Microeconomics Exam 1 Study Guide
Microeconomics Exam 1 Study Guide Eco2023
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This 16 page Study Guide was uploaded by kyrabacon on Thursday October 8, 2015. The Study Guide belongs to Eco2023 at University of Florida taught by Mark rush in Summer 2015. Since its upload, it has received 1461 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Florida.
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Date Created: 10/08/15
Studv Guide Midterm Exam 1 0 Exam Date Oct 13th 0 Covers Ch18 and Ch 20 in textbook and lectures from 824 1510 12 15 0 You are allowed one 3x5 index card on this exam so if there39s anything in this study guide that you feel confused about include it in your index card Ch 1 Lecture 2 and part of 3 0 Economics social science that studies choices that people or businesses make as they cope with scarcity and the factors that in uence these decisions I Scarcity inability to satisfy all wants I Incentive rewardpenalty that encouragesdiscourages an action 0 Difference between macro and micro in this course we study micro I Microeconomics the study of individual firms consumers and markets within the economy I Macroeconomics the study of the overallaggregate economy 0 The three big questions I What goods and services will be produced 0 Goods physical objects 0 Services tasks performed for consumers I How will the g and s be produced 0 Factors of production land labor capital and entrepreneurship I For whom will they be produced 0 Landrent 0 Labor wages earns most 0 Capital interest 0 Entrepreneurship profit 0 Economic structure I Tradition the answer this year is the same as last year follows a pattern I Command Economic planners devise answers and create plans ex North Korea IConsider Selfinterest vs socialpublic interest 0 Selfinterest best decision for yourself 0 Social Interest best decision for everyone Economists favor efficient resource use no one can be better off without someone else being worse off 0 There are five things that Rush does not talk about in his lectures from this chapter but he includes about 510 of his questions from the book so it might be helpful to know I Issues in today39s world regarding social vsself interest 0 Globalization expansion of trade and investments 0 InformationAge Monopolies Information Revolution 0 Climate Change Burning fossil fuels for use 0 Financial Instability unpaid loans 0 Economic way of thinking I Tradeoffs giving up one thing to get something else I Rational choices comparing benefits gains and costs give up 0 Benefit determined by preferences what a person likesdislikes O Opportunitv cost highest valued alternative given up Ex Sally loves both tacos and pizza Both cost 4 Sally would rather get a taco than a pizza slice When she gets a taco her opp cost is the pizza slice I Choices made at the margin compare benefit of more of something with its cost 0 Marginal Benefit benefit received from one more unit consumed Measured as max amount willing to pay for one more unit 0 Marginal Cost opp cost of producing one more unit Measured as increase in total costincrease in output I Respond to incentives see first bullet 0 Positive v Normative Statements I Positive what is I Negative what should be I Economic model explains economic world descriptions of some aspects that include only features needed for purpose at hand Ch 2 Lectures 37 0 Production Possibilities Frontier PPF boundary between combinations of g s that are produced at lowest possible cost Good A Not Attainable and production Attainable but not i Good B I There is no opp cost from going to production inefficient to pro eff I Choice along PPF as you move along line is a tradeoff I Point may be located inside because resources are not being used efficiently I Law of increasing ODDortunitv cost bowed outward because resources are not equally productive at each point 0 Opp cost losegain 0 Allocative Efficiency gs produced at lowest cost with greatest benefit in other words you can39t produce more of one without giving up other I PPF shows limits to production 0 Resources labor capital land and entrepreneurship If resources increasedecrease PPF bows outwardinward 0 Technology I Marginal cost is slope of the PPF I Marginal Benefit Curve shows marginal benefit and quantity consumed unrelated to PPF curve 0 Similar to demand curve 0 principle of decreasing marginal benefit more of good less marginal benefit Ex 1st slice of pizza has more benefit to you than the 10th slice of pizza when you39re not as hungry 0 Economic growth expands PPF outward I Ex Hong Kong catching up to US Good A I Good B I Technological change development of new goods or ways to produce I Capital accumulation growth of capital resources including human capital I Need to know terms economic coordination I Fi economic unit that hires factors of production to