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Intro to Econ Week 6

by: Katie Truppo

Intro to Econ Week 6 Econ 201

Katie Truppo
GPA 3.4

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Exam 1 Review
Into Economics: Survey Course
Kenneth Baker
Class Notes
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This 7 page Class Notes was uploaded by Katie Truppo on Saturday August 20, 2016. The Class Notes belongs to Econ 201 at University of Tennessee - Knoxville taught by Kenneth Baker in Fall 2015. Since its upload, it has received 3 views.


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Date Created: 08/20/16
Review Resources (factors of production, inputs): the inputs used to make the goods/services that individuals and society desires Raw materials (land) Labor (time of workers) Physical Capital (human made goods) Human Capital (what you accumulate, education) Entrepreneurship (organize others inputs into an output) 3 Questions for society WHAT goods/services should we make How many HOW should we make them What is the most efficient way HOW should we allocate the goods/services we made Who gets Ford, who gets Bentley Normative vs. Positive Language Normative Concerned with how world should be Centered around moral, ethical and subjective beliefs The government should raise minimum wage Positive How the world is Factual, testable beliefs If the government increased minimum wage, it would drive up unemployment by 2% 3 Main "Economic Agents" Households Firms/Industries Governments Studies Behavior and choices individually, also studies the interaction between the three groups The Methodology of Economics 1. Identify an issue 2. Simplify using assumptions 3. Develop a working mode/theory 4. Collect data and test the model Complexity is the biggest problem economics face Benefits: What do you gain by saying “yes" Costs: What do you lose when saying “yes" Economists like to think this is their biggest contribution Opportunity Cost: The value of the next best foregone opportunity whenever a decision is made If marginal benefit > marginal cost YES If marginal benefit < marginal cost NO PPF: economic model that shows the maximum combination of goods/services that can be prodcuced given available resources and technology Efficient Points: all points on PPF Inefficient Points: all points inside PPF Unattainable Points: all points outside PPF (scarcity) So, all final production is converted into is market value (what it sells for) This number is GDP, and represents the total value of a country’s yearly production U.S. contains about 7% of the worlds total land (3rd largest) Less than 5% of population live in U.S. (3rd most populus) U.S. produces about 1/5 - 1/4 of worlds output Traditional Economy: answers the three questions the way they have always been answered (Amish) Pros: Less friction in society High sense of community Cons: Restriction of individual freedom Slow economic growth Slow progress of standard of living Command Economy: answers the three questions through decisions of central authority figure Central planners determine production, how to produce, and allocation Pros: Can institute change rapidly Provide economic security to citizens Cons: Extremely difficult to accurately calculate and produce Quality suffers Market Economy: answers the three questions through the use of markets and price system PRICES will answer the three questions Accomplished through interactions of countless individual decision makers Pros: Produces the most possible out of the limited resources available Larger variety of G & S produced Tends to lead to faster economic growth and higher standard living Cons: The division of resources/incomes/wealth can be egregiously uneven Possible misallocation of resources Markets can fail under variety of conditions Capitalism An Economic system characterized by: No state planning of economic activity Resources of production are privately owned and controlled No pre-set plan of how to allocate goods and services Underlying theme: more concerned with private self interest Strengths: Economic efficiency Economic freedom Weaknesses Has a (natural) tendency towards an unequal distribution Cases of “market failure" Karl Marx was Capitalism’s strongest critic Strong proponent of of socialism Against capitalist greed Socialism An economic system characterized by: Fairly high level of state involvement Resources of production are a mix of state own/controlled and private ownership Heavily centralized authority involved in the final allocation of goods/services Underlying theme: more concerned with public interest Strengths: More equitable distribution Economic freedom Weaknesses: Not as efficient Less impetus for individuals innovation and achievement “The Market” determines salary, prices, etc. Quantity Demanded (Qd): The amount of good or service that people are willing and able to buy at various prices, ceteris paribus Ceteris paribus: constant Law of Demand: price and quantity demanded are negatively related, ceteris paribus Law of Demand represented by: 1. Demand Function: a mathematical representation of the relationship between P and Qd 2. Demand Schedule: a table showing the relationship between P and Qd 3. Demand Curve: a graphical representation of the relationship between P and Qd Demand Shifters 1. Income Normal Goods: have a positive relationship between income and amount demanded Graph shifts to the right Inferior Goods: as income goes up, purchases go down 2. Prices of Related Goods Complement Goods: A & B are consumed together Both fall if one falls Substitute Goods: A & B consumed in place of one another One price rises, other demand rises 3. Tastes/Preferences preferences/taste change over time (trends) 4. Price Expectations Buyers expect the price of good to change in the future, which affects how much they buy now (vice versa) 5. Anything, other than change in price itself, that makes buyers wish to buy more or less of good will shift demand Increase in demand is shift to right Decrease in demand is shift to the left Market Demand: the summation of each individuals quantity demanded at every price Market Demand Shifters Increase 1. Increase in consumer incomes 2. Decrease in price of complement good 3. Increase in price of substitute good 4. More popular 5. Belief in price rise in future 6. Increase in number of buyers 7. Any change (other than price of good itself) that causes consumer to buy Decrease 1. Decrease in consumer incomes 2. Increase in price of complement good 3. Decrease in price of substitute good 4. Less popular 5. Belief in price fall in future 6. Decrease in number of buyers 7. Any change (other than price of good itself) that causes consumer to not buy Supply What affects how many products business want to make? 1. Price of good/service itself 2. Price of inputs used in production 3. Expected price 4. Change in technology of production 5. Anything else Quantity Supplied (Qs): The amount of a good or service that sellers are willing and able to supply at various prices, ceteris paribus Law of Supply: Price and quantity supplied are positively related, ceteris paribus As price rises, quantity supplied rises As price falls, quantity supplied falls Supply Function: mathematical representation of the relationship between P and Qs Supply Schedule: table representing relationship between P and Qs Supply curve: graph representing relationship between P and Qs Shift Factors 1. Price of Inputs (labor, capital, fuel, electricity, transportation) 2. Price Expectations 3. Advances in technology 4. Any others (weather, regulations, availability) Right is increase in supply Left is decrease in supply Market Supply: the summation of each firm’s quantity supplied at every price Increase in Market Supply Decrease in price inputs Advancements in technology Belief that price will fall Increase in number of sellers Any change (OTHER THAN THE PRICE ITSELF) Decrease in Market Supply Increase in price of inputs Belief that price will rise Any change (OTHER THAN THE PRICE ITSELF) Only time you move up or down the curve itself is if the price changes Bringing supply and demand together creates our (free) market and free market system I. Markets: Examples Output Markets (Goods/Services) Goods Markets: Milk, Hamburgers, Airplanes, etc. Service Markets: Car repair, Haircuts, House cleaners, etc. Input Markets (Factors of Production) Labor Markets: Teachers, Police, Lawyers Commodities Markets: Wheat, Gold, Oil Financial Markets (Credit Markets) Markets for borrowing/lending (determines interest rates) Foreign Exchange Markets Currency Markets: Dollars -> Euros Illegal Market Changes in Equilibrium Three steps to finding the new equilibrium 1. Does the event affect supply or demand? Both? 2. Which direction is the shift? Increase or decrease? 3. Where is the new Has price risen or fallen? Has quantity risen or fallen? Price Controls Price Floors: legal minimum price for goods/services Binding: Floor is above equilibrium (surplus) Price Ceilings: legal maximum price for goods/services Binding: Ceiling is below equilibrium (shortage)


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