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ECON 2010- Final Exam Guide - Comprehensive Notes for the exam ( 122 pages long!)


Department
Economics
Course Code
ECON 2010
Professor
B.Sharkey
Study Guide
Final

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LSU
ECON 2010
Final EXAM
STUDY GUIDE

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Econ 2010 Macroeconomics Notes
Chapter 3: Supply and Demand
Learning Objectives:
- 1. Describe how the demand and supply cures summarize the behavior of buyers and
sellers in the marketplace
- 2. Discuss how the supply and demand curves interact to determine the equilibrium price
and quantity
- 3. Illustrate how shifts in supply and demand curves cause prices and quantities to change
- 4. Explain and apply the Efficiency Principle and the Equilibrium Principle (also called
the “No-Cash-on-the-Table Principle”)
What, How, and For Whom?
- Every society answers three basic questions:
o What
Which goods will be produced?
How much of each?
o How
Which technology?
Which resources are used?
o For Whom
How are outputs distributed?
Need? Income?
Central Planning vs. The Market
- Central planning
o Decisions by individuals or small groups
Agrarian societies
Government programs
o Sets prices and goals for the group
Individual influence is limited
- The Market
o Buyers and sellers signal wants and costs
Resources and goods are allocated accordingly
o Interaction of supply and demand answer the three basic questions
- *Mixed economies use both the market and central planning
Buyers and Sellers in the Market
- The market for any good consists of all the buyers and sellers of the good
- Buyers and sellers have different motivations
o Buyers want to benefit from the good
o Sellers want to make a profit
- Market price balances two forces
o Value buyers derive from the good
o Cost to produce one more unit of the good
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Demand
- A demand curve illustrated the quantity of buyers would purchase at each possible price
- Demand curves have a negative slope
o Consumers buy less at higher prices
o Consumers buy more at lower prices
Demand slopes Downward
- Buyers value goods differently
o The buyer’s reservation price is the highest price an individual is willing to pay
for a good
- Demand reflects the entire market, not one consumer
o Lower prices bring more buyers into the market
o Lower prices cause existing buyers to buy more
Income and Substitution Effects
- Buyers buy more at lower prices and buy less at higher prices
- What happens when price goes up?
o The substitution effect: buyers switch to substitutes when price goes up
o The income effect: buyers’ overall purchasing power goes down
Interpreting the Demand Curve (image 1)
- Horizontal interpretation of demand:
o Given price, how much will buyers buy?
o At a price of $4, the quantity demanded is 8,000 slices/day
- Vertical interpretation of demand:
o Given the quantity to be sold, what price is the marginal consumer willing to pay?
o If 8,000 slices are sold the marginal consumer is willing to pay $4 per slice
The Supply Curve
- The supply curve illustrates the quantity of a good that sellers are willing to offer at each
price
o If the price is less than opportunity cost, offer more
- Opportunity cost differs among sellers due to:
o Technology
o Skills
o Different costs such as rent
o Expectations
- The low-hanging fruit principle explains the upward sloping supply curve
- The seller’s reservation price is the lowest price the seller would be willing to sell for
o Equal to marginal cost
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