Fall Midterm: Intro to Microeconomics study guide
Fall Midterm: Intro to Microeconomics study guide ECON 1011
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This 9 page Study Guide was uploaded by Caroline Jok on Thursday October 8, 2015. The Study Guide belongs to ECON 1011 at George Washington University taught by Foster, I in Fall 2015. Since its upload, it has received 14 views. For similar materials see Principles of Economics I in Economcs at George Washington University.
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Date Created: 10/08/15
Foster Econ 1011 Fall Midterm Review There will be 1 page of questions from each chapter Chapter 1 Economics Foundations and Models Vocabulary Scarcity unlimited wants exceed limited resources Economics study of choices people make to attain their goals given their scarce resources Economic Model simpli ed version of reality to analyze realworld economic situations Market Group of buyers and sellers of a good or service and the institution or arrangement by which they come together and trade Marginal Analysis comparing marginal bene ts and marginal costs Tradeoff because of scarcity producing more of one good or service means producing less of another good or service Opportunity Cost highestvalued alternative that must be given up to engage in an activity Centrally planned economy Economy where the government decides how economic resources are allocated Market Economy decisions of households and rms interacting in markets allocate economic resources Mixed Economy most economic decisions result from interactions of buyers and sellers but the government still plays a role in the allocation of resources Productive ef ciency good or service is produced at the lowest possible cost Allocative efficiency production is in accordance with consumer preference marginal bene t marginal cost Voluntary exchange both the buyer and seller of a product are made better off by the transaction Equity fair distribution of economic bene ts Economic variable something measurable that can have different values such as the incomes of doctors Positive analysis Analysis concerned with what is Normative analysis concerned with what ought to be Microeconomics study of how households and rms make choices how they interact in markets and how the government attempts to in uence their choices Macroeconomics study of the economy as a whole including topics such as in ation unemployment and economic growth Objectives Calculating Net Bene t 0 Bene t Explicit Cost net bene t o Explicit cost what you re paying out of pocket Determining opportunity cost 0 The dollar amount and the option 0 What is the optimal choice I Choose the one with the highest net bene t I What is the option with the lowest opportunity cost If not everything is laid out make your own systematic table to solve it What is the total economic cost I Total Economic cost explicit cost implicit cost opportunity cost 00 Marginal Bene t and Marginal Cost 0 Marginal Bene t curve I Negative slope I Equivalent to the demand curve willingness to pay 0 Marginal Cost I Positive slope 0 Why is it that the intersection is the optimal point I Looking at the options cumulatively I Finding the bene t from the EXTRA unit Relationship between Total Revenue and Marginal Revenue 0 What is Total Revenue I Total Revenue PriceQuantity I Total Expenditure by consumer is the same as the total revenue Chapter 3 Where Prices Come From The Interaction of Demand and Supply Vocabulary Perfectly Competitive market A market that has many buyers and sellers all rms selling identical products and no barriers to new rms entering the market Demand Schedule table showing the relationship between the price of a product and the quantity demanded Quantity demanded amount of a goodservice that a consumer is willing and able to purchase at a given price Demand curve curve showing relationship between the price of a product and the quantity of the dproduct demanded Market Demand the demand by all the consumers of a given good or service The law of demand all else constant when the price of a good falls the quantity demanded will increase and vice versa Substitution effect change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes Income effect the change in the quantity demanded of a good that results from the effect of a change in the good s price on consumers purchasing power Ceteris paribus all else equal Normal good demand increases as income rises and decreases as income falls Inferior good demand increases as income falls and increases as income rises Substitutes Goodsservices that can be used for the same purpose Compliments goods and services that are used together Demographics Characteristics of a population with respect to age race and gender Quantity supplied the amount of a good or service that a rm is willing and able to supply at a given price Supply Schedule table showing the relationship between the price of a product and the quantity of the product supplied Supply curve curve showing the relationship between the price of a product and the quantity of the product supplied Law of Supply all else constant increasing price increases the quantity supplied and decreases price causes a decrease in the quantity supplied Technological change A positive or negative change in the ability of a rm to produce a given level of output with a given quantity of inputs Market Equilibrium A situation in which quantity demanded equals quantity supplied Competitive market equilibrium a market equilibrium with many buyers and sellers Surplus quantity supplied is greater than quantity demanded Shortage quantity demanded is greater than quantity supplied Objectives There will be a graphing question just like the second quiz Price is always y and Quantity is always X Demand curve Provide the X and y intercept and the equilibrium coordinates Scale the axis correctly Demand curve is always negative Give the X intercept of the supply curve which is always positive OOOOO Law of Demand 0 When prices increase quantity demanded decreases and vice versa 0 Income Effect amp Substitution effect 9 both look at what happens when Price changes Movement along vs Shift of the demand curve 0 Change in price of the good 9 Movement along 0 Income price of related goods substitutes vs Compliments tastes and preference future expectations number of buyers shift of demand curve Movement along vs Shift on the supply curve 0 Along I Change in Price of the Good 0 Shift I Price of input I Expectations I Technology I Prices of substitutes in production I Number of sellers Substitution effect 0 Explains the law of demand Substitutes o Relates to the demand curve 0 Only show up in the demand curve Substitutes in production 0 Used in the context of the supply curve Negative sign for income inferior Good Know how the signs in the equations tell you the relationship between the variable 0 A minus sign with the substitute 9 means that they are compliments 0 Be able to explain why the relationships are as is An increase in Shifts the demand curve Because Income wnormal good Right Consumers spend more of their higher incomes on the good Income winferior good Left Consumers spend less of their higher incomes on the good Price of a substitute good Right Consumers buy less of the substitute good and more of this good The price of a complimentary