Introduction to Economics
Introduction to Economics ECON 101
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This 4 page Class Notes was uploaded by Erna Gislason on Sunday October 25, 2015. The Class Notes belongs to ECON 101 at University of North Carolina - Chapel Hill taught by Ralph Byrns in Fall. Since its upload, it has received 12 views. For similar materials see /class/228690/econ-101-university-of-north-carolina-chapel-hill in Economcs at University of North Carolina - Chapel Hill.
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Date Created: 10/25/15
PART I STUDY GUIDE Economics the study of scarcity and choice 1 Economics is the study of how people allocate their limited resources to try to ful ll their unlimited wants 2 The fundamental economic problem is scarcitywhich occurs because human wants exceed the production possible with our limited time and resources 3 A good adds to human happiness and a bad detracts from it A service is a non tangible good 4 No goods are truly free in an economic sense except for maybe heat from the sun 5 Production is using technology to apply energy to materials to improve them Technology consists of the recipes available for use in production 6 The four factors of production are land capital entrepreneurship and labor 7 Homo economicus is Adam Smith s characterization of all human behavior as rationally selfinterested Economists assume that human nature is to take the best for yourself 8 Opportunity costthe value of the next best alternative surrendered when a choice is made 9 Absolute prices are actual monetary values relative prices are prices of goods in terms of another Relative prices affect rational decisions the most 10 Relative prices give information High prices are incentives to sellers while low prices are disincentives Prices act a rationing devices because higher prices for goods indicate scarcity 11 Economic efficiency is achieved when we produce the combination of outputs with the highest attainable total value given our limited resources 3 types of economic inefficiencies are allocative productive and distributive 12 Occams razor says that the simpler something is the better 13 Positive economics addresses what is and predicts observable and testable tendencies in economic relationships Normative economics addresses value judgments l4 Macro is the study of the entire society while micro focuses on the detailed behavior of specific households firms or industries 3 goals of micro are efficiency equity and freedom while 3 goals of macro are high employment pricelevel stability and economic growth Scarcity in a world in transition Circular ow model how money goods services and resources ow between household product markets resource markets and firms 2 Firms cannot bear the burden of taxation because it ultimately rests on resource suppliers owners and customers 3 Division of labor entails dividing the work required to produce or accomplish something 4 The law of comparative advantage states that mutually beneficial trade is possible whenever relative production costs differ prior to trade 5 A PPF depicts the maximum combination of goods a society can produce in a given period V 8 O V PPFs are bowed out because of the principle of increasing costs repeatedly increasing output by some set proportion ultimately requires more than proportional increases in resources and thus higher prices PPFs are negatively sloped because of diminishing returns Outward shifts in the PPF curve mean that more of all goods can be produced and the economy has experienced growth Allocative mechanisms include the market system brute force queuing random selection tradition and government 10 Hallmarks of capitalism are private property and decentralized laissezfaire policies by government Demand and supply 1 4 V VI V The law of demand says that consumers buy more of a good during a given period the lower its relative price and vice versa The income effect says that a lower price for any good means that the purchasing power of a given monetary income rises The substitution effect says that the cheaper good will now be used more ways as it is substituted for higherpriced goods Diminishing marginal utility the more you have of any good relative to other goods the less you desire and are willing to pay for additional units of that good The ceteris paribus assumption is that all other in uences on some dependent variable are assumed to be constant while examining the effect of changing a single independent variable This is Alfred Marshall s methodology and it is used so that we can examine one at a time the variables that affect human behavior Shifts in the demand curve are caused by a Tastes and preferences b Income and its distribution c Prices of related goods d Number and ages of buyers e expectations about prices income and availability f taxes subsidies and regulations Chan es in relative market prices cause changes in the quantity demanded while changes in in uences other than a good s own price change the demand The law of supply states that higher prices cause sellers to make more of a good available per period Factors that would cause a shift in the supply curve include a The number of sellers Technology Resource costs Prices of other producible goods Producers expectations Specific taxes subsidies and government regulations Know what a surplus and shortage look like graphically wag103 Markets and equilibrium 1 The invisible hand of selfinterest harmonizes the forces of competition with the public interest to generate real national wealth Adam Smith came up with this concept 2 Be able to analyze changes in equilibrium price and quantity when either supply or demand shift or both Transaction costs arise because information and mobility are costly This allows the price of a good to vary between markets and to approach its equilibrium erractically L V UIlk VV Price ceiling prices cannot be higher than a certain value such as a limit on the price of gasoline Price oors are minimum legal prices like minimum wage 6 A price oor is set above equilibrium price and causes a surplus A price ceiling is set below the equilibrium price and causes a shortage 7 Be able to discuss the affects of a minimum wage law on the market Also be able to discuss the effects of different policies on the market for illegal drugs Elasticity Price elasticity of demand is a measure of the proportional change in units purchased when price is changed by a given small proportion The formula for elasticity of demand is the percentage change in quantity divided by the percentage change in price Complete the chart Units of measurement affect slope but units of measurement do not affect elasticity If we know that demand is inelastic then when prices fall the increase in quantity will be relatively less than the decrease in price and total revenue will fall Conversely if demand is elastic and price falls then revenue rises because quantity grows relatively far more than price falls 4 Major determinants of elasticity of demand include a The number quality and availability of substitutes for a good b The proportion an item absorbs from a typical budget c The length of time considered Income elasticity of demand for a good measures the proportional change in the quantity demanded resulting from a given small proportional change in income The cross price elasticity of demand estimates the proportional change in the quantity of one good demanded when the price of another related good is changed When cross price elasticities of demand are positive the items in question are substitute goods Sets of goods for which cross price elasticity of demand is negative are complementary goods Taxes will be 100 percent forward shifted if either a demand is perfectly inelastic or b supply is perfectly elastic Taxes will be backward shifted completely if either a supply is perfectly inelastic or b demand is perfectly elastic V LAN VV UI V O V Consumer choice 1 Utilitarianism is the idea that the pleasure or pain from any activity respectively L V VI O V l V adds or detracts from a person s utility or satisfaction Bentham founded this school of thought Marginal utility is the gain in satisfaction derived through the consumption of one additional unit of a good The law of diminishing marginal utility states that the marginal utility from consuming equal units of a good eventually decline as the amount consumed increases Consumer surplus is the difference between the amounts people would willingly pay for various amounts of specific goods and the amounts they do pay at market prices Water generates substantial total utility and consumer surplus because of its low price while diamonds have a very high price and generate far less total utility and consumer surplus Marginal utility not total utility determines market prices Rational ignorance occurs because people seek information only as long as their expected benefit exceeds their expected cost Thus consumers choose to be rationally ignorant of much information Asymmetric information occurs when people have different levels of knowledge about a bargaining situation a A moral hazard occurs when one party to a contract can unexpectedly raise the costs or lower the benefits of the other party who cannot perfectly monitor or control the first party s actions Adverse selection occurs when one bargaining party ultimately suffers unexpected disadvantages because the other party conceals information prior to a contract
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