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Econ First Exam Notes

by: Megan Glock

Econ First Exam Notes Econ 200

Marketplace > University of Arizona > Economics > Econ 200 > Econ First Exam Notes
Megan Glock

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About this Document

These notes cover up to the first exam of the semester.
Econ 200
Dirk Mateer
Class Notes
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This 11 page Class Notes was uploaded by Megan Glock on Monday July 18, 2016. The Class Notes belongs to Econ 200 at University of Arizona taught by Dirk Mateer in Summer 2016. Since its upload, it has received 48 views. For similar materials see Econ 200 in Economics at University of Arizona.


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Date Created: 07/18/16
The Five Foundations of Economics The Scarcity Condition  All of these things are scarce o Nice vehicles o High fashion o Diamonds o Water Scarce: if it is not freely available from nature. Scarcity NOT poverty  Economics is the study of how people allocate their limited resources to satisfy their  unlimited wants. Foundation #1: Incentives  Positive and negative incentives (EX: grades) o Unintended consequences Incentives  Human Action  Human Design Foundation #2: Life is About Trade­Offs  The cost of one modern heavy duty bomber is this: a modern brick school in more than  thirty cities. It is two electric power plants each serving a town of 60,000 people. It is two fine, fully equipped hospitals. It is some fifty miles of concrete highways. We pay for a  single fighter with a half million bushels of wheat. We pay for a single destroyer with  new homes that could have housed more than 8,000 people. – Dwight Eisenhower, 1953. Foundation #3: Opportunity Cost  What is Opportunity Cost? o Highest­valued alternative that must be given up to engage in an activity.  How long would you wait in line on Black Friday to save $300 on a TV? (think pair  share) Foundation #4: Marginal Thinking  What is marginal thinking? o Evaluating whether the benefit of acquiring one more unit of something is greater  than its cost. Foundation #5: Trade  Trade and Comparative Advantage o Idea that you find something that you’re good at and you specialize in that,  “specialized skill”.  Does trade create value? Model Building and Gains from Trade The Scientific Method in Economics  Positive and normative analysis o Positive = testable; normative = opinion.  Why it is good to have a point of view but bad to be biased? o People get so invested into their idea, they don’t listen to other people’s ideas or  point of view. Economic Models  Models are simplistic, but they can bring out essential concepts. Change only one  variable at a time…What economists term ceteris paribus, or “holding other things  constant.”  We judge models by how well they make predictions. o Endogenous and Exogenous factors. o Endogenous: inside the model. o Exogenous: factors beyond the model.  The dangers of faulty assumptions.  Opportunity Cost: the highest­valued, next­best alternative that must be sacrificed to  attain something or satisfy a want.  Subjective Value:  Consider the true costs of traveling from Tucson to San Diego by plane or bus.  Suppose: o The bus ticket costs: $80 and takes 20 hours r/t o The plane costs: $160 and takes 4 hours r/t o You value your time at $8 an hour  Should you take the bus or the plane? o Bus: 20 (8) = $160 o Plane: 4 (8) = $32 The Production Possibilities Frontier  Way in which we model choices.  What is the max amount of any two products that can be produced from a fixed set of  resources? o  When you operate on the curve, you operate sufficiently.  All of the points on the curve are efficient.  What shifts the curve to the right? o Resources o Technology o Time NOTE: the law of increasing relative cost (non­linear) Increasing Opportunity Cost  Capital Goods: goods used to produce other goods.  