ECN 203: Principles of microeconomics and macroeconomics - Study Guide
ECN 203: Principles of microeconomics and macroeconomics - Study Guide ECN 203
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This 7 page Study Guide was uploaded by an elite notetaker on Sunday October 19, 2014. The Study Guide belongs to ECN 203 at Syracuse University taught by Donald Dutkowsky in Fall. Since its upload, it has received 232 views. For similar materials see Principles of microeconomics and macroeconomics in Economcs at Syracuse University.
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Date Created: 10/19/14
Chapter 3 Essentials of free market Consumers choosing a variety of goods and services based upon maximizing utility subject to the budget constraint Firms specialization into producing different types of goods based upon maximizing profits Perfect competition A high degree of competition among different firms producing the same good with no single firm having an advantage over another firm in the industry Perfect Competition A price for a good or service which is known to buyers and sellers Mutually Beneficial Exchange trade or purchasing something takes place only if it serves to benefit both the buyers and the sellers Beauty of free market People are free to make their own choices based on their preferences The efficiency of the markets ensures people get the most utility out of the resources they own and bring to the market The agility of the market system allows it to respond creatively to changing conditions and evolve in constructive ways The role of money in markets Primary role is as a Facilitator of Trade to serve as a lubricant to make trade take place as smoothly as possible It is the engine oil to the engine of trade A medium of exchange others accepted gold for any good or service A unit of account it allowed people to measure the value of their holdings A store of value people could hold value in the form of gold How a market works Demand is not a number but a function It reflects the attitude of demanders and is represented by the demand schedule or demand line Quantity demanded QD refers to a specific number a given good or service that one or more people intend to purchase Shifts in demand curve A change other than P that makes QD increase is described as a rightward shift of the curve or an Increase in Demand A change other than P that makes QD decrease is described as a leftward shift of the curve or a Decrease in Demand Demand of goods causes The Price of Goods P P ceteris paribus 13 QBquot A Whole Bunch of Other Causes e g Tastes Tastes ceteris paribus 13 QB Supply or Quantity Supplied Qs the amount of a given good or service that firms intend to produce and sell Supply of goods causes Price of Goods P P ceteris paribus 13 Q5 A Whole Bunch of Other Causes e g Price of Energy Price of Energy Ceteris paribus 13 Q5quot Shifts in supply line A change other than P that makes Q5 increase is described as a rightward shift of the curve or an Increase in Supply A change other than P that makes Qs decrease is described as a leftward shift of the curve or a Decrease in Supply Equilibrium Equilibrium P and Q The Values where the price of coffee and quantity i of coffee will ultimately settle given that the strategies of demands and suppliers play out If the price of coffee is anywhere other than P natural market forces bring it to equilibrium If P gt P there exists excess supply and pressure for the price to fall E EvIEEE SL1 p plly P Ees5 SLHDADW Th Lngjipllyr 39 Z 0G c e I quot 39 Q 39L g 393939 2 1quotquotya Pquot wv quotff HFquot quot 3939 quot2 I W 39 quot H fwf T BIrgzrrar1vjl a393939 quot L D Q guJarmtli139ge39 P5 Cguja r IlFiL I K dlemanded qr Q 5Lliil Ed Q5 If P lt P there exists excess demand and pressure for the price to rise Price A Suppy I 39 I Demand I Excess I 39 I Demand Os QD Quantity Market shifts and market adjustments case 1 In the figure below demand rises from D to D1 As a result there is an excess demand so p is not the equilibrium price To reach the new equilibrium point the price rises from p to p1 and the quantity increases from Q to Q1 F39l39i39iZEquot E E 51 3931 Quantity 5 iL39JfF39i iD I139r39B39quot39Ei39Iniquoti Ei quot 3 9quot Ir5sL39ai1 Ii39al Market shifts and market adjustments case 2 In the figure below supply falls from S to S1 As a result there is an excess supply and P is no longer the equilibrium price To reach the new equilibrium point price moves downward from P to P1 and quantity increases from Q to Q1 F39 ri4E V 51 3 I I I I I I I I I I I fl I3 1 Quantity a39it p i iirrt 39 rm3939 aa39 n II quoti1i 939t Ic The general market system Circular flow The web of connections between the various goods and input markets in the economy that determine quantities traded and prices connected by income generated by production and used for purchasing Two kinds of players individuals and firms Individuals Demand goods and services Supply inputs e g labor E Supply goods and services Demand inputs e g labor In the circular diagram below Individuals supply factors to Factor market and Factor market give back wages rent or interest Factor market demands factors from Firms and Firms offer Costs to factor market Firms supply products to Product market and Product market give back revenue Product market demands products from Individuals and Individuals consume products General Competitive Equilibrium GCE The situation in which all perfectly competitive markets are in equilibrium simultaneously Most efficient optimal type of overall economy Very possible to have economy in general equilibrium without GCE sub optimal with distortions Nice assumptions Are the ideal market conditions that ensure perfect competition There are two nice assumptions no market power and no market failure No market power everyone faces the same set of opportunities and obstacles in the race of wealth The advantages in the market are transitory and can be eliminated by competition Everyone has equal access to information Everyone has equal access to markets No market failure markets form quickly and function smoothly and efficiently to coordinate choices of individuals and firms Markets form quickly when needed Markets function smoothly and efficiently to coordinate choices The role of government in free market economy Try to eliminate market power when it exists enforce laws Try to eliminate market failure when it exists regulate externalities provide for public goods Pareto optimality there is no way to make one person better without making someone else worse off
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