Left Consumers buy less of the good complimentary good and less of this good Taste for the good Right Consumers are willing to buy a larger quantity of the good at every price Population Right Additional consumers means greater demand at every price The expected price of the Right Consumers buy more of the good in the FURTURE good now to avoid the higher price in the future An increase in Shifts the supply curve Because Price of an input Left The costs of producing the good rises Productivity Right The costs of producing the good falls The price of a substitute in Left More of the substitute is production produced and less of the good is produced The number of firms in the Right Additional firms result in a market greater quantity supplied at every price The expected future price of Left Less of the good will be the product offered for sale today to take advantage of the higher price in the future Variables that shift market supply Price of inputs Technological change Prices of substitutes in production Number of firms in the market Expected future prices Chapter 4 Economic Ef ciency Government Price Setting and Taxes Vocabulary Price Ceiling legally determined maximum price that sellers may charge to be effective this must be below the equilibrium Price Floor legally determined minimum price that sellers may receive to be effective it must be above the equilibrium Consumer Surplus The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays Marginal Benefit The additional bene t to a consumer from consuming one more unit of a good or service Economic Surplus the sum of consumer surplus and producer surplus Deadweight Loss reduction in economic surplus resulting from a market not being in competitive equilibrium Economic Efficiency a market outcome in which the marginal bene t to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum Black Market a market in which buying and selling take place at prices that violate the government price regulations Tax Incidence the actual division of the burden of a tax between buyers and sellers in a market Tax Imposition Who is the tax imposed on Objectives Market ef ciency 0 Is the market more ef cient with a tax 0 The answer is always NO 0 There is dead weight Loss Tax Ef ciency 0 Compare tax revenue with the deadweight loss Imposition 0 Demand shifts on Buyers 0 Supply Shifts on sellers Tax Incidence o Burden On Buyers price now price equilibrium 0 Burden on Sellers equilibrium price price receiving now 0 The more vertical the demand inelastic the more that Buyers pay Chapter 6 Elasticity the Responsiveness of Demand and Supply Vocabulary Price Elasticity of Demand The responsiveness of the quantity demanded to a change in price 9 divide the percentage change in the quantity demanded of a product by the percentage change in the products price Elastic Demand demand is elastic when the percentage change in he quantity demanded is greater than the percentage change in price so the price elasticity is greater than 1 in absolute value Inelastic demand demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price so the price elasticity is less than 1 in absolute value Unitelastic demand demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price so the price elasticity is equal to l in absolute value Perfectly inelastic demand the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero Perfectly elastic demand the case where the quantity demanded is in nitely responsive to price and the price elasticity of demand equals in nity Total Revenue Total amount of funds a seller receives from selling a good or service calculated by multiplying price per unit by the numbers of units sold Income Elasticity of demand A measure of the responsiveness of the quantity demanded to changes in income measured by the percentage change in the quantity demanded and divided by the percentage change in income Price elasticity of Supply The responsiveness of the quantity supplied to a change in price Measured by dividing percentage change in quantity supplied of a product by the percentage change in the product s price Objectives If demand is Then the absolute value of Slope is price elasticity is Elastic Greater than one Less vertical 9 slope greater than 1 Inelastic Less than one More vertical 9 Slope less than 1 Unit elastic Equal to one Slope of l Perfectly elastic Equal to in nity Horizontal Perfectly inelastic Equal to zero Vertical If demand is Then Because Elastic An increase in price reduces The decrease in quantity revenue demanded is proportionally greater than the increase in price Elastic A decrease in price increases The increase in quantity revenue demanded is proportionally greater than the decrease in price Inelastic An increase in price increases The decrease in quantity revenue demanded is proportionally smaller than the increase in price Inelastic A decrease in price reduces The increase in quantity revenue demanded is proportionally smaller than the decrease in price Unit elastic An increase in price does not affect revenue The decrease in quantity demanded is proportionally the same as the increase in price Unit elastic A decrease in price does not affect revenue The increase in quantity demanded is proportionally the same as the decrease in price Key determinants of price elasticity of demand 0 The availability of close substitutes to the good I If a product has more substitutes it will have a more elastic demand Time I The more time that passes the more elastic the demand for a product becomes Whether the good is a luxury or a necessity I The demand curve for a luxury is more elastic than the demand curve for a necessity The definition of the market I More narrowly defined a market is the more elastic the demand will be having fewer alternatives The share of the good in the consumer s budget I The demand for a good will be more elastic the larger the share of the good in the average consumer s budget Price elasticity of Demand 0 If prices change how much will quantity demanded change 0 change in Quantity Demanded change in Price 0 Q2 QlQ1Q22 l00P2PlP1P22 100 I The 100 s actually cancel out o If Change in price is 5 then when put into the equation put it in as 005 Mid point of the Demand curve is typically unit elasticity Price elasticity of demand equals l 0 Prices Go up Quantity Demand Decreases TR same At Higher prices elastic demand 9 Greater than 1 o If prices increase 9 Total Revenue decreases bc decrease in Quantity Demand will be much larger lower prices have the opposite effect 0 People are price sensitive At lower prices inelastic demand 9 Less than 1 0 Price Increase Quantity demand decrease Total Revenue goes up What is the Total revenue Perfectly Elastic Horizontal demand EP infinity Unit Elastic Slope of l moderately sloped EP l Relatively INelastic More vertical steep EP lt l Perfectly Inelastic Vertical Demand EP 0 Relatively Elastic More Horizontal less steep EP gt 1 Income Elasticity 0 Percentage change in quantity demand divided by change in Income 9 Similar formula to above 9 Income replaces price 0 Be able to calculate based on graphs 0 And determine the types of goods Necessities and Luxury goods 0 Luxury income elasticity gt1 0 Necessity 0ltEltl Cross price Elasticity Relationship between 1 Goods price and the other goods Quantity
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