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Mid Term Exam Notes.pdf

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McGill University
Economics (Arts)
ECON 227
Christopher Ragan

ECON 219 Midterm Exam Review 2011 Chapter 1: Economic Issues and Concepts - spontaneous economic order: consumers and producers act independently for self- interests and collectively create a coordinated outcome that ts together to produce products in demand; self-organizing economy - Smith: people do not and CANNOT always be motivated by kindness; self-interest is the foundation of economic order - characteristics of market economies: - self-interest: buy and sell whats best for them - incentives: sell when prices are high, buy when prices are low - market prices and quantities: prices and quantities are determined in markets where individuals trade voluntarily - institutions: nature of private property and contractual obligations are dened by law - a production possibilities boundary illustrates three concepts: scarcity, choice and opportunity cost - scarcity is indicated by the unattainable combinations outside the boundary - choice, by the need to choose among the alternative attainable points along the boundary - opportunity cost, by the negative slope of the boundary - - four key economic questions: - what is produced and how? - the allocation of scarce resources determines the quantities of various goods that are produced - because resources are scarce, they must be used efciently and therefore, it is important to choose the right method of production - dont want to be inside the production possibilities boundary by inefciently using resources - what is consumed and by whom? - the distribution of resources among people must be determined - must determine whether the economy consumes the same as it produces, or if trade with other countries allows different consumption amounts - determine the allocation of resources as it is affected by the workings of the price system - why are resources sometimes idle? - sometimes resources lie idle; thus the economy is operating inside its production possibilities boundary - could be inside the boundary because some resources are being unused (labour, land, capital) or resources are being wasted and not used to their complete ability - why is it difcult for some people to nd jobs? - should governments worry about idle resources? can they do anything about it? - is productive capacity growing? - the capacity to produce goods and services can grow rapidly, slowly, or even decline in some countries - if production capacity is growing, combinations that are unattainable today can soon become attainable - growth is demonstrated by an outward shift of the production boundary - specialization of labour: being skilled in a particular trade (comparative advantage); efcient because: - allows people to do what they can do well while leaving everything else to be done by others - people become better at tasks that they concentrate on - division of labour: specialization within the production process (assembly line) - types of pure economic systems: - traditional economy: behaviour is based primarily on tradition, custom and habit - works best in an unchanging environment - common in earlier times - command economy: behaviour is determined by some central authority, usually the government, which makes most of the necessary decisions on what to produce, how to produce it, and who gets it - centralized decision making - enormous quantity of information needed to create complex plans which must be constantly modied - free-market economy: decisions about resource allocation are made without any central direction, but from numerous independent decisions made by individual producers and consumers - decentralized decision making, yet coordinated - mixed economy: most economies are a mixture of each type of economy rather than being wholly one type Chapter 3: Demand, Supply and Price - variables will inuence the demand curve as well: 1. Consumers income: - if average income rises, consumers as a group are expected to desire more of most goods, ceteris paribus (shift to the right) - normal goods: quantity demanded increases with increased income - inferior goods: quantity demanded decreases with increased income - a change in the distribution of income will cause an increase in the demand for products bought most by consumers whose income increases; decrease in the demand for products bought most by consumers whose income decreases 2. Prices of other goods: - substitutes in consumption: products that can satisfy the same needs and desires - the curve can shift when either the product becomes less expensive than the substitute, or the price of the substitute rises; either change will increase the amount of the product - complements in consumption are products that tend to be consumed together; the fall in the price of one product increases demand of both products 3. Tastes: - a change in taste can be long-lasting (typewriters to computers) or short-lived (newest Xbox game) - this includes changes in consumers perception of the quality of goods that may result from published research 4. Population: - an increase in population with purchasing power will increase demands for all products purchased by the new people 5. Expectations about the future: - expectations about the future can cause the demand for a product to either increase or decrease (buy U.S. dollars because you think that the value will increase over time) - law of demand: the price of a product and the quantity demanded are negatively related holding constant any external factors (taste, income, age distribution of the population, alternatives) - why? self-interest; substitution - if something is less expensive it will be bought instead of the more expensive things - inelastic demand: steep demand curve - responsiveness to the change is price is larger over long periods of time - elastic: atter demand curve - a demand curve can shift in two ways: - more is demanded at each price so the curve shifts to the right so that each price corresponds to a higher quantity than it did before - less is desired at each price so the curve shifts to the left so that each price corresponds to a lower quantity than it did before - change in demand: a change in the quantity demanded at each possible price of the commodity, represented by a shift in the whole demand curve; result of a change in any of the ceteris paribus factors - rightward shift indicates an increase in demand - leftward shift indicates a decrease in demand - change in quantity demanded: a change in a specic quantity of the good demanded, represented by a change from one point on a demand curve to another point (movement on the curve), either on the original demand curve or a new one; result of a change in price - movement down and to the right indicates an increase in quantity demanded - movement up and to the left indicates a decrease in quantity demanded
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