Econ_Test.pdf Econ 120
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This 22 page Class Notes was uploaded by rthoma20 on Sunday October 2, 2016. The Class Notes belongs to Econ 120 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by Officer in Fall 2016. Since its upload, it has received 14 views.
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Date Created: 10/02/16
Econ Test 1 • https://www.youtube.com/watch?v=2izx5W1FAEU • Economics – is the science of scarcity • Scarcity – we have unlimited wants but limited resources • Since we are unable to have everything we desire, we must make choices on how we will use our resources. • Microeconomics – study of small economic units such as individuals, firms, and industries. • Macroeconomics – study of the large economy as a whole or economic aggregates • Trade-offs – all the alternatives that we give up when we make a choice (ex: when I decide to take these notes rather than watching a movie) • Opportunity cost – most desirable alternative given up when you make a choice. (what you are giving up in order to do something else) 5 Key Economic Assumptions • Society has unlimited wants and limited resources (scarcity). • Due to scarcity, choices must be made. Every choice has a cost (a trade-off). • Everyone responds to incentives and acts in their own “self interest.” • Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. • Real-life situations can be explained and analyzed through simplified models and graphs • Investment – the money spent by business to improve their production • Consumer goods – created for direct consumption (ex. pizza) • Capital goods – created for indirect consumption (ex: oven, blenders, knives, etc.) Goods used to make consumer goods • Human Capital – any skills or knowledge gained by a worker through education and experience • The Factors of Production – Land, Labor, Capital • An economic system is the method used by a society to produce and distribute goods and services. • Invisible hand of capitalism – the concept that society’s goals will be met as individuals seek their own self-interest. • Example: Society wants cell phones… • Profit seeking producers will make more. • Competition between firms results in low prices, high quality, and greater efficiency. • The government doesn’t need to get involved since the needs of society are automatically met. • Mixed economics – a ties with free markets but also some government intervention. • Almost all countries, including the US, have mixed economics • Production Possibilities curve – is a model that shows alternative ways that am economy can use its scarce resources. • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. A B C D E Bikes 14 12 9 5 0 Computers 0 2 4 6 8 • Its inefficient if it produced under the line and it is efficient when produce on the line and producing above the line is impossible. • Constant opportunity cost – resources are easily adaptable for producing either goods. Results in a straight line which means the opportunity cost stays the same. • Law of Increasing Opportunity Cost – As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Results in a bowed out curve. • Capital Goods and Future Growth • Countries that produce more capital goods will have more growth in the future. Specialization and Trade • Absolute advantage – the producer that can produce the most output or requires the least amount of inputs(resources) • Ex: The US has an absolute advantage in shoes. • Comparative advantage – the producer with the lowest opportunity cost. • Ex: The US has a comparative advantage is movies • Countries should trade if they have a relatively lower opportunity cost • Terms of trade – both countries can benefit from trade if they each have relatively lower opportunity cost. The agreed upon conditions that would benefit both countries. • https://www.youtube.com/watch?v=gdXoDkCfcM8 • Demand – is the different quantities of goods that consumers are willing and able to buy at different prices. • Law of demand – there is an inverse relationship between price and quantity demanded. (when the price goes up, consumers buy less goods. When the price goes down, consumers buys more goods.) • The law of demand occurs for three reasons: • The Substitution effect ( when prices goes up for a product, you buy cheaper product. When price goes down, you move from the product you were currently using to this product.) • The Income effect (when the price goes up, consumers buy less goods. When the price goes down, consumers buys more goods. The income stays the same.) • The Law of Diminishing Marginal Utility ( this is the idea that you get less and less additional satisfaction from each unit that you consume) • Demand curve is downward sloping • X-axis represent the quantity and y-axis represents the price • When it comes to supply and demand increases always to the right and decreases always to the left. • 5 shifters of Demand • Tastes and Preferences • Number of Consumers • Price of Related Goods • Income • Future Expectations • Change in price don’t shift the curve, it only causes movement along the curve. • Price of Related Goods – the demand curve for one good can be affected by a change in the price of ANOTHER related good • Substitutes: Price of A increases, Demand for B increases. Price of A decreases, demand for B decreases. • Complements: Price of A increases, Demand for B decreases because the price of hot dogs goes up, people will buy less of hot dog buns. Price of A decreases, Demand for B increases because the price of hot dog goes down so people will buy more hot dog buns. • Changes in Income – the demand curve for a good can be affected by income, but it depends on the type of good. • Normal Goods: Income increases, demand increases. Income decreases, demand decreases. • Inferior Goods: Income increases, demand decreases. Income decreases, demand increases. • Supply – is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. • Law of Supply – there is a direct (or positive) relationship between price and quantity supplied. • As price increases, the quantity producers make increases • As price falls, the quantity producers make falls • Supply curve has a upward sloping curve and supply curve shift right when there is a increase and shift left if there is a decrease. • 5 Shifters of Supply • Prices/Availability of inputs (resources) • Number of sellers • Technology • Government Action: Taxes and Subsidies (A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. • Expectations of Future Profit • Changes in Price don’t shift the curve. It only causes movement along the curve. • Equilibrium is when quantity demand equals quantity supply • Excess supply/surplus is when quantity supplied is greater than quantity demanded. • Excess demand/shortage is when quantity demanded is greater than quantity supplied. • Double Shift Rule: If two curves shift at the same time, either price or quantity will be indeterminate • Price Ceiling – maximum legal prices a seller can charge for a product. Goal: Make affordable by keeping price from reaching Equilibrium. ( has to below equilibrium) (when prices are low, people buy more of it and producers don’t want to produce more of it so it results in a shortage) • Price Floor – minimum legal price a seller can sell a product. ( has to above the equilibrium) (when price goes up, less people buy it so it results in a surplus which is when quantity supply is greater than quantity demanded) • Elasticity – shows how sensitive quantity is to a change in price. ( finding how much more will people buy when price goes down; a little bit more, a whole lot more.) • Inelastic demand – quantity is insensitive to a change in price. • If price increases, quantity demanded will fall a little • If price decreases, quantity demanded increases a little • In other words, people will continue to buy it • Characteristics of Inelastic goods • Few substitutes • Necessities (required now, rather than later) • Small portion of income • Elasticity coefficient less than 1 • % change in quantity/ % change in price • Elastic demand – quantity is sensitive to a change in price. • If prices increases, quantity demanded will fall a lot • If prices decreases, quantity demanded will increases a lot • In other words, the amount people buy is sensitive to price • Characteristics of elastic goods • Many Substitutes • Luxuries • Large portion of income • Elasticity coefficient greater than 1 • % change in quantity/ % change in price • Market Economy Versus Command Economy • Market Economy – The “free Enterprise system.” Price arise naturally in market economy based on supply and demand. • The Two Fundamental aspects of market economies are: • Private ownership of the means of production • Voluntary exchanges/contracts • Command Economy – governments own all of the factors of production such as land, capital, and resources, and government officials determine when, where and how much is produced at any one time. • Individual choice – decisions by an individual about what to do and what not to do. • Resource – is anything that can be used to produce something else. • Total Revenue (P * Q) • What happens to quantity for each when price increases? (the quantity goes down in both cases- relatively inelastic and elastic. • Total Revenue Test – uses elasticity to show how changes in price will affect total revenue (TR). • Inelastic Demand • Price increases, TR increases • Price decreases, TR decreases • Elastic Demand • Price increases, TR decreases • Price decreases, TR increases
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