[ECON 104] - Midterm Exam Guide - Ultimate 35 pages long Study Guide!

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UMASS-Amherst
ECON 104
MIDTERM EXAM
STUDY GUIDE
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Five short answer 2 banking problems
Supply & Demand (determinants, contrasting movement vs shift):
Supply:
The Cost of Production:
Available technologies: Improvement in technology > More efficient and easier to produce >
Supply curve shifts to the right
Prices / Quantities of Outputs: Cost of output goes up > Company produces more > Supply curve
shifts to right
Prices of Related Goods:
Substitutes: Ex. Whopper and Big Mac (very similar), The price of the Whopper goes up, so
people buy less > people buy more Big Macs > Supply curve for Big Macs shifts to the right.
Compliments: Ex. Cars and gas (you need both), The price of gas goes up, so people buy less gas
> people drive less > the demand for cars goes down > Supply curve for cars shifts to the left.
Demand:
Income: Income goes up > people buy more > Demand curve shifts to right
Wealth: Net worth goes up > people are worth more > Demand curve shifts to right
Prices of Related Goods:
Substitutes: Ex. Whopper and Big Mac (very similar), The price of the Whopper goes up,
so people buy less > people buy more Big Macs > Demand curve for Big Macs shifts to
the right.
Compliments: Ex. Cars and gas (you need both), The price of gas goes up, so people buy
less gas > people drive less > the demand for cars goes down > Demand curve for cars
shifts to the left.
Taste and Preferences: People like something > buy more > demand curve shifts to right
Expectations: Ex. People expect future price to go down (End-of-Year Sales / Black Friday) >
Today’s demand will go down > Today’s demand curve will shift to the left.
Income vs. Wealth
Income: the flow variable, measured across an interval of time. Wages and salaries are examples
of income.
Wealth: the stock variable, measurable at a moment in time. Net worth is an example of wealth.
Movement vs Shift:
Movement along a curve
Price changes
Change in quantity demanded
Ceteris Paribus holds
Endogenous change
Shift in a Curve:
Determinant changes
Change in Demand
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Ceteris Paribus is broken
Exogenous change
Market Failures:
1. Market Power
The invisible hand works best when markets are competitive
The process of exploiting an advantage to have an individual some control in the market
Makes the economy less efficient as there are no competitive markets
Example
AT&T was the only phone company in america at the time until they distributed out their company
2. Public Goods
Non-exclusive consumption
Remedies
Non-market allocation mechanism
One option: collect taxes to fund them
Another approach: private membership
Example:
Roads or parks (has to do with the idea that it's not mutually exclusive)
Someone’s use of it does not affect my use of it (Why? Light house(Free ride and use it/Wait for market
and stubbornly outlast/risk not normally taken))
3. Equity
In the market world the market place is not blind racially. Markets are blind to fairness.
Non-market allocation mechanism
Rationing, first-come-first-served
Price Controls (ceilings and floors)
4. Externalities
Transaction that impacts a third party which is not involved
When social costs differ from private costs, the discrepancy is an external cost
External cost matter but generally don’t get included in production/transaction decisions
Contrasting real variables with their nominal counterparts:
Real interests rates nominal interest rates
Gross Domestic Product:
GDP: the total dollar value of final output produced within a nations borders in a given time
period
Final Output: Don’t count the same thing multiple times.
Within borders: If you are a U.S. citizen and work in Canada for a year, you are not producing
GDP for the U.S.
Time period: Could be measured quarterly, annually, etc.
Dollar value: used as the unit for counting output.
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