Chapter 10 TREVOR NOTES
Chapter 10 TREVOR NOTES ECON 102
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This 6 page Test Prep (MCAT, SAT...) was uploaded by Kevin Krieger on Thursday January 29, 2015. The Test Prep (MCAT, SAT...) belongs to ECON 102 at Pennsylvania State University taught by Dr. Geerling in Fall. Since its upload, it has received 51 views. For similar materials see Micro Economics in Economcs at Pennsylvania State University.
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Date Created: 01/29/15
Chapter 1 The Basics 2 MC Q s Terms Market Group of buyerssellers of goodservice and institution or arrangement by which they come together to trade Economics Study of how people allocate their limited resources to satisfy their unlimited wants Prices Mechanism that allocates scarce resources Macroeconomics Study of economy as whole Ex Economic growth unemployment in ation Microeconomics Study of decision marking by individuals and firms along with how government in uences these decisions Ex Supply and demand consumers and producers market output Scarcity Situation in which unlimited wants exceed the limited resources available to fulfill those wants Marginal Analysis Requires decision makers to evaluate whether benefit of l more unit of something is greater than its cost TradeOff Occur because time and resources are scarce Opportunity Cost Highest valued alternative being sacrificed in order to do something else Economic Model Simplification of compleX portion of economy Includes underlying assumptions Normative Analysis Concerned with what should be Opinion Ex Unemployment is more harmful than in ation Positive Analysis Concerned with what is current not always true Speculation Ex A reduction in income tax will improve the incentives of the unemployed to find work Economic Variable Endogenous Built INTO model Exogenous OUTSIDE model Chapter 2 The PPF Model 3 MC Q s 30 points Terms Production Possibilities Frontier PPF Curve showing maXimum attainable combinations of 2 products with available resources and technology To create you need 1 ResourcesTechnology 2 Production s Absolute Advantage Ability of company to produce more of good than competitors using same amount of resources Comparative Advantage Company has lower opportunity cost Economic Growth Outward shifts in PPF as it allows economy to increase production of goodsservices ultimately raising the standard of living Trade Makes it possible for each company to specialize in what they re good at Once they trade they have more than they would have without trading and both sides are better off Ways for PPF to shift outward Phil 3 W per 2 hours 4 B per 3 1 Resources hours Technology 0f Pmductlon Process Claire 5 W per 3 hours 1 B per Comparative 2 3 Incentives 4 s Trade wsw 35 B 89 B 98 W Claire W 5 10 B 3 O PC wo Trade P with Trade Trade terms C with trade Gains from Trade 35 NonLinear PPFLinear PPF CH1quot m quot 39 A Production Possibilities Frontier other quotquotquot goods H Constant slopoconstant opp cost Hn uannnlgbj Pizza Ui mq5 P5HB mr l i W8 men 316 Mb nWG erNQAREEQHWnE Q er GEE N 39 misstt l e H tH g 9151959ng Chapter 3 Supply and Demand 5 MC Q s 30 points Terms Supply and Demand Model Most powerful tool in economics used to explain how prices are determined Assumptions must be made assume that analyzing perfectly competitive market Perfectly Competitive Market A market that has 1 Many buyers and sellers 2 All firms are selling identical products 3 No barriers to new firms entering market EX NYC hot dog venders Ceteris Paribus Holding all else equal and constant Latin Market Equilibrium QD Q5 Where supply curve meets demand curve Shortage Qs lt QD Surplus Qs gt QD Demand Law of Demand Holding all else constant when price of product falls quantity demanded of product will increase and vice versa INDIRECT RELATION Demand Curve Curve showing marginal value placed on product by market Willingness of market to pay for certain quantity of product Reasons for downward sloping Substitution Effect When consumers buy m of product when price goes up because it s relatively more expensive than other products Income Effect When consumers buy m of product when price goes up because it now takes up larger share of income Demand Schedule Table showing relationship between price of product and quantity demanded Quantity Demanded Amount of good or service that consumer is willing and able to purchase at given price Change in