Midterm 1 Study Guide
Midterm 1 Study Guide ECON 1010
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This 6 page Study Guide was uploaded by Michael Notetaker on Friday October 2, 2015. The Study Guide belongs to ECON 1010 at Tulane University taught by Toni Weiss in Fall 2015. Since its upload, it has received 132 views. For similar materials see Intro to Microeconomics in Economcs at Tulane University.
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Date Created: 10/02/15
CHAPTER 1 Introduction to Economics Microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decisionmaking units such as firms and households It examines the quottreesquot not the quotforestquot One big question Microeconomics asks is quotWho gets the goods and services that are produced why does poverty exist who is poor and why do some jobs pay more than othersquot Opportunity Cost The best alternative choice that we give up when we make a choice or decision It is measured by What was given upW hat was gotten All resources have a different opportunity cost Must be considered when determining what to produce Law of Increasing Opportunity Cost The more of something we do or produce the higher the opportunity cost illustrated by the bowed out shape of a ppf Marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision and ignoring sunk costs Efficient Market A market in which profit opportunities are eliminated almost instantaneously Industrial Revolution 18th19th century in England where new manufacturing and transportation technologies spawned factories and large urban areas Positive Economics Understanding behavior and the operation of systems without making judgments It describes what exists and how it works Testable Normative Economics Policy Economics Analyzes the outcomes of economic behavior evaluates them as good or bad and may prescribe a course of action Ethical not testable Empirical Economics The Collection and use of data to test economic theories Model A formal statement of theory usually a mathematical statement of a presumed relationship between two variables Ockham39s Razor Irrelevant detail should be cut away leaving the simplest explanation Ceteris Paribus All else being equal a device used to analyze the relationship between two variables assuming all other variables are held unchanged Fallacies Post Hoc Ergo Propter Hoc Fallacy Erroneously believing that since B follows A B was caused by A Fallacy of Composition Erroneously believing that what is true for a part is necessarily true for a whole The Four Criteria for Judging Economic Outcomes Efficiency Allocative Efficiency An efficient market is one that produces what the people want at the least possible cost Productive Efficiency Any point on the actual ppf Equity Fairness Growth An increase in the total output of an economy Stability A condition in which national output is growing steadily with low in ation and full employment of resources CHAPTER 2 Scarcity and Choice 3 Key features of society Since resources are scarce What gets produced How is it produced Who gets what is produced Capital Goods that are produced and then used in the production of other goods and services Money Not a capital good it is a means of exchange allowing for the transfer of goods Factors of Production Factors or Resources The inputs into the process of production The 3 key factors are land labor and capital Production The process that transforms scarce resources into useful goods and services Inputs Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants Input Market The market for labor where firms compete for the labor supplied by households Outputs Goods and services of use to households Output Market The market for goods where households compete for the goods supplied by firms Nearly all the same basic decisions that characterize a complex economy must also be made in a simple economy Theory of Comparative Advantage Specialization and free trade will benefit all trading parties even those that may be quotabsolutelyquot more efficient producers David Ricardo 19th century British economist Absolute Advantage A producer who can produce a product using fewer resources Overruled in production by a producer with the comparative advantage Comparative Advantage A producer who can produce a good at a lower opportunity cost than another A producer with a comparative advantage should produce goods before the producer with the absolute advantage A producer can only have the comparative advantage in one good Saving Trading present value for future value Consumer Goods Goods produced for present consumption iPod Intermediate Goods Goods that pass through the production process rubber for basketballs Capital Goods Goods used to produce other goods industrial printing press Investment The process of using resources to produce new capital Production Possibility Frontier PPF A graph that shows all the combinations of goods and services that can be produced if all of society s resources are used efficiently Marginal Rate of Transformation MRT The slope of an economies PPF Law of Increasing Opportunity Cost The more of a good moving down and to the right or up and to the left on a PPF increases the opportunity cost Output Efficiency The economy must be operating at the right point on the PPF Economic Growth An increase in the total output of an economy Growth occurs with the acquisition of new resources and with better knowledge of how to maximize existing resources Market