What Economics is About - Final Exam Study Guide

What Economics is About- Final Exam Study Guide We are going to make assumptions - Ceteris paribus (all things are assumed perfect condition) Economics is about - People - Choices Economics is - social science - About people - Beyond our control (objective lke the law of gravity) - Studies people making choices ● Production ○ Can produce goods and services (haircut or car) ○ pulling resources to make a GOOD or SERVICE ● Good ○ Something that people purchase to satisfy needs and wants ○ Something that has utility ● Bads ○ A pollution, traffic jam ○ disutility ● Utility ○ Satisfaction, happiness, gratification ○ Essentially imaginary ○ Utiles (standard unit of measurement) ○ Utility = good, disutility = bad) ● Utilitarianism ○ A lot of things we do as consumers are to please ourselves ● Exchange ○ Two sides ■ Consumers (demand) ■ Sellers (supply) ● 1776 the Wealth of Nations (Adam Smith) ○ Things are going to follow a pattern/law ○ Everyone can be better off by participating in the market ● In order to be a buyer you need to be a seller (need a job to get money) ○ Labor Market Markets - Markets intertwine - In order to buy somethings in the market of goods and services you must partake in the market of resources - Labor - Ability and willingness to work Land - An economic resource (can be used to produce things and can be zoned for different uses) - Commercial, agricultural, residential, landfill/trash - Capital - Things that we can make out of other things (laptop, pen, pencil) - Car for joy rides is a good v. car for pizza delivery is capital - Financial, human are different types - Entrepreneurship - Taking risk (could waste resources) - Cocky, gamble - Earns profit Entrepreneur earns profit Laborer earns salary Landlord earns rent Financial resources earn interest ● Distribution ○ Who gets what ■ Distribution of income NAFTA - free = no tariffs Import - A commodity that comes into a country that was produced in another country Export - A commodity that goes out of a country where it was produced and brought to another country Tariffs - Taxes on imports or exports - Makes imports more expensive Positive Statement - Something that can be verified/proved Normative Statement - Opinion - Cannot be disproved or proved Federal Reserve System - Central baking system - The Fed formed in 1913 If demand is too high > shortage > price can be raised 2 questions on quiz: determine if question is normative or positive and micro or macro Opportunity Cost ● ● ● ● The next best alternative Explicit Cost ○ Implicit Cost ○ What you give up to get what you get ○ Opportunity cost General Motors ○ Conventional vehicles ○ Electric cars ○ Opportunity cost: giving up the conventional vehicles hours studying 10 One extra hour of studying for astronomy = opportunity cost of one less hour studying for economics. (take this as an absolute) astrono my 5 5 Productivity economic s productiv ity Practi ce questi ons Delta Y A’ Delta X hours Scarcity - Wants and desires > resources 10 - - Resource examples - Land (natural resources) - Labor - Capital (something that you use to produce something else) - A country doesn’t generate enough capital if the economy does not produce enough income. Sustenance income. - Many countries don’t want to become capitalists - They don’t have the legal environment to support entrepreneurs - Entrepreneurship Free goods cannot be scarce Models - scarcity bread Nuclear bombs Production Possibilities - - - Opportunity cost - Possibilities not realized when resources are used for a given purpose; opportunity costs are measured by the best alternative use of the same resources Production possibilities boundary - A curve representing all the possible combinations of goods that could be produced using the available resources fully and efficiently, given fixed technology PPB for two goods - Plot good y on vertical axis and good x on horizontal - PPB graph shows all possible combinations of two goods that can be produced using the available resources fully and efficiently - One person economy on a deserted island - Two goods: rabbits (4 hours to catch) and fish (2 hours to catch) - Fixed technology: wooden spear - Resource scarcity: max of 16 hours daylight for production choice rabbits/day fish/day A 4 0 B 3 2 C 2 4 D 1 6 E 0 8 rabbits/day PPB (slope = -½ : opportunity cost of 1 more rabbit is two fish) 4 Not attainable Attainable but undesirable point fish/day 8 Opportunity cost of 1 rabbit = 2 fish Opportunity cost of 1 fish = ½ rabbit Important points about the one-person PPB: 1. Points within the PPB are attainable but less desirable 2. Points outside the PPB are not attainable given the available resources and technology 3. Opportunity cost is reflected in the PPBs slope a. Negative slope - > tradeoff b. Along a PPB with negative slope you have t produce less of one good in order to make more of the other. c. In terms of the graph, opportunity cost equals the decrease in one goods axis from increase in other goods axis 4. If a PPB has a fixed slope, then this indicated fixed opportunity costs a. Implies resources are 100% interchangeable b. May be realistic for one person economy, but not a national economy PP @ national level - Civilian goods produced in a country (called “atlantica”) - E.g. consumer goods, schools, civilian-good factories etc - Military goods produced in atlantics c/ yeC ar0 C 1 C 2 M1 - M0 = M2 - M1 c0 - c1 < c1 - c2 M0 M1 M2 M/ year PPB in that Different from the fish-rabbits - National PPB is concave : slope becomes steeper )(more negative as we move from left to right. This graphical characteristic represents increasing opportunity costs. Moving rightward (producing more M) required increasing amounts of C to be foregone. The more M is produced the more C must be foregone in order to produce an additional unit of M. SEPTEMBER 13th P D’ D’’ D Qd From D to D’ demand increases From D to D’’ demand decreases Shifters of Demand - Change in number of consumers - Expectations of future prices (NOT ACTUAL PRICE, just expectation of future prices) - Change of consumer income - Preferences - Price of related goods - Substitute, complement, and independent good - Substitute - interchangeable - Complements - things that go together - Independent - religious rituals (no other option) Increase in Demand - # of consumers increases - Increase in consumer income - Expectations of future prices to increase - Increase in desire for a specific good - Decrease in price o Decrease in Demand - Expectations of future prices to decrease - # of consumers decreases - Decrease in consumer income - Decrease in desire for a specific good Normal Goods - Income goes up, demand for this good goes up - Income and demand are directly related (if demand and income move in the same direction the good is a normal good) Inferior Goods - Income increases, demand decreases - Income and demand are inversely related Deriving Market Demand Curve P D1 Alice Q P D2 Alex Q P D3 P3 Albert Q Q3 Market Demand Curve Dm Q1Q1+Q2Q1+Q2+Q3 Consumer Surplus - reservation price (upper limit) - Difference between what consumer is willing to pay and what price seller sets P Area above price and below demand curve $1,000 D Q1 = 1 Q On test there will be question to calculate consumer surplus! Supply● ● ● Goal = profit (maximization) P goes up and down > QS goes up and down > S Equality is when price of supply and demand equal not when supply=demand Surplus: QD < QS Shortage: QS < QD ● Overall surplus: take the (y) distance and (x) distance and half it. 7 factors that shift supply curve 1. Technology 2. # of producers (firms) 3. Prices of inputs 4. Expectations of future prices 5. Physical conditions (weather, climate, etc) 6. Taxes and subsidies 7. Quota!!! Application: Sales of SUVs in the US - Gasoline in US is increasingly expensive P P 0P S U Vs Exce ss supp ly 1 Q Q S0 D 1 D 0 1 costs Increasing gas 0 causes the demand curve to shift left The Price of a Foreign Currency - The market for foreign currencies is called the foreign exchange market (forex) - Exchange rate: the price of one currency in terms of another one - People demand foreign currencies to buy those countries’ goods and assets Examples of foreign exchange rates currency American dollar ER Mexican peso .0738 13.5520 China yuan .1463 6.8 -1.3 A review of Changes in Supply and Demand (ADD PICTURES OF SHIFTS TO THIS CHART AND PUT ON CHEAT SHEET) No change in supply Supply shifts out Supply shifts in No change in demand No change Price falls, quantity rises Price rises, quantity falls Demand shifts out Prices rises, quantity rises Quantity rises, price could rise or fall Price rises, quantity could rise or fall Demand shifts in Price, falls, quantity falls Price falls, quantity could rise or fall Quantity falls, price could rise or fall TEST QUESTIONS - Determine whether surplus or shortage and determine where shortage will be calculated - Every student at 12 can attend a class, but not every student can take the class at 10. Tuition does not vary by time. It follows demand for 10 am class - Demand for the 10 am class is _GREATER__ than the demand for the noon class (no surplus or shortage at 12 but shortage at 10 so demand is greater for 10 am class) Toll 1 Toll 2 Qs Toll 3 Qd 8-9.30 9.30-16.30 Capacity of I-66 Pot Legalization 10% tax on soda S1 S 0. 2 5 $2.60 $2.50 D Refer to exhibit… which graph depicts the result of a decrease in the unemployment rate? - NONE OF THEM (only shows shifts of PPF but does not show point inside the PPF) IF the demand for a good rises by more than the supply of the good falls then the goods equilibrium price will _RISE__ and its equilibrium quantity will __RISE___ Which of the following persons is most likely to buy these items at a convenience store (7-up, loaf of bread, half gallon of ice cream) a. Person with a high opportunity cost of time Decision making “at the margin” means making a choice based on ___ of a decision a. Total benefits b. Total costs c. Comparing the total benefits and costs d. Comparing additional benefits and costs If MB > MC person will keep using When MB = MC the person stops (this is where efficiency is achieved) MB,M C MC Studying MB>M C  MC>MB MB Studying Incentive: something that encourages or motivates a person to undertake an action o Incentives are closely related to benefits and costs. o Individuals have an incentive to undertake actions for which the benefits are greater than the costs/ for which they expect to receive net benefits (benefits greater than costs) Ceteris Paribus: all other things constant or nothing else changes Abstraction: the process of focusing on a limited number of variables to explain or predict an event Microeconomics: branch of economics that deals with human behavior and choices as they relate to relatively small units: an individual, a firm an industry, a single market - Discuss price Macroeconomics: the branch of economics that deals with human behavior and choices as they relate to an entire economy. - Discuss price level Positive economics: attempts to determine what is - Deals with cause-effect relationships that can be tested Normative economics: addresses what should be - Deals with value judgements and opinions and cannot be tested Opportunity Cost - The higher the opportunity cost the less likely it is that it will be done Scarcity - Because of scarcity a rationing device is needed Decisions on the margin - Decision making characterized by weighing the additional (marginal) benefits of a change against the additional (marginal) costs of a change with respect to current conditions Efficiency - When the marginal benefits are greater than the marginal costs ○ Know whats micro, macro, positive and normative, opportunity cost ○ Read end of chapter summaries ○ PPF ■ model of scarcity ■ Wants and needs growing faster than resources available ■ Efficient ■ Inefficient ■ Unattainable ■ Shifts of PPF ○ Supply and Demand ■ Shifters of curves and directions of shifts ■ Will have table where you must fill in the blank ■ derive market supply curve ○ Ceteris paribus ○ Inferior v. Normal goods and shifters of supply and demand ■ Normal good + increase In buyers income = shift right of demand ○ Government does ■ ■ ■ Taxes subsidies Regulation Mandatory prices ■ Price ceiling (maximum/ top price) ■ Gov’t takes the side of consumers ○ Consumer and producer surplus ○ Calculate consumer surplus! 5 questions from chapter 5 on test