Test 1 study guide
Test 1 study guide Econ 2314
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This 7 page Study Guide was uploaded by Cassie Aramil on Monday October 5, 2015. The Study Guide belongs to Econ 2314 at Texas State University taught by Dr. Bruce McClung in Fall 2015. Since its upload, it has received 27 views. For similar materials see Principles of Economics in Economcs at Texas State University.
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Date Created: 10/05/15
ECOExamOne Economic questions always deal with choice in the face oflimited resources and the central concern of economics is Even if all of the world s resources were to magically increase a hundredfold then the scarcity principle would still govern behavior At the very least Joe Average and Bill Gates are both identically limited by the 24 hours that compromise a day If Chris has a one hour break between his classes and he can either spend that time at the library studying or at the gym working out the decision he needs to make is an economic problem because Chris has only one hour scarcity during which he can only study orwork out The costbene t principle indicates that an action should be taken only if the extra bene t is greater than or equal to the extra costs The opportunity cost of an activity is the value of the next best alternative forgone So If Bob was accepted at 3 different graduate schools and must choose one Option 1 Elite U costs 50000 per year Financial Aid 0 Value Bob places on Elite U 60000 highest value to Bob Option 2 State College costs 30000 per year Financial Aid 10000 Value Bob places on State College 40000 2nCI highest value to Bob Option 3 No Name costs 20000 per year Financial Aid 20000 Value Bob places on No Name 15000 Bob doesn t give a fuck Then the opportunity cost of attending Elite U would be 20000 because the next best alternative forgone was State College 30000 per year 10000 financial aid 20000 However Bob would maximize his surplus by attending State College because the difference between the bene t and cost is greatest there difference between the price of attending and the value Bob places on attending Isabella earned 25000 a year before Edward got her pregnant and she magically became a mother in about 2 months After she became a mother she told her employer that her opportunity cost of working is now 50000 a ECOExamOne year and that she will constantly be covered in sparkles Isabella is basing her decision on the value she places on spending time With her demon child If Pizza has an absolute advantage over Salad then Pizza can accomplish more in a given period oftime then Salad can Having a comparative advantage in a particular task means that you give up less to accomplish that task than you do others Comparative advantage does not require absolute advantage The application of the Principle of Comparative advantage leads to greater specialization of labor and other factors of production Dent 39n Derp Used Cars amp Trucks employs 3 salesmen Data for their sales are shown in this lovely table Cars Sold Trucks Sold 10 5 9 9 WEI 3 12 Larry has the absolute advantage in selling cars Ralph has the absolute advantage in selling trucks For Larry the opportunity cost of selling a truck is 2 fewer cars sold 10 cars sold divided by 5 trucks sold For Ralph the opportunity cost of selling a truck is 14 of a car not sold 3 cars sold divided by 12 trucks sold Joe39s opportunity cost of selling a car is less than Ralph s and greaterthan Larry s The production possibilities curve shows the maximum production of one good for every possible production level of the other good The demand curve illustrates the fact that consumers tend to purchase more of a particular good as its price falls The supply curve illustrates that rm s increase the quantity supplied of a good when its price rises According to the Principle of Increasing Opportunity Cost expanding production requires using resources starting with the resource with the lowest opportunity cost and proceeding to the higher opportunity cost resources You have no life so you ve noticed that your next door neighbor Lucy always works in the garden and her husband Natsu always walks the ying cat Based on this observation you conclude that Natsu has a comparative advantage in walking the ying cat ECOExamOne Michelangelo saw a giant ass pizza that he was willing to buy for 35 The price shown on the menu however was only 2999 Therefore Michelangelo should buy the pizza because the price is less than his reservation price A market comprised of a downwardsloping demand curve that intersects an upwardsloping supply curve is said to be stable because at any price other than equilibrium forces in the market move price towards the equilibrium A market in disequilibrium would feature either excess supply or excess demand A shortage occurs when the quantity demanded exceeds the quantity supplied If the demand for a good decreases as income decreases it is a normal good If the price of computers increases and the demand for monitors decreases as a result then computers and monitors are complements Suppose that the technology used to manufacture laptops has improved the likely result would be an increase in the supply of laptops The percentage change in quantity demandedthat results from the percentage change in price is known as the Price Elasticity of Demand If the price of weeeeeeed increases by one percent and the quantity demanded falls by onehalf percent then demand for weeeeeeed is Price Inelastic Price elasticity of demand is often expressed as a positive number because it s convenient to use absolute values even though the formula yields nonpositive numbers If the percentage change in