Midterm 1 Study Guide
Midterm 1 Study Guide ECON 101
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This 48 page Study Guide was uploaded by Chloe on Sunday October 4, 2015. The Study Guide belongs to ECON 101 at University of Wisconsin - Madison taught by David W. Johnson in Summer 2015. Since its upload, it has received 336 views. For similar materials see Principles of Microeconomics in Economcs at University of Wisconsin - Madison.
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Date Created: 10/04/15
Chapter 1 scarcity economics efficiency equality opportunity cost rational people marginal change incen ve market economy property rights marke failure productivity inflation business cycle Chapter Vocab Chapter 2 circulerflow diagram production possibilities frontier microeconomics macroeconomics positive statements normative statements Chapter 3 absolute advantage opportunity cost comparative advantage imports exports Chapter 4 market competitive market quantity demanded law of demand demand schedule demand curve normal good inferior good substitutes complements quantity supplied law of supply supply schedule equilibrium equilibrium price equilibrium quantity surplus shortage law of supply and demand Chapter 5 Chapter 6 elasticity price ceiling price elasticity of price floor demand tax incidence total revenue income elasticity of demand crossprice elasticity of demand price elasticity of supply Cha ter 7 welfare economics willingness to pay consumer surplus cost producer surplus efficiency equality W deadweight loss W world price tariff Vocabulary Defined Chapter 1 scarcity there are few resources available economics studying how society manages scarce resources efficiency getting the most possible out of scarce resources how big can we make the pie equality distributing economic prosperity equally throughout societyhow many equal pieces can we cut the pie into opportunity cost what we give up to get another item rational people people who systematically and purposefully do what they can to achieve their goals marginal change a small change in the plan of action incentive something that makes someone want to do something market economy an economy that distributes resources through the combined decisions of many firms and household as they interact in markets for goods and services property rights a person s right to own and control scarce resources market failure when a market left to its own devises fails to efficiently allocate resources externality the impact of an individual s actions on the wellbeing of another secondhand smoking market power the ability of a single economic participant to have a substantial influence on market prices small country vs large country and its affect on world prices monopolies productivity the quantity of goods and services produced per until of labor input 1 shirthour inflation the increase in overall level of prices over time why arn t candy bars still 25 Z business cycle fluctuations in economic activity employment and production Chapter 2 circulerflow diagram a simplified visual model of how money flows between households and goods 3 good Br services emi 39 Market for goods 18 services mquot Market for factors of production femurs of production firms production possibilities frontier a graph that shows the combinations of outputs that an economy can produce given the available factors of production quot Quantity 7 neti a nrnnutf Fish Crusoe st F s1534 and Nut lemme ProductlcnPcsstbmhhes 35 I mm P rontie r m I Feasible bin nu Erl ricrrl 1 4 3 Coconuts 1 2E 3D 4U Eff Quantity of sh microeconomics the study of how households and firms interact in markets and make decisions macroeconomics the study of economywide phenomena ie inflation unemployment and economic growth positive statements claims that attempt to explain the world as it is I am positive that the world is like thishead normative statements claims that attempt to prescribe how the world aught to be I would like the world to normally be like thisheart real economic variables corrected for inflation nominal economic variables in name only Chapter 3 absolute advantage being able to produce more of a good than another producer opportunity cost whatever you give up to get something else comparative advantage the ability to produce a good at a lower opportunity cost price than anther producer imports goods made abroad that are sold domestically exports goods made domestically and sold abroad Chapter 4 market buyers and sellers of a particular good or service competitive market a market in which both buyers and sellers have a negligible impact on the market price we want this sort of market quantity demanded the amount of a good buyers want and are able to buy law of demand the higher the price the lower the quantity sold demand schedule a table that demonstrates the relationship between price of a good and the quantity demanded demand curve a graph of the relationship between the price of a good and the quantity demanded downward sloping normal good a good that acts normally if income increases so will the demand for this goodthe apple watch inferior good normally seen as inferior if income