Demand When entire demand curve shifts because of an EXOGENOUS factor changes desire to purchase product at every price Change in QD When desire to purchase product changes because price changed ENDOGENOUS change results in movement along curve PRICE DOES NOT CAUSE CURVE SHIFTS Reasons for shift in demand curve 1 Income 2 Price of related good 3 Taste s and preferences 4 Population and Demographics 5 Expected future prices Norm 1 Good Good for which demand increases as income rises and vice versa DIRECT RELATION EX Cars houses clothes Inferior Good Good for which demand increases as income decreases and vice versa INDIRECT RELATION EX Chicken in a can store brand products walking Complements Goods and services used together Not on sale at same time EX PB J hot dogs buns Substitutes Goods and services that can be used for same purpose EX Cokepepsi Books Ebooks Supply Law of Supply With Ceteris Paribus price increases as q increases and vice versa DIRECT RELATION Supply Curve Curve showing relationship between price and quantity of product being supplied Shows marginal cost placed on product by market and willingness of market to sell certain q of product for Supply Schedule Table that shows relationship between price and quantity of product being supplied Quantity Supplied Amount of goodservice that a firm is willing and able to supply at given price Change in Supply Entire curve shifts because EXOGENOUS factor changes seller s willingness to sell product at every price Change in Q5 Sellers willingness to sell changes because price changed by ENDOGENOUS factor resulting in movement along curve Reasons for shift in Supply curve 1 Price of inputs 2 Technological Changes 3 Price of substitute in production 4 Number of firms 5 EXpected future prices Chapter 4 Economic Ef ciency 5 MC 0 5 30 points Terms Welfare Economics Study of how allocation of resources affects economic wellbeing Consumer Surplus Difference between willingness to pay for good and price paid to get it CS PD P Producer Surplus Difference between willingness to sell good for a certain price and price received PS PS P Total Economic Surplus Also known as quotSocial Welfarequot welfarebene t sum of consumer surplus and producer surplus Maximized when market is at competitive equilibrium TS CS PS Deadweight loss When market is not at equilibrium Total surplus not maximized DWL is resulting loss of total surplus DWL TSE TS Black Market Market in which buying and selling take place at prices that violate government price regulations to avoid them Price Controls An attempt to set prices through government involvement of market Less total surplus in society then results in DWL Price Ceiling Legally established maximum prices for goodsservices Examples are rent control price gouging laws Negatives Shortage of product because lower prices not incentive to produce 0 Quality of product will decline incentive to use cheaper inputs 0 Consumers will spend more time searching for product because of shortage increasing their opp cost 0 Black markets form which lead to lower tax revenues more criminal activity Price oor Legally established minimum price for good or services Examples min wage cigs support for agriculture Price Gouging When a seller puts price of goods unreasonably high after a shock in the supply or demand Examples natural disasters gt Large increase in demand Economic ef ciency Market outcome in which marginal bene t to consumers of last unit produced marginal cost of production Consumer producer surplus is at maximum Excise taxes Taxes levied on particular good or service Only account for 4 of overall US tax revenue Help us understand overall effects of tax on productionconsumption Ex alc gas cigs NOT SALES TAX Taxes provide both cost and bene t to society Tax Incidence How tax is split up between buyer and seller of pWW BXEQWENTIRE TAX NOT ON CONSUMER To Biapdmigen e tce39i mgxmer and W rmf enr gliim ng grice for consumer PFIIEE39 Types of Graphs nea EL39rgluF i 2 Supplii Eu 5 ply rice Ceilin F Erie malkgt mice supply Curve I 5 IE F I I l I rid PS Q g iing I 1 I Producer I 39 Bindin C39han39 es market ti Exar 39pleiauilnmie ceiling increase after atura disaster Price 3 g 7 Demand curve T Quan39tity i nbinding will not change market Price T QD gt Q5 iantity T Result Shortage 3 lt QS rsult Surplus BIndIng PrIce Floor NonBIndIng PrIce Floor Minimum Wage FriEL Eur plus 3prly W I I I I IFquot I I I I 5 PH tau rp lus u p ply PP quot39quot39 