of leather 3. Change in expectations seller expects price to rise = Decrease in current supply 4. Change in # of sellers more sellers - more supply (market) 5. Change in technology Lower costs to produce = increase in supply Equilibrium Qs > Qd = Surplus Qs < Qd = Shortage Qs = Qd = Equilibrium Equilibrium is a price and quantity. (Quantity demanded and Quantity supplied is equal. Changes in equilibrium Changes in demand If demand decreases, equilibrium Price and quantity decrease (and vice versa) Changes in supply Increase in supply = equilibrium Price decrease, Quantity increase Decrease in supply = Equilibrium price increase, quantity decrease Simultaneous change in demand and supply (Draw two pictures) When both curves shift, one coordinate will be "indeterminate" increase in demand - Price increase, Quantity increase decrease in supply - price increase, Quantity decrease. so price definitely increases, quantity is indeterminate. Elasticity - "responsiveness" Price elasticity of Demand - responsiveness of consumes to a change in price Flat demand line = more elastic, steeper = less elastic %Change in Quantity demanded/%Change in price > 1 elastic = 1 unit elastic < 1 inelastic Determinants of E^d Availability of substitutes more subs - more elastic Demand, less subs - less elastic Demand Proportion of income or budget it takes to purchase the good small proportion - less elastic, Large proportion - more elastic Demand Time less time to respond - less elastic, more time to respond - more elastic D E^d = (Change in Qd/Avg Qd)/(Change in Price/Avg Price) Avg = midpoint Changes based on quantity demanded (Qd) even though it's linear mid point of Demand curve = unit elastic Revenue = Price * Quantity Demanded if price goes up, revenue uncertain bc Qd will go down too. E^d > 1 (elastic) - if price increases, decrease in Qd will be "large" - Revenue decreases "revenue follows Quantity demanded" E^d < 1 (inelastic) - price increases, decrease in Qd will be "small" - Revenue increases" "revenue follows price" E^d = 1 (unit elastic) - P increases, Qd decreases "proportionate" - Revenue Constant Nothing to do with equilibrium. Revenue Maximum Price*Qd --> area in the rectangle. Other types of Elasticity Income Elasticity - %change in Qd / %change in income > 0 for normal good, < 0 for inferior (change in Qd/Avg Qd )/(change in income/ avg income) Cross Price elasticity %change in Qdx / %change Py > 0 if substitutes, <0 if complements in consumption x = coke, y = pepsi, Increase in Py => increase in Qdx , therefore substitutes. Price elasticity of Supply - %change in Qs / %change in Price E^s >1 - S is elastic E^s <1 - S is inelastic E^s =1 - S is unit elastic if S goes through the origin, the whole line is unit elastic. Determinants of Es Availability of substitute inputs easy to find subs (easy to replace people w/ robots) => more elastic S hard to find subs => less elastic S Time - more time (to respond) => more elastic, less time => less elastic Extreme Elasticities perfectly inelastic demand (or supply) vertical line, E^d or E^s = 0 perfectly elastic demand (or supply) horizontal line, E^d or E^s = infinity. Efficiencies and Equity Production efficiency- any point on the PPF allocative efficiency - resources used where most highly valued MB = MC, equilibrium! Consumer Surplus - value consumer received above price paid (if it costed 8 dollars i woulda bought 1, but it is only 4, and i still only bought 1. its worth 8 dollars to me, but i only paid 4.) Area of triangle under demand curve, above equilibrium price MB - P* = consumer surplus Producer surplus - value producers receive above the cost of production. Cost of 3rd box is 3.50, but i sell all boxes at $4, so I (producer) have .50 surplus Area of triangle above supply line, under the equilibrium price. P*-MC= producer surplus CS + PS = "Total Surplus", Sum of all MB-MC Maximized at equilibrium What if quantity demanded/supplied is limited to something underneath equilibrium quantity? Or forced to buy more than Q*? Dead weight loss - decrease in CS and PS in an inefficient level of output Market Failures controls on price controls on quantity taxes Equity - "Fairness" trade off between efficiency and equity Symmetry Principle - people in similar situations should be treated similarly 2 types of fairness: 1. Utilitarian - maximize happiness for greatest number of people john makes 80k/yr, mary makes 20k/yr, transfer money from john to mary because mary's dollars are worth more than johns since she has less. "Units of happiness" 2. Maximin principle - make the poorest person as well of as possible leads to everyone having the same level of income. Price Controls Price Ceiling - setting legal maximum price -gas prices, salary cap, rent ceilings... leads to shortages if ceiling set below P* (not effective if set above) price floor - legal minimum prices -minimum wage, agricultural price supports Black Market Price - price people are actually willing to pay for it, even though it disobeys laws for price ceilings - price ceiling on cocaine = $0, so Black market sells at price that its worth. If there is a shortage due to price ceiling, who gets the few units available? 1. first come first serve (time is big cost) 2. circumvention – getting onto a ‘list’, “key money”, black market 3. rationing – like gas coupons 4. lottery 5. discrimination (preferences) price floors – ex) minimum wage (input market) labor demand for labor (firms), supply for labor (people) – reversed for input/output market if equilibrium at $5/hr, but minimum wage makes $10/hr many people lose job ($5/hr -> 0$/hr) many people gain income ($5/hr -> $10/hr) people didn’t work, but now looking for a job bc higher pay ($0 -> $0) (new entrants) Agricultural price supports ex) dairy DWL from overproduction Gov’t pays for the surplus caused by the price floor, they do something with it Taxes Cause inefficiency whether the tax is imposed on the buyer or seller Ex) cars MB = demand curve, MC is original supply curve, not supply + tax DWL = ½ * change in Q * tax Both consumers and producers are affected by taxes Change in total surplus = tax revenue (rectangle -> Pc - Ps * new Qd) + DWL Tax incidence (Tax burden) Whoever is less elastic bears more of the burden of the tax. If Ed < Es -> consumers bear more Ed > Es -> sellers bear more Ed = Es -> share burden 50/50 Ratio of elasticities determines ratio of tax burden
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'