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Economics 103 Midterm Notes.docx

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ECON 103
Iryna Dudnyk

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Economic 103 Midterm Notes Chapter 1: Introduction Economics: is a particular way of thinking about behaviour. Models: 1. Formality, testable, Simple and people are fundamentally the same. Assumptions (Economic Principles): Maximization, Substitution, Demand, Cost, Etc. Constraints: Prices, Income, Customs, Laws, Etc. Chapter 2: Maximization (it works and is a behaviour that survives/always is present) Maximization: All individuals are always motivated by greed. Scarcity: If the price of a good is zero and people want more than is available, that good is scarce. Indifference: Letting someone else choose for you. Equilibrium: A situation where no one wants to change behaviour. Consumers maximize utility, firms maximize profits. The world is optimal. Chapter 3: Substitution Substitution: Everyone is willing to trade some amount of one good for some amount of another. 1 Is willing to do it, not forced consumption 2. Everyone is willing, but not how much, personal taste. 3. Relationship between what one is willing to pay and able to pay. Trade-offs are everywhere in life. Marginal Value (MV): The maximum amount of one good an individual is willing to sacrifice to obtain one more unit of another good. Measured in terms of other goods and varies with consumer. Trade does not occur because of a surplus, or exchange of equal value. It happens when MV is different. Mutual voluntary trade makes both parties better off. Chapter 4: The Law of Demand Diminishing Marginal Value: The maximum one is willing to sacrifice at the margin for a good, per unit of time, declines the more one has of that good- other things held constant. Real Income= M/p2, M=number of dollars consumer has (nominal income). Real income is the measure of a consumer’s purchasing power in terms of goods. Relative Price= p1/p2, measures how many other goods one must sacrifice to obtain more of another good. Is a physical exchange rate of one good for another. Usually in dollars for convenience. Behaviour depends on real income and relative prices, not nominal income and nominal prices. Law of Demand: There is a negative relationship between a good’s price and the quantity demanded, other things held constant. P=relative price on a graph, Demand curve tells us maximum amount one is willing to spend. Like MV as it diminishes due to the more one has of good 1. Q=quantity, Demands a specific Q at a P. A consumer is in equilibrium when relative price=MV. Height of demand curve=MV, area under it is the total value (TV). TV=The maximum amount one is willing to pay for a given quantity rather than have none at all. There is an inverse relationship between TV and MV. TV is sum of all MVs. P1 x Q1=consumer’s total expenditure (how much they spend). Demand curve is how much willing to spend, boxed area=how much has to be spent. Surplus is above and gained from spending. Consumer Surplus (CS) is a measure of the gains from trade to the consumer. Chapter 5: Techy Issues of Demand A change in demand is a shift, right increase, left decrease. Changes in demand result from changes in exogenous parameters. Different taste=different MV and different rates it diminishes. Normal Goods: When income increases the demand for normal goods also increases. Inferior Goods: When income increases the demand for inferior goods decrease. Substitute good 1 into 2=substitution effect. Good 2 cheaper, good 1’s price increases. Substitute Goods: When the price of good 2 increases the demand for good 1 also increases. Complement Goods: When the price of good 2 increases the demand for good 1 decreases. A change in quantity is demanded is a movement along a demand curve that results from a change in the price of the good. Price falls, quantity demanded increases. Demand curve doesn’t change. Changes in quantity demanded result from changes in the relative price. Elasticity: means how much the quantity supplied (or demanded) changes if
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