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[ECO100Y1] - Final Exam Guide - Ultimate 71 pages long Study Guide!Premium

71 pages202 viewsWinter 2015

Department
Economics
Course Code
ECO100Y1
Professor
James Pesando
Study Guide
Final

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UTSG
ECO100Y1
FINAL EXAM
STUDY GUIDE
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CHAPTER 3 THE GAINS FROM TRADE
Absolute advantage – the comparison among producers of a good according to their productivity
Comparative advantage – the comparison among producers of a good according to their
opportunity cost
Comparative advantage is the driving force of specialization
Trade allows both an opportunity that would be impossible in the absence of trade
The producer that requires a smaller quantity of inputs to produce a good is said to have
an absolute advantage in producing that good
Cost of producing a product can be determined by comparing inputs required or
comparing the opportunity costs
The producer who gives up less of other goods to produce good X has the smaller
opportunity cost of producing good X and is said to have a comparative advantage in
producing it
It is impossible for one person to have a comparative advantage in both goods
Unless the 2 people have the exact same opportunity cost, there will be comparative
advantages
The gains from specialization and trade are based on comparative advantage
For both parties to gain from trade, the price at which they trade must lie between the two
opportunity costs
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
Market - a group of buyers and sellers of a particular good
Competitive market – a market in which there are many buys and sellers so that each has a
negligible impact on the market price
Quantity demanded – the amount of a good that buyers are willing and able to purchase
Law of demand – the claim that, other things equal, the quantity of demanded goods falls when
the price of goods rises
Demand schedule – a table that shows the relationship between the price of a good and the
quantity demanded
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Demand curve – a graph of the relationship between the price of a good and the quantity
demanded
Normal good – a good for which, other things equal, an increase in income leads to an increase
in demand
Inferior good – a good for which, other things equal, an increase in income leads to a decrease in
demand
Substitutes – two goods for which an increase in the price of one leads to an increase in the
demand for another
Complements – two goods for which an increase in the price of one leads to a decrease in the
demand for another
Quantity supplied – the amount of a good that sellers are willing and able to sell
Law of supply – the claim that, other things equal, the quantity supplied of a good rises when the
price of the good rises
Supply schedule – a table that shows the relationship between the price of a good and the
quantity supplied
Supply curve – a graph of the relationship between the price of a good and the quantity supplied
Equilibrium – a situation in which the price has reached the level where quantity supplied equals
quantity demanded
Equilibrium price – the price that balances quantity supplied and quantity demanded
Equilibrium quantity – the quantity supplied and the quantity demanded at the equilibrium price
Surplus – a situation in which quantity supplied is greater than quantity demanded
Shortage – a situation in which quantity demanded is greater than quantity supplied
Law of supply and demand – the claim that the price of any good adjusts to bring the quantity
supplied and the quantity demanded for that good into balance
Assume the markets are perfectly competitive:
(1) the goods offered are exactly the same
(2) the buyers and sellers are so numerous that no single buyer or seller has any influence
over the market price
Because buyers are sellers in perfectly competitive markets must accept the price, they
are said to be price takers
Monopoly – only one seller and that seller sets the price (price maker)
Quantity demanded is negatively related to price
Market demand – the sum of all individual demands for a particular good or service
Shifts in demand:
oIncome
- Normal good vs. inferior good
- Example of an inferior good is bus rides (cant afford car if income falls so
you take the bus)
oPrices of related goods
- Substitutes vs. complements
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