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ECON 310 Midterm 1 Notes

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ECON 310
Ratna Shrestha

ECON 310 Midterm Study Partay Chapter 1 ? Scarcity- society has less to offer than what people desire to have Economics- study of how society manages its scarce resources ? How People Make Decisions -tradeoffs (food vs. clothing, work vs. leisure time) -cost: what you give up to get something -thinking at the margin – would you consume one more of something? -incentives- tax breaks, contracts, scholarships Efficiency: getting the most you can from scarce resources Equity: benefits of resources distributed fairly among society Opportunity Cost: what you give up from one choice to get what you want from another choice Trade: allows one to specialize in what they do best and still enjoy a variety of goods. Everyone benefits from trade Market Economy: households and firms determine everything. Interaction between supply and demand is guided by prices. When this fails the government can intervene to promote efficiency and equity (often not simultaneously obtainable) Market Failure Externality: impact of one persons actions on the well-being of others (pollution, slowing down o na highway (negative) research (positive)) Market Power: single person unduly influences market (you are the only hotdog vendor) Asymmetric InformationL one party (seller or buyer) has more info than another about a product. Auto market – drivers know whether they are good drivers or not- ICBC doesnt How gov helps: collusion (break up a big company into smaller ones), creating activities ? How the Economy as a Whole Works Standard of Living: depends on a country's ability to produce goods per capita – the productivity (Productivity- amount of goods produced from each hour of a worker's time) -prices rise when gov prints too much money, tradeoff between inflation and unemployment inflation: more money- same amount of goods – people dont have more to buy but they have more money so they are willing to spend more -unemployment – in times of inflation gov needs to supply less money to economy. We will buy less, produces will produce less and lay off workers Chapter 2 Circular Flow Model: consumer + producer interactions in a market. Basic model of economics Production Possibilities Frontier: graph of various combos of outputs that economy can possibly produce given the available factors of production/tech Efficiency- resource use along the red line is efficient. Anything under the curve is wasteful Tradeoffs- can produce 100 more cars if we produce 500 fewer computers, etc Opportunity Cost- In order to build 1 more X you have to sacrifice n Y's – the opportunity cost of X is n Economic growth- line as a whole can expand out – represents improvement of technology in one or both things Economists as scientists (try to explain world) policy-makers (try to change world) PositiveAnalysis- statements dealing with fact or questions about how things are NormativeAnalysis- reflect individual opinions about how the world should be Economists disagree: about validity of alternative theories (positive), or because they hold different values (normative) Chapter 3 We can satisfy our needs by being self-sufficient or specializing and trading with others (Economic interdependence) Why is Interdependence the norm? -people are better off when they specialize in goods they can produce at lower costs and trade with others -even if someone can be more productive in both resources than another supplier – that person may benefit from trade when we look at the opportunity costs of each resource. Ie: Rancher has a comparative advantage in producing meat, and the farmer in potatoes (look at opportunity costs). So the farmer produces potatoes and the rancher meat and they trade -opportunity cost determines who should produce what and how much we should trade Absolute advantage: producer that requires smaller quantity of inputs (time in this case) to produce a good -in this example the rancher has an absolute advantage in both products Chapter 4 Competitive Market- no single consumer or firm can influence price – total supply and demand determine price Other Markets: Monopoly: Only one Seller and so can control price. e.g. BC Hydro, Shaw Cable Oligopoly: Few Sellers, no aggressivecompetition Monopolistic Competition: – Many Sellers, slightly different products – e.g. auto, computer, restaurants, Honda Civic is different from Toyota Corolla. Demand – determined by consumers, amount of a good that buyers are willing to purchase at various prices for a given period Factors that influence demand (6): -product's own price, -consumer income, -price of related goods (pepsi and coke), -personal tastes, -expectations (of own income), -number of consumers Law of Demand – inverse relationship between price and quantity demanded Shift in demand – caused by non price factors (the other 5 from above) -as income increases, demand for inferior good shifts down, demand for normal good shifts up -when fall of price in one good reduces demand for another the two goods are substitutes -when the opposite happens the two are complements Supply – determined by producers, amount sellers are willing to make available for sale at alternative prices for a given period – minimum price = cost of production Factors that influence supply (5): -products own price, -cost of production, -tech, -expectations, -number of producers Law of Supply- direct positive relationship between price and quantity supplied Shift in Supply – caused by non price factors from above Equilibrium- Equilibrium price/quantity: intersection of supply and demand curves. No tendency to chance because everyone is doing the best that they can Excess Supply: price above equilibrium – producers are unable to sell all they want at the going price Excess Demand: price is below equilibrium so consumers cant buy all they want for the going price -shifts in supply or demand curves will cause a change in market equilibrium Chapter 5 Elasticity – percent change in one variable caused by 1% change in another Perfectly Inelastic: E = 0 (consumers unresponsive to price changes) Perfectly Elastic: E = - infinity (customers infinitely responsive to price changes) Unit Elastic: E = -1 (customers response is equal to the chance in price (in % terms) Elasticity of Demand = %change in quantity demanded given 1% change in price Determinants of Elasticity of Demand: -demand is more elastic when more substitutes are available (can easily switch to less expensive goods); happens when the good is luxury, or very narrowly defined (toyota cars vs. cars in general) -demand more inelastic if the good is a necessity or market is broadly defined Long Run: more substitutes usually available in long run, consumers take time to adjust habits Formula: -when demand is more elastic for a decrease in price – total revenue goes up because demand goes up -steeper demand curve – more inelastic the good (change in demand for a given price is smaller) Elasticity of Supply - % change in quantity supplied resulting from a 1% change in price Determinants: flexibility of sellers to change amount of good produced (more elastic in long run ie farms) Cross Price Elasticity - % change in quantity demanded of one goodthat results from a 1% change in the price of another good -compliments (E is negative – price of one increases, demand of the other decreases) or substitutes (E is positive – price of one increases, demand of the other increases) Income Elasticity – the % change in quantity demanded given a 1% change in income % change in Demand / % change in Income Income Elasticity > 0 = normal good (also luxuries) Income Elasticity < 0 = Inferior good (shitty food, ramen, McD's) Income Elasticity = 0 → Income-neutral goods (necessities) Chapter 6 Price Ceilings – legally established maximum price seller can charge Price Floors – minimum price which a buyer must pay Binding vs. not binding: having an effect on market outcomes (aka cuts off equilibrium price). -binding ceiling creates shortages; shortage smaller if S and D are relatively inelastic (so in the long run shortages become bigger) -binding floors create surplusses; -price control happens because the government things prices are unfair – often aimed at helping poor Taxes Excise Tax: a per unit tax independent of the price of the product -buyer, seller, or a combo of both can pay the tax -burden of tax falls on the side of the market with smaller price elasticity ie: elastic supply, inelastic demand = consumer pays more tax elastic demand, inelastic supply = producer pays more tax -blue square = producer's burden of tax (since in this case demand is more inelastic – buyer bears larger tax burden) Chapter 7 Welfare Economics – whether a certain allocation of supply/demand maximizes combined welfare of both consumers/producers Consumer Surplus – the amount a buyer is willing to pay for a good minus the amount they actu
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