the price of a good is less than the percentage change in the quantity demanded of that good then the demand for that good with respect to price is elastic When the demand for a good is inelastic that good is likely to have few close substitutes Jeans in general as a clothing item have fewer close substitutes than any speci c brand of jeans wrangler levi etc Therefore the demand forjeans in general would be more inelastic than the demand for a speci c brand ofjeans ECOExamOne Regards to Prana for the following Microeconomics deals with how individual decision makers make choices Principles of Microeconomics An introduction to the microeconomics of a modern industrial society Emphasis is on supply and demand cost and price concepts market structures income distribution and similar issues Rationalizing Optimizing Individual ROI faces resources limitations and possesses preferences makes choices to optimize his economic wellbeing Scarcity possessing unlimited wants all individuals have only limited resources available to fulfill their wants Cost Bene t Rule individuals should pursue an activity as long as the extra benefits from the activity exceed the extra cost of the activity stopping when the two are equal Allows one to determine the benefits and costs of various alternatives Total Economic Surplus TES the difference between the Total Benefits TB and the Total Costs TC of an activity TES TB TC Marginal Analysis small marginal changes to make choices Marginal Benefit MB benefit of 1st hour 2rld hour etc Marginal Cost MC Marginal Benefit Marginal Cost 1St Hour spend studying ECO 25 6540 1st hour not spent on CALC 5 5560 2nd Hour 15 8065 2rld hour 10 4555 3rd Hour 10 9080 3rd Hour 15 3045 4th Hour 5 9590 4th Hour 30 030 ECOExamOne Marginal Analysis Keep going as long as MBgtMC 1st 25 5 5 3rd10 155 4th 5 30 25 Margin Can also sum the test scores 1st 6555 120 3rd9030120 4th95095 Expected Value EV the sum of the probabilities of an outcome times the value of the outcome EV p X outcome 1 lp X outcome 2 Fair bet Gamble With an expected outcome of ZERO Betterthanfair bet Gamble With a positive EV Risk Neutral individual will accept a fair bet Risk averse will reject all fair bets Adverse selection Present Value Formula PV X1r to the nth power Relates future values to current values Discount Factor 11r to the nth Future oriented person has a small rate of discount Players rationalizing optimizing individuals ROI Who play the game Strategies actions players can take Payoffs Outcome each player receives for each possible combination of strategies Payoff Matrix look at diagram on page 12 Nash Equilibrium a set of strategies in which no player can do better by unilaterally changing his strategy CHAPTER g Whv do Deonle trade Absolute advantage produces more output in a given time than the competition ECOExamOne Comparative Advantage when one has a lower opportunity cost of producing output than another person Rule of Comparative Advantage everyone is better off concentrating on activities in which they have comparative advantage ie lowest opportunity costs INSERT 3 DIAGRAMS FROM PGS 15 17 Production Possibility Curves Loads vs shirts PG 18 DIAGRAM Illustrates the maximum production of one good or serVice for each and every level of production of the other good or serVice RR line 0 from one good to 0 for the other good dLoadsdShirts PAGE 20 Ef cient all resources are fully utilized Inef cient all available resources are not engaged Social Production Possiblities Curve amp Trade Combination of efforts Rule of Increasing Opportunity Cost when production of a goodservice is increased the resources with the lowest opportunity cost should be used first followed by the next lowest opportunity cost then the next etc CHAPTER 3 How do markets work What is going to be produced How will it be produced Who will receive what is produced Law of Demand the quantity of a goodservice demanded is inversely related to the price of it Demand Function QDx f Px Demand as a function of price Demand Curve Graph of Demand Function Buyer s Reservation Price Maximum price one is willing to pay for goodservice Law of Supply relation between quantity of good X supplied and price of good X is positive or direct QSX fPX Seller s Reservation Price Seller s minimum price they will accept Equilibrium Price the price at which GoodX demanded Quantity of GoodX supplied PGX QGX Equilibrium Quantity Quantity of GoodX which results at Equilibrium Price Shortage of Excess Demand Quantity demanded is smallerlarger than quantity supplied ECOExamOne Normal Good increases as demand increases Inferior Good demand increases as incomes fall Ramen noodles Pog Price of other goods Substitutes goodservices used in place of one another Complements two goodsservices used together Automobiles amp gasoline SUPPLY Technology greatest variable in supply Price of Inputs wage rate rent price of electricity etc Number of Firms requiring inclusion in supply function SUPPLYDEMAND FUNCTIONS SHIFT LEFT AND RIGHT AS THEY ADJUST TO EACH OTHER CHAPTER 4 HOW MUCH LESS DO I BUY WHEN THE PRICE RISES Price Elasticity of Demand ABS Ed ABS DQuantityDPrice pg 53 1 balance line lt1 elastic sensitive to price changes gt1 inelastic relatively unresponsive to changes in price OR DM M2 M1MZ Ed Q2 Q1Q2 P2 P1P2 When Price Elasticity of Demand 0 or infinity demand is perfectly inelastic Income Elasticity of Demand the percentage change in the quantity of GoodX demanded DIVIDED by the percentage change income E1 DQuantityDIncome Cross Price Elasticity of Demand Eog percentage change in quantity of GoodX demanded DIVIDED by the percentage of change in price of GoodZ Eog DQuantityX DPriceZ
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