ECON 201 1st Edition Quiz 1 Study Guide Lectures 1 7 Lecture 1 What is economics Economics is the study of how human beings coordinate their wants and desires given the decision making mechanisms social customs and political realities of the society Due to resource scarcity any economic system must solve three central coordination problems 1 What and how much to produce 2 How to produce it 3 For whom to produce it What is economic reasoning Economic reasoning is making decisions by comparing costs and benefits What are Marginal Costs and Marginal Benefits The additional cost to you over and above the costs you have already experienced is a marginal cost The additional benefit above and beyond what you ve already experienced is a marginal benefit Lecture 2 What is the economic decision rule If the relevant benefits of doing something exceed the relevant costs do it If the relevant costs of doing something exceed the relevant benefit don t do it Example Ex You are given a monthly allowance of 600 minutes from your telephone company You receive a message saying that your 600 minutes have been used up Suddenly you get a phone call from a 1 800 number but all of your minutes have been used up If you answer you will be charged 10 cents per minute and that is your marginal cost If you answer the call and the company calling offers you a new credit card and you need a new credit card that is your marginal benefit What is an opportunity cost An opportunity cost is the basis of cost benefit economic reasoning It is the benefit foregone or cost of the next best alternative to the activity you have chosen Example A company contacts you and tells you that if you attend a seminar you will receive a free lunch voucher and a free digital camera You live 45 minutes away from the seminar and you must drive your own car to it When you get there you must spend an hour of your own time patiently sitting through the seminar At the end you receive your lunch and camera Were the lunch and camera really free You spent your time and money to get there as well as your own time to be there The lunch and camera were not free because there was an opportunity cost What is the invisible hand The price mechanism the rise and fall of prices that guides our actions in a market What is an economic institution Laws common practices and organizations in a society that affect the economy Objective Policy Analysis 1 Keeps value judgments separate from the analysis 2 Positive economics the study of what is and how the economy works 3 Normative economics the study of what the goals of the economy should be Lecture 3 What is a production possibility curve PPC A production possibility curve PPC measures the maximum combination of outputs that can be achieved from a given number of inputs It slops downward from left to right A production possibility curve is used to illustrate opportunity cost It shows the trade offs among choices we make Example of PPC Laura s production possibility curve for math and economics problems in one night is shown in the graph Her opportunity cost of finishing six math problems instead of four math problems is one economics problem because finishing two more math problems means not finishing one 4 3 economics problem What is a comparative advantage Why opportunity costs increase as the consumption of a good increases What is productive efficiency Achieving as much output as possible from a given amount of inputs or resources or achieving a goal as cheaply as possible Lecture 4 Supply and Demand Demand in Economics Prices coordinate individual s desires in free market economies through supply and demand Forces of supply and demand determine prices and quantity What is demand The willingness and capacity to pay Example of demand If you want to own a Ferrari which costs 650 000 and you are able to pay then there is a demand A desire for a Ferrari and the inability to pay does not create a demand What is the law of demand There is an inverse relationship between price and quantity demanded 1 Quantity demanded rises as price falls other things constant 2 Quantity demanded falls as price rises other things constant Example of the law of demand If one ice cream cone cost 3 you are likely to buy 2 cones per week but if prices go up to 5 a cone you will probably only buy 1 cone per week What is the demand curve The graphic representation of the law of demand Two variables on x axis quantity demanded per unit of time and y axis price per unit Why does the demand curve slop downward As the price goes down the quantity demanded goes up The demand curve is downward sloping for the following reasons 1 At lower prices existing demanded buy more and new demanders enter the market 2 Substitution and income effect Example If prices of ice cream goes down you may substitute frozen yogurt with it The Demand Table The demand table assumes all of the following 1 Quantity demanded has a specific time dimension to it 2 All the products involved are identical quality 3 Ceteris Paribus means Everything else is held constant Other things constant These factors may include changing tastes prices of other goods income even the weather Example Given the graph the quantity that would be associated with the price of 4 in a demand table would be 2 To find the quantity demanded at a price of 4 extend a horizontal line from 4 to the demand curve and drop a vertical line down to the quantity axis It will intersect it at 2 This is the quantity that will be Shifts in Demand Versus movements along a demand curve a Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices others things constant it is the entire demand curve b Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price it is a point on the demand curve c A movement along the demand curve is the graphical representations of the effect of a change in the price of the quantity demanded d A shift in demand is a graphical representation of the effect of anything other than price on demand Shift factors of demands Society s income 1 An increase in income will increase demand for normal goods demand curve shifts to the right 2 Example when income rises one is likely to buy more DVDs 3 Increase in income will decrease demand for inferior goods 4 Example When income rises one is less likely to ride a bus You can afford to buy a car rent a parking space or take a cab The price of