sell gs I Market arrangement that allows buyers and seller to get info and do business 0 Competitive no buyer or seller in uences I Property rights social arrangement that governs ownership and use of valued property real financial and intellectual I Money commodity or token accepted as payment 0 Trade Gains Rush doesn39t mention this until Lecture 20 but its included in Ch 2 so I39ll mention it here I Comparative Advantage countryperson can perform activity at lower cost than others ex Suppose US outperforms China in rice and shirt production but is better at producing shirts than rice so China produces the rice I Absolute Advantage countryperson is more productive than others in all activities ex Suppose US outperforms China in rice and shirt production Ch 3 Lectures 8 This chapter is most crucial of all I recommend you research it more in depth in addition to the study guide 0 Markets and Prices I Competitive Market See markets in Ch 2 I Money price dollars exchanged for good or service I Relative price ratio of one price to another opportunity cost 0 Demand Law of Demandhigher the price of a good the smaller the quantity demanded and lower the price higher the quantity demanded Pl QW and Vice versa Demand entire relationship between price of good and QD 0 want afford and plan to buy Quantity demande amount of a good or service that consumers plan to buy during a given time period at a particular price point on demand curve 0 Change in QD caused by change in price indicates a movement along the demand curve Demand Curve relationship between QD and its price other in uences constant Price Quantity Demanded I Change in Demand Supply 0 Indicates a shift of the demand curve 0 gt The way I remember change in QD or change in demand is that movement is two syllables move and ment just like quantity demanded is two words Shift is one syllable like how demand is only one word This can also apply for supply Hope this helps O Caused by 6 factors Price of related goods 393 Complemen good used with another good 393 Substitute good that can replace another good Expected future prices Income 393 Normal gooddemand increases as income increases 393 Inferior good demand decreases as income increases Credit market conditions Preferences of demanders Law of Supply The higher the price of a good the greater the quantity supplied of it and the lower the price the lower the QS Price Quantity I Supply entire relationship between price of good and QS I Supply Curve relationship between QS and price other in uences constant 0 See curve above 39 Quantity supplied amount of good or serVice that producers plan to sell during a given time period at a particular price 0 Change in QS caused by change in price indicates movement along the supply curve I Change in Supply 0 Indicates a shift of the supply curve 0 Caused by 6 factors Cost of factors of production Technology of suppliers Price of related goods 393 Subs in production uses same materials ex leather wallets and leather belts 393 Comps in production produced together beef and cowhide State of Nature natural occurrences that affect resources Expected future prices opposite demand pattern 0 Market Equilibrium I Equilibrium price price where QD QS I Equilibrium quantitV quantity bought and sold at equilibrium price P s EP I D bQ Q I If QD gt QS then price is too low and there is a shortage and the price goes up I If QS gt QD then price is too high and there is a surplus and the price goes down I Shifting the Demand OR Supply Curve I P and Q rise demand curve shifts right I P rises and Q falls supply curve shifts left I P falls and Q rises supply curve shifts right I P and Q fall demand curve shifts left I Shifting both Demand and Supply I D shiftgt than S shift P and Q rise I D shiftlt than S shift P falls and Q rises I Rush39s 4step method for shifts of supply OR demand curves 1 Draw demand and supply diagram 2 Which curve shifts 3 Determine direction of shift 4 Draw a new line Ch 4 Lectures 1214 0 Price Elasticity of Demand responsiveness of the QD of a good to a change in the price I change QD change P 0 You can calculate the change in P or QD with the formula change in P average price X 100 0 Ex Original price of pizza was 2050 and the new price is 1950 The price change is 1 and the average price 195 2052 is 20 so 120 is 5 0 Use the Slope Formula riserun to find change in Pchange in QD Still confused Try combining the two formulas into the commonly used MidPoint Formula change in 2D average 2D change in P average P gt The elasticity is the magnitude of response we know if it39s negative or positive based on Law of Demand so it39s always expressed as a positive I Types of Elasticity 0 quotPerfectly Elasticquotdemand with an infinity price elasticity vertical demand curve Elastic Egt1 almost vertical 0 quotPerfectlv Inelasticquot demand with zero price elasticity