Current Consumption of Goods  Consumer goods: goods produced for personal satisfaction. Comparative Advantage  Comparative advantage: states that you can gain by specializing in producing what you  do well and exchanging that production for something that you would have trouble  making. o Do what you do best and trade for things that you’re not good at. Supply and Demand DOUBLE COINCIDENCE OF WANTS What’s Your Price? Law of Demand: there exists an inverse relationship between the price of the good and the  amount of it buyers are willing to purchase. Price increases, buy less / Prices decrease, buy more An increase in the price of a good will raise the opportunity cost of consuming it. A movement along a demand curve is a result of a price change alone. This is known as a change in the quantity demanded. A shift in the entire curve occurs when something other than price changes. This is a change in  demand. The demand curve shifts whenever ceteris paribus is violated. Examples: changes in income, in tastes, in the price of related goods, in expectations, or  the number of buyers. Prices of related goods: complements or substitutes Expectations: If prices decline in the future, demand is less The Law of Supply Law of Supply: there exists a direct relationship between the price of the good and the amount of it that will be offered for sale. More on Supply By changing the question we alter the supply relationship. A movement along the supply curve is a result of a price change alone. This is known as a  change in the quantity supplied. A shift in the entire curve occurs when something other than the price changes. This is a change  in supply. Whenever ceteris paribus is violated the supply curve shifts.  Examples: input costs, changes in technology, changes in tax subsidies, in expectations  and the number of sellers. Example Graph Demand: Qd = 90­2P Supply: Qs = P What happens when a tariff (a tax on imports) is placed on foreign goods? Suppose the U.S. places a $5,000 tariff ion German automobiles. What happens to the market P  and Q of German cars imported? What happens to tge market P and Q of U.S. cars produced? Luxury Goods Elasticity Elasticity of Demand Elastic of Demand: refers to the flexibility of consumer’s desires for a product. Determinants of Price Elasticity of Demand Existence of Substitutes More substitutes = more elastic demand Share of the Budget Bigger share of your budget = more elastic demand The length of time allowed for adjustment More time = more elastic demand Time and the Adjustment Process As time passes, consumers and producers are able to find substitutes. Immediate­Run (def.): there is NO time to adjust. Short­Run (def.): time to adjust, but only PARTIALLY. Long­Run (def.): time to adjust FULLY. Examples of Demand Elasticity for Selected Goods Is the demand for your favorite Starbucks coffee elastic/inelastic? Inelastic Is the demand fort an inexpensive item (napkin, salt, etc.) elastic/inelastic? Inelastic Is the demand for a truck you need for your work? Inelastic When you decide to have pizza, is demand elastic/inelastic? Elastic Do you need it now (inelastic) or later (elastic)? Calculating Elasticity Ep = (% change in Q) / (% change in P) MIDPOINT FORMULA Ep = ((change in Q) / (Q1 + Q2) /2)) / ((change in P) / (P1 + P2) / 2)) Total Revenue TR = PQ ** If one price is higher than the other = Inelastic Price has no effect on quantity demanded. Unitary – the demand curve isn’t too steep and isn’t too flat. Ep = ­1 THINK PAIR SHARE Demand = ELASTIC A % rise in price brings a greater % fall in QD. TR falls. Price and TR change in the opposite  direction. Demand = UNITARY A price change leave TR unchanged Demand = INELASTIC A % rise in price brings a lesser % fall in QD. TR rises. Price and TR change in the same  direction. Price Controls How did firms get around price controls? ­Same price, less product Price Ceilings: A Thought Experiment Price Ceiling – A legally imposed maximum price. Binding Price Ceilings, Black Markets and Shortages Price Gouging How do price gouging laws work and how is the result different from what happens in  unregulated markets? ­only activated in extraordinary circumstances.  Should Shortages in the Ticket Market be Solved by Scalpers? ­Scalpers help to establish the true market clearing price.  Minimum wage: lowest hourly wage rate that firms may legally pay their workers. Policy Implications of the Minimum Wage Law Minimum wages price the services of the least productive workers out of the market. The MW is a political tool with serious economic consequences, hence the MW typically lags  real wage increases. If raising the MW makes sense then we have been too timid in applying the logic across the  board! Consider $10.00, $25.00, or more an hour! The real solution is higher work productivity. Zimbabwe and Chris Rock Zimbabwe – In 2007 President Mugabe imposed massive price controls to curb inflation. End  result, nothing was left.


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