increases the demand for this good decreases ramen substitutes two goods for which if the price of one increases the demand for the other increasesif the price of hot dogs increase the demand for hamburgers will go up because no one wants to buy expensive hotdogs complements two goods for which the increase in the price of one will lead to a decrease in the demand for another an increase in the price of hotdogs will lead to a decrease in the demand for ketchup because fewer people will be eating hotdogs quantity supplied the amount of a good sellers want and are able to sell law of supply the higher the price the more stuff the producer will make to sell supply schedule a table demonstrating the relationship between the price of a good and the quantity supplied supply curve the graph of the relationship between the price and the quantity supplied upward sloping equilibrium when the market price is such that the quantity supplied and demanded of a good is the samewhere the supply and demand curves intersect equilibrium price the market price where the quantity supplied and demanded of a good are the same equilibrium quantity the quantity supplied and demanded at the equilibrium price surplus when there is too much stuff to sell and not enough people willing to buy Qs gt Qd E S shortage when too many people want something that there isn t enough of Qs lt Qd law of supply and demand THE INVISIBLE HAND the price of any good will adjust to bring the quantity supplied and quantity demanded into equilibrium Chapter 5 elasticity a measure of the responsiveness of quantity supplied or quantity demanded to a change in one of it s determinants if price goes up with the quantity demanded go down by a little or a lot How stretchy the supply and demand for a good is price of elasticity of demand how much the quantity demanded of a good responds to the change in price of a good Own Price Elasticity Dijjl39erence in Quantity 0 399 Quantity Dijjl39erence in Price IPILJ ILi quot339 Q I 2 Percent Change in Quantity 39 Percent Change in Price a rig 39l I ifquot I J ireF Elasticity Price 1 The Absolute Iiialoe remouee the negative eign total revenue the amount paid by buyers and received by sellers of a good Price of good X Quantity sold income elasticity of demand how much the quantity demanded responds to a change in the consumers income helps determine if normal or interior good Percentage change in quantity demanded Income Elasticity of Demand 2 Percentage change in income crossprice elasticity of demand how much the quantity of a good responds to the price change in another good substitute or compliment Croee Price Elasticity of Demand Din change in guantity demanded of good X EH change in price of good Ir price elasticity of supply how much the quantity supplied of a good responds to change in the price of a good A in quantity supplied are in price Chapter 6 price ceiling a legal maximum on on the price of a good Fi lili39lil price floor a legal minimum on the price of a good price floor 25 llJ Iiloor Price p U 39qlg 51 lls Quantity in tax incidence the manner in which the burden of a tax is charged among participants in a market if both demand and supply curves are of the same elasticity both consumers and producers will be losing the same amount to tax Price 5 tax r n Qua ntity rimright 39a39a39w39a39a39 t39 fl mll39 mitlmemt uk Chapter 7 welfare economics studying how the allocation of resources affects economic wellbeing how to share the pieces of the economic pie willingness to pay the maximum amount a consumer is willing to pay for a good consumer surplus how much of a deal a consumer feels they got from the purchase of a good what they expect to pay what they actually pay producer surplus how much of a deal a producer feels they get from selling their good what they get for the good the sellers cost of providing the good Tulallv umlua 93 39 Il39mrmlll 1 II II 391 V Total 3quotle E EMH39 mDF Sulfur z V f Product Swarm quot SEE CIuanL 1539 cost the value of everything a seller gives up to make a good sweatbloodtears cost D efficiency allocating resources in a manner to maximize total surplus received by all members of society head equality distributing economic property uniformly among members of societyheart Chapter 8 deadweight loss the fall in total surplus that results from a market distortions ietaxes II motlweight Ilu 35 Gmwrmmeul Quinta E II 1 n t quot Chapter 9 world price the price at which the world market values a good tariff a tax on imported goods 10 Principles of Economics 1 How People Make Decisions 1a People Face Tradeoffs people often have to give something up to get something else Trade off example includes quotGuns and Butterquot in societies Will more money be allocated to military spending or to consumer goods Another major trade off between efficiency and Equality Efficiency Getting the most out of limited resources available Want production consumption Equality Giving everyone a fair share Pie example p2 1b The cost of something is what you have to give up in order to get it You can39t always get what you want but you can try In order to get what you want you often must make