Systems Command Economy An economy in which a central government either directly or indirectly sets output targets incomes or prices LaissezFaire Economy An economy in which individual people and firms pursue their own selfinterest without any central direction or regulation Consumer Sovereignty Consumers dictate what will be produced by choosing what to purchase Free Enterprise The freedom of individuals to start and operate private businesses in search of profits Price Theory The basic coordinating mechanism of the market is price Problems of a free market economy Inefficiencies unequal distribution of rewards and regular unemployment and in ation CHAPTER 3 NOTES Demand Supply and Market Equilibrium Firms make decisions in order to maximize profits households make decisions based on personal taste amp preferences Output or product markets The markets where goods and services are exchanged Firms supply the goods which households demand Input or factor markets The markets where the resources are used to produce goods and services are exchanged Firms demand the labor that households supply Changes in the price of the good affect the quantity demanded and move the point to a new position on the same curve changes in any other factor such as income or preferences affect demand and shift the entire curve Quantity Demanded The amount of a good or service the market is willing to buy at a given pr1ce Absolute Price Price tag price Relative Price Opportunity Cost How much goodl costs in terms of how many of good2 one could buy DEMAND Demand Schedule Shows how much of a given product a household would be willing to buy at different prices for a given time period Demand Curve A graph illustrating how much of a given product a household would be willing to buy at different prices It illustrates demand when read from the left and illustrates marginal benefit when read from the bottom Marginal Benefit The additional benefit received by consuming one more unit of the good Law of Demand The negative relationship between price and quantity demanded Determinants of Demand Price tastes and preferences income prices of related goods expectations of future prices SUPPLY Supply Curve A graph illustrating how much of a product a firm will sell at different prices The curve shifts after any change that is not a change in the price of the good Supply Schedule How much of a given product firms will sell at alternative prices Quantity Supplied A point on a supply curve that moves along the same curve when the price changes Determinants of Supply Price technology prices of factors of production prices of related goods expectations of future prices Law of Supply The positive relationship between price and quantity supplied In the short term other limiting factors such as factory size time and other resources may cap the supply curve Law of Diminishing Marginal Utility Each additional good provides less utility Normal Goods Demand goes up when income is higher cookies toys etc Inferior Goods Demand goes down when income is higher fast food cheap motels etc Substitutes Goods that serve as replacements for one another when the price of one goes up demand for the other one goes up Perfect Substitutes Identical products Complementary Goods A decrease in price of one good increases demand for the other bacon and eggs cars and gas hot dogs and buns Factors determining what Households can buy Income wealth and the price of the good Shift and Movements of the Demand Curve Shifts move the actual demand curve movements happen when the actual demand point moves on the same graph due to a price change Shift and Movements of the Supply Curve Shifts move the actual supply curve movements happen when the actual production point moves on the same graph due to a price change Price Rationing When there is a shortage or excess demand some people will be satisfied and some will not CHAPTER 4 Demand and Supply Applications Surplus39s and shortages show suppliers and producers what the buying habits of consumers are Fall in demand leads to surplus leads to drop in price leads to drop in quantity supplied leads to new equilibrium at lower price and lower quantity Scarcity Lower QS than QD illustrated by downward slope of curve Preventing price from rising to equilibrium is justified on several grounds Price gouging is bad income is unfairly distributed and some items are necessities that everyone should be able to buy at a reasonable price Queuing Waiting in line as a means of distributing goods and services a nonprice rationing system Favored Customers Those who receive special treatment from dealers during situations of excess demand Ration Coupons Tickets or coupons entitling consumers to purchase a certain amount of a given product per month Consumer Surplus The difference between the maximum amount a consumer is willing to pay and the market price top of triangle of demand curve Producer Surplus The difference between the current market price and the cost of production for the firm Deadweight Loss The total loss of producer and consumer surplus from underproduction or overproduction In economics acting on expectations can cause that expectation to realize itself if I think prices will rise in the future demand will go up now causing prices to rise Voluntary Exchange Buyers and sellers exchange freely in the market based on rational self interest one does what one feels is best for oneself
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