horizontal demand 0 curve 0 Inelastic 0ltElt1 almost horizontal 0 Unit Elastic E l change in P change in QD 0 Factors that In uence Elasticity I of substitutes I Proportion of income spent I Time elapsed since price change Rush doesn39t include this but it39s in the book 0 gt Elasticity changes as you go down a downward slope I Total Revenue Test method of estimating price elasticity of demand by observing change in total revenue results from a change in price 0 Total Revenue value of firm39s sales P of good X QD E 0 Other types of Elasticities of Demand I Cross E of D responsiveness of demand for a good of a sub or comp O change in QD change in price of subcomp Helpful Hint Substitute Positive Complement Negative I Income E of D responsiveness of demand to change in income 0 change in QD change in income IEDgt0 normal good IEDlt0 inferior good 0 Price Elasticity of Supply responsiveness of Q8 of a good to change in price I change in QD change in income I Similar to PE of Demand with graphs and elasticity I Two factors affect magnitude of elasticity Rush doesn39t mention these but they39re in the book so I suggest studying them a bit 0 Resource substitution possibilities productive resources available then E will be greater 0 Time frame for the supply decision Momentary supply response of sellers to a price change at the very moment it changes Shortrun supply response after some adjustments such as technology are made Longrun supply response made after all adjustments are made Ch 5 Lecture 15 16 and part of 17 I Allocation of resources Rush doesn39t mention this in his lectures so I39ll be brief but it39s good to know just in case I Market Price I Command system someone of authority allocates I Majority rule I Contest I Firstcome firstserved I Lottery I Personal Characteristics EX Marriage In the workplace this is not allowed I Force EX military war 0 Demand and Marginal Benefit I Marginal Analysis compares marginal benefit to marginal cost 0 MBgtMC do action 0 MBltMC don39t do action 0 EX The director has eaten 4 slices of pizza at 4 a slice All his slices combined are his total benefit but the benefit he gets from eating a fifth slice is his marginal benefit max price willing to pay for next slice 0 Marginal Benefi marginal social benefit demand curve Benefit to consumer from one more unit of good When Q rises MSB falls When Q falls MSB rises 0 Marginal cos marginal social cost supply curve opp cost of producing one more unit producer When Q rises MSC rises When Q falls MSC falls 0 Allocative Efficiency one point on PPF Where it is not possible to produce more of one good Without producing less of another valued more see ch 2 I MSB MSC Total Surplus EP Allocatively Efficient Quantity same as Equlibrium EQ AConsumer S lus EP 7 A11 Eff Equ Producer Surplus quot I Total Surplus su EQ onsumer and producer surplus measures efficiency I Consumer Surplus marginal benefit price paid quantity bought I Producer Surplus price marginal cost quantity sold 0 Finding areas of surpluses area of triangle l2BH 0 Market Failure market delivers inefficient outcome I Underproduction Deadweight Loss measure of inefficiency decrease in total surplus due to inefficient production I Overproduction deadweight loss from surplus Under DWL Over DWL I Sources of market failure Again Rush doesn39t include this this is from the book 0 P and Q Regulations Taxes and subsidies Externalities Public goods and common recources Monopoly High transaction costs opp costs of trades in market 0 Fairness of Market and Theories I Adam Smith quotSuppliers and demanders pursue selfinterest and social interest at 00000 the same timequot Invisible Hand I Rules of fairness book not Rush 0 Not fair if the result isn39t fair Utilitarianism principle that states that we should strive to achieve quotthe greatest happiness for the greatest of peoplequot Big tradeoff tradeoff between efficiency and fairness Make poor welloff John Rawls A Theory of Justice 0 Not fair is rules aren39t fair Symmetry principle people in similar situations treated similar Fairness rules Robert Nozick Anarchy State and Utopia 1 State enforces laws that establish and protect private property 2 Private property transferred voluntarily Ch 6 Lectures 1720 0 Price Ceiling Price Cap government sets max legal price that can be charged ex rent I Rent ceiling price ceiling for rent 0 Effects Black Market markets in which otherwise legal goods are traded at an illegal price ex key money Search activitv time spent looking for someone to buy or sell a good Housing shortage QDgtQS Only sellers and buyer with little search gain society loses Short S Unemploym nt e E uilibrium PQ q Price Ceiling 05 OD Min Wage D 0 Price Floor government sets minimum legal minimum price ex agricultural products I Minimum Wage regulation that makes hiring of labor below a specified wage rage illegal 0 