IDI I HEWHand I emand in L l uam39w Ex Docs don t get paid min wage n I 39 393 Quantity Price oor gets in way of charging lower price 725 Price T Pr39ce T Quantity T Quantity T QD lt 05 OD lt 05 Result Surplus Result Surplus in number of people unemployed Chapter 5 Externalities 5 MC Q s 40 points External Social Internal Private Terms Externality Costs or bene ts of a market activity that affect a third party Negative Exists when external cost gt internal cost Ex smoking talking in class Total external cost is greater than what people rms consider when consumingproducing product market then outputs MORE than what is best for society If market was left alone there would be too much of product Result External Cost exists Positive Exists when external bene t gt internal bene t Ex Flu shot Smart friends Total external bene t is greater than what people rms consider when consumingproducing market then outputs LESS than what is best for society If market was left alone there would be too little of product Result External bene t exists Market Failure When market fails to produce socially optimal level of output SOLO Occurs when externalities exist SOLO TS CS PS Pigovian taxsubsidy Makes it so people rms feel external costsbene ts more when producingconsuming product AKA used to correct market inef ciencies created by externality Bring closer to SOLO Tax ex Cig Alc Gas Subsidy ex US Products Tax Results Cost T SD i Q i Subsidy Results Cost l SD T Q T Not always sometimes use bene ts or incentives External Bene t Bene ts of market activity received by people who aren t participants Ex Flu shot gt Surrounded by people less likely to get u Internal Bene t Bene ts of a market received by an individual participant Ex Flu shot gt Less likely to get u External Cost Cost of market activity paid by people who are not participants Ex Smoking gt 2nOI hand smoke problems Internal Cost Costs of market activity paid by individual participant Ex Smoking gt health problems FIRMS AND PEOPLE MAKE DECISIONS BASED ON INTERNAL CB TO MAX PROFIT Property rights Provide exclusive right of ownership that allows for use and exchange of property Creates incentive to maintain protect conserve and trade property with others Coase Theorem If there are no barriers to negotiations and if property rights are fully speci ed interested parties will bargain to correct externalities From 1960 economist Ronald Coase argued that establishing private property rights can close gap between internalexternal costs If dif cult to bargain private parties will be unable to internalize externalities between themselves Private solutions not always possible therefore government needs to intervene Excludable good Consumer must purchase before being able to use Rival good Cannot be enjoyed by more than one person at a time Private Good Both excludable and rival in consumption most goods Market has no problem producing because everyone can purchase Ex Pizza Public Good Neither excludable nor rival Market doesn t always produce because people can get without paying Ex National Defense Free rider problem Occurs whenever someone receives bene t without having to pay for it Occurs with public goods Public sector division helps to eliminate it restore optimal level Club Good Nonrival in consumption and excludable Markets usually suppy these goods as they are excludable Very cheap to supply once market is set up so rms limit market supply to maximize pro ts Ex Cable Direct TV CommonResource Good Rival in consumption nonexcludable and used up really quickly Ex Cattle grazing land Tragedy of the commons Common ownership turns out to be recipe for resource depletion and economic disaster Taxes and policies used to prevent Occurs when commonresource good becomes depleted With this known strong incentive to consume and product depletes faster and faster Transaction costs Costs in time and other resources that parties incur in process of agreeing to and carrying out exchange of goodsservices Private Goods CommonResource Goods Food clothing cars personal Fish timber coal electronics NonRivarous Club Goods Public Goods Movies private parks Freetoair television air satellite television national defense FOSIIIVE xrernallty Pram lExterna V IE A 5 PI Pi t quot v DE i D2 Q1 Q2 EDENi125 S SMCQl Free Market I D2 SMBQZ SOLO P1 SOCIaI CostPMC Externallty SMC D1 PMBSMB PMB Externa Bene t P Private Cost PMB Q1 Q Quantity
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