ECO- Test 1 Study Guide
ECO- Test 1 Study Guide Eco2023
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This 5 page Study Guide was uploaded by Cara Johnson on Wednesday October 7, 2015. The Study Guide belongs to Eco2023 at Florida State University taught by Dr. McCaleb in Fall 2015. Since its upload, it has received 65 views. For similar materials see Microeconomics in Economcs at Florida State University.
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Date Created: 10/07/15
Economic Methodology Ceteris Paribus all other things constant Law of Demand when the price of something rises ceteris paribus the quantity demanded decreases Nominal values price of good or service without adjusting for in ation Real values prices adjusted for in ation Methodological Fallacy correlation does not imply causation Scarcity and Marginal Analysis Marginal analysis leads to correct decisions conserves on scarce resources such as information and is descriptive of most realworld decision processes more realistic in order to make a rational decision you must determine the costs and bene ts of alternatives rst Marginal bene t gt Marginal cost gt you should do more gain Marginal bene t lt Marginal costs gt you should do less MB MC gt maximizes net gain increase every activity as long as MBgtMC and decrease every activity as MBltMC resulting in MBMC optimal activity Scarcity a resource is scarce if the amount available is less than the desired amount Choice If a resource is scarce choices must be made alternatives Opportunity cost when choosing a scarce resource an opportunity cost is the highestvalued alternative forgone the value of what you could have spent the money on Marginal analysis producing more of one thing and less of another lncentives in uenced in predictable ways changes in marginal bene ts and marginal costs of alternatives Production Possibilities Frontier PPF boundary between the combination of goods and services that can be produced and the combination of the ones that can t be produced given the available factors of production in given state of technology shows the limits of production with available resources and technology if either changes the PPF shifts illustrates the effects of scarcity and its consequences Types of resources 1 Capital real items such as machines buildings the more capital available the more that can be produced 2 Land all natural resources 3 Labor force employed unemployed 4 Entrepreneurship Full employment of resources vs Unemployment of resources Points B C and D are attainable and have full employment of resources Point A is attainable but has unemployment of resources Point X is unattainable with the given amount of resources Uuantity df Guns Frdduced Uuanljty df Elutter Produced TradeOffs Substituting one good for another When moving from one point to another a tradeoff exists If you move from point D to point B a quantity of butter produced must be given up to gain in quantity of gum produced Important information about PPFs 1 PPFs do not show where the economy is at it does not represent actual production it shows the maximum potential for an economy 2 Changes in employment and unemployment do not affect the curve a Changes do not shift the entire curve only moves to different points on the curve Shifters of the PPF 1 Technology available generally does not decrease 2 Change in available resources 3 Changes in the labor force Comparative Advantage Absolute advantage 0 The ability to produce more of a good or service with the given amount of resources in a given amount of time Comparative Advantage The ability to produce a good or service with the lowest opportunity cost Specializing in production of goods for which the opportunity cost is low 0 Not producing those with high opportunity costs Exchanging the goods they provide for the goods they wish to consume 0 A person state region or country can have absolute advantage in everything 0 A person state region or country cannot have comparative advantage in more than one thing 0 Every person state region or country has a comparative advantage in something Supply and Demand Law of demand price of a good and quantity demanded are inversely related quantity demanded is the amount of a good that people are willing and able to buy at a set price change in price leads to movement along the curve or change in quantity demanded When demand decrease entire curve shifts inward or left When demand increases entire curve shirts outward or right Demand changes to outside effect other than price Shifters of demand 1 Price of related good or service 2 Buyer s income 3 Buyers expectations 4 Number of buyers 5 Likes and preferences Two goods are either related or unrelated 1 Unrelated if the price of one changes it has no effect on the other Related two goods can be complements or substitutes Complements If the price of one goes up the demand for the other goes down and vice versa consumed together Substitutes If the price of one goes up the demand for the other goes up in place of the other 2 Income Normal Superior vs Inferior Goods Normal lf income goes up the demand also goes up and vice versa Inferior lf income increases the demand decreases and vice versa 3Likes and Preferences More people like it outward shift of demand curve Less people like it inward shift of demand curve 4Buyers Expectations Expect lower future price buy less now Expect higher future price buy more now 5Number of Buyers More buyers outward shift Less buyers inward shift Law of Supply If the price of a good rises the quantity supplied of that good increases and if the price of a good falls the quantity supplied of that good decreases Re ects what sellers are willing and able to produce Independent of Demand When supply decreases entire curve shifts left When supply increases entire curve shifts right Shifters of Supply 1 Price of related goods 2 Price of resources or input 3 Sellers expectations 4 Number of sellers 5 Productivity 1Price of related goods Compliments in production when the price of producing one good rises the supply of the compliment increases which results in an outward shift Substitutes in production when the price of producing one good rises the supply of the other decreases which results in an inward shift 2lnput Price lf wages increase supply decreases lf wages decrease supply increases 3Productivity lf productivity increases supply increases lf productivity decreases supply decreases Equilibrium Equilibrium a state in which there is no tendency to change when everyone is doing the best heshe can Market equilibriumstate of rest between price and quantity neither buyers nor sellers have the incentive to change when quantity demanded quantity supplied Above equilibrium OS gt Qd surplus so price will drop until you reach market equilibrium Below equilibrium Qs lt Qd shortage so price will increase until you reach market equilibrium Effects of an increase in demand on equilibrium 1 An increase in demand shifts the demand curve rightward and because of the price increase quantity supplied increases along supply curve and so the equilibrium quantity increases Effects of an increase of supply 1 an increase in supply shifts entire curve rightward price decreases to restore market equilibrium and because of price decrease the quantity demanded increases along demand curve and so equilibrium quantity increases Effects of an increase in both supply and demand 1 Increase in demand shift entire curve rightward an increase in supply shifts entire curve rightward equilibrium quantity increases and the equilibrium price may rise fall or remain the same Important If both supply curve and demand curve shift and you know the direction one factor will be determinable and one will be ambiguous
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