Effects Illegal hiring some workers and firms agree to wages lower Search As workers search for jobs they39re unemployed Only workers who find jobs with little search and labor unions gain all businesses and unemployed workers lose society loses 0 Taxes I Tax Incidence division of burden of tax between buyers and sellers I Supply curve shifts up by amount of tax Ex Tax of 2 Seller pays 1 and buyer pays 1 Government tax revenue Tax X EQ EP tax 4 CS DWL PS tr1angles on graph PP 2 PS 2 I Tax imce depends on Price Elasticity of Demand 0 FEB gt PES elastic suppliers pay more of tax 0 FEB lt PES inelastic demanders pay more of tax 0 Taxes and Fairness book not Rush I Bene ts Principle people should pay taxes equal to the benefits they receive from the services provided by government benefit most pay most I Ability to pay principle people should pay taxes in accordance with their ability to pay I Production Quotas and Subsidies Ex Farming Again book not Rush I Production Ouota upper limit to quantity of good that may be produced has effect only if below EQ 0 Effects decrease in supply rise in price decrease in marginal cost inefficient underproduction incentive to cheat and overproduce I Subsidies payment made by government to a producer mostly to agricultural products 0 Effects increase in supply fall in price and increase in QD increase in marginal cost payments by government to farmers inefficient overproduction I Market for Illegal Goods book not Rush so I39ll be brief I Penalties on sellers ex illegal drugs additional cost in production and supply decreases curve shifts to left I Penalties on buyers ex illegal drugs additional cost to buy and demand decreases curve shifts to left I Penalties on sellers and buyers both supply and demand curves shift ex Penalty is higher on sellers of illegal drugs than buyers so supply curve shifts more than demand causing the price to rise Ch 7 Lectures 20 and 21 0 mports goods and services that we buy from other countries 0 Exports good and services that we sell to other countries I Comparative and absolute advantage see Ch 2 0 Ex China outperforms US in tshirt production but US outperforms China is airplane production World Price World Price EQ I Effects of Exports 0 Winners Producers and Society 0 Losers Consumers I Effects of Imports 0 Winners Consumers and Society 0 Losers Producers 0 Trade Restrictions I Tiiff tax on a good that is imposed by the importing country when an import crosses an international boundary works like a tax see tax graph in Ch 6 0 P rises QD falls domestic prod rises imports fall and tariff revenue created 0 Effects Losers Consumers and Society Winners Producers and Government I Import Ouota restriction that limits max quantity of a good that may be imported in a given period shifts supply curve to the right 0 P rises QD falls imports fall domestic prod rises and DWL created 0 Effects Losers Consumers and Society Winners Producers and Importers I Other Import barriers regulatory book not Rush 0 Health safety ex beef imports fall with mad cow disease 0 Voluntary export restraints governmentimposed restrictions on exports 0 Export subsidies government payments to producers of exports illegal 0 The Case Against Protection book not Rush I Trade restrictions help because 0 Helps infant industries grow needs time to become productive enough to compete with international companies 0 Counteracts dumping foreign firm sells exports at lower price than its cost of production to undercut domestic businesses Saves domestic jobs Allows US to compete with cheap foreign labor Penalizes law environmental standards Prevents rich countries from exploiting developing countries Reduces offshore outsourcing US firms buy finished goods or service from 00000 firms in other countries 0 Why is international trade restricted I Tariff revenue goes to government I Rent seeking lobbying for special treatment by government to create profit or divert consumer producer surplus away from others Ch 8 Lectures 22 23 and part of 24 0 Consumption Possibilities book not Rush not very important so I39ll be brief I All the things you can afford to buy I Budget Line marks boundary between combinations of goods and services that an individual can afford and can39t afford to buy 0 Utility benefit or satisfaction a person gets from consumption of goods and services I Total Utilitv all of the benefit a person gets from consuming all goods and services I Marginal Utility change in total utility resulting from a oneunit increase in quantity consumed 0 change in TU change in Q I Diminishing Marginal Utility increases in utility get smaller as consumptions rises Units of Utility Quantity Consumedr 0 Consumer Eguilibrium consumer allocates all available income in the way that maximizes their total utility using the prices of such goods and services 0 Marginal Analysis compares MUdollar