sacrifices which is considered the cost Opportunity Cost What you give up in order to get an item 1c Rational People Think at the Margin Rational people do what they can with available opportunities to systematically do their best to achieve their goals Marginal Change making a small adjustment to an existing plan or action Marginedge quotTrimming the edge a bitquot Understand that it is important to compare marginal benefit to marginal cost not marginal benefit to total cost as demonstrated in the phone example 1d People Respond to Incentives If someone is rational therefor thinking about what they can do to reach your goal then they respond to incentives Incentives can change as demonstrated in the Seat Belt Law story Incentive the prospect of punishment or reward 2 How people interact 2a Trade can make people better off trade allows people to specialize in certain fields and reduces the cost of goods and services 2b Markets tend to be a good way to organize economic activity Market Economy decisions pertaining to what how much and who what goodsservices how much goodsservices and who produces and consumes these goods and services to markets and households The Invisible hand the hand that guides firms and households to work together in creating a successful market economy with desirable market outcomes 2c Governments Can sometimes improve market outcomes athe government is needed to enforce rules and maintain institutions that are key to a market economy This include PROPERTY RIGHTS in which an individual owns and controls scarce resources Having rules keep people from obtaining things for free thus befitting the producer and allowing for the invisible hand to work Government Intervention and Reallocation of Recourses b efficiency in times of market failure well designed public policy can enhance economic efficiency Externality unpriced cost or benefit education vs pollution Market Power Water well and lack of competition c equality the market economy is based on a give and get system and the more someone wants something the more they will pay to get it This does not ensure equality enough resources for those with less to give and get welfare and taxes balance this out 3How Economy as a whole works 3a A country39s standard of living depends on its ability to produce goods and services Productivity the quantity of goods and services produced per each unit of labor input What goes in must come out Higher productivity yields higher quality of life Growth rate of productivity growth rate of ave income Boost living standards by boosting productivity 3b Prices Rise when the government prints too much Inflation an increase in overall level of prices in an economy lmposes various costs on society policymakers try to avoid it Cause growth in quantity of growth in inflation 3c Society faces a shortrun trade off between inflation and unemployment Long run higher level of money to match higher level of prices short run more cash higher spending thus demand higher demand need for supply firms higher more workers and produce more goods and services hiring lower unemployment 1 The Economist as a scientist econ uses Sci Meth a The Scientific Method Observation Theory and more observation Observation Hypothesis Test Analyze Test againconclude All observable but no lab data b The Role of Assumptions they simplify the world for better understanding Diff ass for diff questions c Economic Models Simplify understanding of economy a Circular Flow Diagram relationship between firms and households b The Production Possibilities Frontier uses math to generate a graph demonstrating the combinations of output given available factors or production and available production technology Endpoints represent extremes Works with resource avaHabHHy 2 Micro v Macro Micro the study of how households and firms make decisions and how they interact in specific markets Macrostudy of economywide phenomena including inflation unemployment and econ growth 3 Econ Advising a Pos v Normative Analysis Positive statements are decriptive and claim how the world is Normative statements are prescriptive and claim how the world aught to be Key diff how we judge their validity 4 Econ in the Gov39t Fed res dep of labor justice dep 5 Diff in Econ Op a diff in scientific judgements Disagree in validity of alt theories and the size of important parameters that measure how economic variables are related b diff in values Absolute Advantage the ability to produce a good using few inputs than another producer comparative advantage the ability to produce a good at a lower opportunity cost than another producer ie give up less for the same amount End up doing what you do best and buy the rest The price of trade for both parties to benefit from trade the price of trade must lie between the two opportunity costs Trade between countries Imports goods produced abroad and sold domestically Exports goods produced domestically and sold abroad All has to do with resources TRADE IS GOOD Welfare Economics how distributing resources effects economic wellbeing can everyone get what they want Equilibrium makes everyone happy by maximizing the total benefit received to both