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ECO 001 Exam 1 Study.rtf

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Department
Economics
Course
ECO 1
Professor
Frank Gunter
Semester
Spring

Description
ECO 001 Exam 1 Study Chapter 1 Assume 1. People are rational 2. People respond to incentives 3. Decisions are made at the margin positive economics- what is normative economics- what should be scarcity- wants are unlimited but resources are limited if the price is 0, amount demanded is greater than the amount supplied economics- study of choices people make to attain goals given their resources market- group of buyers and sellers of a good or service and the arrangement by which they come together to trade assume consumers/firms use all available information as they act to achieve goals people choose and action if benefits outweigh costs optimal decision is to continue and activity up to the point where marginal benefit = marginal cost trade offs- producing more of one good or service means producing less of another opportunity cost- highest valued alternative that must be given up to engage in that activity market economy- decisions of households and firms interacting in markets allocate economic resources voluntary exchange- buyer and seller are made better off by the transaction "not a zero sum game" because it is voluntary, the traded thing is of lesser value than the thing received in trade equity- fair distribution of economic benefits there exists a trade off between efficiency and equity capital- financial capital- stock and bond issued, bank accounts, money holdings physical capital- manufactured goods used to produce other goods and services Chapter 2 production possibilities frontier- curve showing maximum attainable combinations of two products that may be produced efficiency - if all resources are being fully utilized law of increasing marginal opportunity cost- the more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. economic growth- represented by shifts in the PPF, allows economy to increase production and raises standard of living absolute advantage- ability to produce more of a good or service than competitors using the same amount of resources comparative advantage- ability to produce a good or service at a lower opportunity cost than competitors if one person has comparative advantage in one thing the other person has comparative advantage in the other thing because that is the nature of comparative if you want to know the opportunity cost of honey, maple over honey. as long as opportunity costs are different, voluntary trade is beneficial. divide extremes of opportunity cost list. investment- anything that allows you to produce a good or service better or more of the good or service in the future free market- government places few restrictions on how goods and services can be produced and sold or how factors of production can be employed market system won't work unless a significant number of people risk funds Chapter 3 demand and supply model assumes perfectly competitive market many buyers and sellers, all products sold are identical, no barriers to new firms entering the market law of demand- holding everything else constant, when price of a good or service decreases, quantity demanded increases. when price rises, quantity demanded falls. substitution effect- price changes, quantity demanded because good is more or less expensive to substitute goods income effect- price falls, consumers purchase more quantity of the good demand curve is a series of if-thens. If it costs _____, I will buy ______. shift of demand curve- increase or decrease in demand due to 3rd variable movement along demand curve- increase or decrease in quantity demanded normal good- income up Qdemand up. (positive) inferior good- income up, Qdemand down. (negative) complementary good- good 1 price up, quantity down (positive) good 2 price?, quantity down substitute good- good 1 price up, quantity down (negative) good 2 price? quantity up Variables that shift demand curve ***mightbeon4:00 1. income - normal good, shift right inferior good, shift left 2. price of related goods- decrease in substitute price makes demand curve shift left 3. tastes- taste increases, demand shifts right 4. population number - increase, shift right 5. expected future price - increase, shift right (right now) law of supply- holding all else constant, increase in price of a good or service causes increase in quantity supplied. decrease in price of a good or service causes decrease in quantity supplied. change in supply- increase/decrease in supply by third variable change in quantity supplied- movement along the supply curve cause by change in price someone will not produce more than the quantity/corresponding price for which they will lose money Variables that shift supply 1. price of inputs - increase, shifts left 2. technological change- can increase or decrease productivity, usually decreasing cost of production and increasing supply 3. prices of substitutes in production- alternative products that a firm could produce. if an alternative product is more profitable, firm will produce less and supply shifts left 4. number of firms in the market- new firms enter market, supply for entire market shifts right 5. expected future prices- a firm will slow production/supply if they expect prices in the future to be higher market equilibrium- quantity demanded = quantity supplied a market not in equilibrium moves towards it, a market in equilibrium stays in equilibrium surplus- quantity supplied > quantity demanded leads to cutting prices, increase in q demand, decrease in q supply shortage- quantity demanded > quantity supplied leads to raising prices, increase in quantity supplied, decrease in quantity demanded equilibrium price is the maximum amount of a good/service that can be traded. above and below equilibrium price will either be too little supply or demand. at competitive market equilibrium consumers willing to pay market price can buy as much as they want and producers willing to accept market price can produce as much as they want a product with higher demand can sell for less if a substitute exists and has smaller supply consumer sovereignty- consumer has ability to pick what they like and ability to drive market prices one shock to a market will leave you with two definitive answers. but multiple shocks have possible ? answer. if in all shocks the quantity or price moves in one direction, you are good. if in all shocks the quantity or prices moves back and forth, question mark. marginal buyer is willing to pay market price marginal supplier is willing to receive market price Chapter 4 consumer surplus- difference between what someone is willing to pay and what they actually pay (area under demand and above market price) consumer is willing to pay up to the point where marginal benefit = price producer surplus- difference between the lowest price they will accept and the price they receive (area above supply and under market price) economic surplus- producer + consumer surplus consumer/producer surplus measures net benefit not total benefit market economy tries to maximize economic surplus price ceilings and floors always decrease amount of economic surplus price floor- government mandated minimum price sellers can receive a price floor below equilibrium does not affect market a price floor above equilibrium will cause a surplus minimum wage laws. winners- people who had jobs and keep them losers- people who get fired in area between equilibrium and new market price companies pay more for less work unemployed won't get hired (surplus labor) raising minimum wage decreases economic surplus (positive economics) price ceiling- government mandated maximum price sellers can charge a price ceiling above equilibrium does not affect market a price ceiling below equilibrium price causes shortage rent control winners- people who had apartments already losers- landlords
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