on each good quotbang for your buckquot Marginal Utility per dollar marginal utility that results from spending one more dollar on a good MU P UtilityMaximizing Rule 0 v Spend all available income 339 Equalize MUdollar 0 EX Sam loves pizza and soda Both cost 4 and his income in 20 Pizza Soda Q TU M MUP J U 0 1 16 160 40 Pizz Sod TU 2 a a 5 O O46046O 3 4 1 42024066O Greatest 3 2 360320680 lt 4 2 3 28036064O 1 4 16038054O 5 EU W5 1U O388388 0 0 Predictions I I I using Greatest Utility Theory I EX Q Movies cost 8 soda costs 4 and Lisa39s income 1 220 210 is 40 She decides to see 2 movies and buy 6 2 320 80 20 cases of soda 0 3 360 40 10 What happens if there is a fall in the 4 380 20 5 price of the movies 5 388 8 2 Calculatin g her utility for movies and soda Lisa will buy 6 movies and 4 cases of soda 0 What happens if there is a rise in the price of soda Calculating her utility for movies and soda Lisa will buy 6 movies and 2 cases of soda 0 What happens if there is a rise in her income Calculating her utility for movies and soda Lisa will buy 8 movies and 6 cases of soda I Paradox of value EX Diamonds worth more than water I TU of water gt TU of diamonds but I MU of water lt MU of diamonds I Explaining Consumer Choices Rush doesn39t really mention this but the book includes it I Behavioral Economics study of ways limits on human brain39s ability to compute and implement rational decisions in uence economic behavior 0 Bounded rationality O Bounded willpower O Bounded selfinterest O Endowment effect I Neuroeconomics study of activity of human brain when a person makes an economic decision 0 Ordinal V Cardinal Utility Rush not book 39 Ordinal Utility Assumes a person can tell us if a change makes them better off worse off or no change 39 Cardinal Utility Assumes we can measure a person39s utility 0 In this chapter Ch 8 we use cardinal utility A prime example of cardinal utility is insurance which will be Ch 20 but Rush brie y explained a bit of ordinal utility which is Ch 9 Ch 9 Part of Lecture 26 Don39t worry it39s not the whole chapter just part about ordinal utility 0 Indifference Curves consumer is indifferent among any combination of goods on an indifference curve 39Person prefers each point 0 in relation to initial point 0 but indifferent to 0 Bread 39 Wine V Ch 20 Lectures 2426 0 Insurance uses cardinal utility see Ch 8 to study decisions under risk I Risk Aversion dislike of risk 0 EX Mark has a car His car is worth 5000 with no accident but only 1000 with an accident WealthIncome TU MU per 1000 0 0 1000 150 150 2000 250 100 3000 300 50 4000 330 30 5000 350 20 Mark has a 5050 chance of haVing an accident so without insurance Car Worth Utility 50 No Accident 5000 350 50 Accident 1000 150 0 Expected Wealth money value of what a person expects to own at a given point in time EW 5000 X 05 1000 X 05 3000 0 Expected Utilitv utility value of what a person expects to own at a given point in time EU 350 x 05 150 x 05 250 Will Mark buy this insurance policy if the premium is 2000 and it pays 4000 with accident and 0 with no accident With Insurance Car Worth Utility 50 No Accident 5000 0 insurance pays 300 2000 premium 3000 50 Accident 1000 4000 2000 3000 300 EU 3000 x 05 3000 x 05 3000 EW 300 x 05 300 x 05 300 EU w insurance gt EU wout insurance so Mark will buy the policy 0 Insurance Supply I Ex With a Premium of 3000 will the company sell insurance 0 Revenue per person 3000 0 Expected Cost 4000 x 05 0 x 05 2000 0 Expected Profit Revenue Cost or 3000 2000 1000 The company makes a profit of 1000 so yes they will sell I Increased Risk 80 accident 20 no accident 0 Rev 3000 0 EC 4000 x 8 0 x 05 3600 0 Expected Profit 3000 3600 600 The company would have to increase its premium to sell 0 Private Information info about the value of an item being traded that is possessed by only buyers or sellers asymmetric I Adverse selection tendency for people to enter into agreements in which they use their private information to their advantage Companies can sell policies to people who are riskier than they thought 0 Ex Bank lends loan and knows risk that creditor may default on loan creditdefault risk 0 Signaling consumers signal ways that show their level of risk ex grades 0 Screening sellers require private info about person to determine level of risk and sell policy appropriate to their risk level Moral hazard tendency for people With private info to use such info to their benefit and cost of uninformed party Lemons problem problem that in a market it39s not possible to distinguish reliable products from bad products lemons O Pooling eguilibrium equilibrium of market When one message is sent out to all consumers and no one can determine quality 0 Separating equilibrium equilibrium of market When signaling provides full info to a previously uninformed party
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