buyers and sellers Consumer Surplus what do the buyers get out of participating in the market Willingness to pay how do I value this good Do I believe that I am getting something for more than I am paying Consumer Surplus Price consumer is willing to pay price they actually paid The Demand Curve for consumer surplus looks like stairs Marginal Buyer the person who is most likely to drop out if the price rises any more Consumer Surplus Demand curve area under the stair between 2 prices Consumer Surplus essentially measures the value of the good as the consumer perceives it Producer Surplus How a seller perceives their opportunity cost affects for how much they are willing to receive for their services Producer Surplus The amount a seller is paid cost of production Height of supply curve sellers costs Market Efficiency Do markets spread resources efficiently and in a desirable manner Total Surplus Consumer Producer Surplus OR TS Value to buyers cost to sellers D International Trade 3 questions to think about a How does international trade affect price of products and quantity sold in the domestic market b Who gains from International Trade Who loses in international trade Do the gains exceed the losses c Should a tariff be imposed Tariff tax on imports World Price and Comparative Advantage Should we export or import World Price the main price of a good in the world market Easiest to export if export prices are lower than world price Easier to import if world price is cheaper than domestic prices Pretrade world and domestic prices demonstrate comparative advantage the domestic price is the opportunity cost for producing a good Gains Losses Change in consumer and producer surplus Conclusion a When a country becomes an exporter of a good in a world market domestic producers are better off and domestic consumers are worse off b Trade increases a nation39s wellbeing because the gains of producers winners exceed the losses of consumers losers Tariffs and Quotas Tariff tax on imported goods Quota limiting the amount of goods imported into a country Help the domestic producer as they both increase the demand for domestic goods hurt the domestic consumer as both cases drive up prices Tariff creates deadweight loss by slightly increasing the price of a good in the domestic market causing domestic suppliers to make more of the good and domestic consumers to buy less of it There is a slight deadweight loss DWL 12Qs after tariff Qs before tariffP with tariffP no Tariff12Qd before tariffQd after tariffP with TariffP no tariff Trade has added benefits Increased flow of ideas Adds Competitions Lowers cost of economics of scalehuge amount of goods at a low cost Larger variety of good available Arguments for Restricting Trade 1 The Jobs Argument What People will lose jobs because of trade Lol There will be a lower quantity demanded of a good in a domestic market for a good that is imported from the worl market however this does not mean that there are NO MORE JOBS AVAILABLE in the country It is likely that the country exports certain goods as well meaning that some goodand industry is benefitting from trade As a result people should be trained for production in this other market and thus make a higher incomethus standard of living through reallocation of resources ie people to another market 2 The National Security Argument What Certain industries are vital to the production wartime goodsweapons If we were to to participate in free trade then we would be getting resources for the fabrication of weapons from other countries If war were to break out foreign supply would be interrupted Lol If we are importing the material to make weapons from the world market then it would be much cheaper to produce these weapons 3 The infantIndustry Argument What lnfant lndustriesnew firms cannot grow up of there is intense competition from already mature foreign firms We need to impose tariffs and quotas and subsidize infant industries until they are mature enough to compete in the world market Lol lnfant Industries cannot mature if they do not face competition and are subsidized as they do not learn to be efficient Instead they will be dependent on subsidies and demand more taking away from consumers lnstead an infant firm must be left to fend for itself It is normal to face losses before making profits If a firm is to succeed firm owners will be willing to take these losses 4 The unfaircompetition Argument What A country could subsidize a product allowing it to be more competitive in the world market Lol although our producers take a hit we import the product thus benefitting consumers cheaper prices It is that country39s consumers who take a hit and who have to pay taxes to support that subsidy 5 The Protection as a bargaining chip argument What The threat of a trade restriction can remove a trade restriction already imposed by a foreign government Lol Threats might not work Either the country making the threat will have to implement the trade restriction thus reducing its own economic welfare or back out of the threat making it look bad in terms of international relationsimage
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