ECON 110 Final Exam Study Guide Lectures: 1 - 26Lecture 1 (August 21)The big idea of this lecture was the Ten Basic Principles of Economics.I. Tradeoffs: resources are limited, and hence we must choose how to spend them.II. Opportunity Costs: What you give up to get what you desire. III. Comparing and contrasting benefits to costs: Specifically looking at whether the marginal benefits outweigh the marginal costs.IV. People respond to incentives: when the benefits outweigh the costs.V. Trade can help everyone because it encourages competition, and allows for specialization. VI. Markets can be used to organize economic activity: In microecononmics, the market that we study is the one that occurs between households and firms. VII. Governments can improve market outcomes: The government can also pass laws to regulate the invisible hand.VIII. A country’s quality of living is dependent on its ability to produce goods and services. IX. Inflation occurs when the government prints too much money.X. Society plays a balance game between inflation and unemployment. Also termed equality and efficiency in economics, this is the constant battle.Other Big Ideas of EconomicsI. Scarcity: when society has less to offer than people are demanding.II. Choices: economics is all about the choices people make, studying why they make them, and attempting to influence them to make a choice that is beneficial to the economy.III. Forces that affect the economy in the grand scheme of things (but this is known as macroeconomics)Lecture 2 (August 26) Terms you should know: scarcity, tradeoffs, decision, opportunity cost, incentives, and choice. Lecture 3 (August 28)Circular flow diagram: details the economic relationship between households and firms.The different actors in this model are the firms, the households, and the markets. The firms are entities that utilize factors of production in order to turn out goods and services; they buy resources, hire labor, and convert resources into products for the households. The households consume the goods and services, and own and sell the factors of production such as labor and land. The markets are the means of exchange between the firms and the households. Factors of production in this model are resources. NOTE: Capital is any resource that is not human input, such as equipment and supplies, and is technically non-financial. Production Possibilities Frontier (PPF) is a graph that shows the combinations of outputs that are possible, given available factors of production and production technology. The line on the graph runs between the two maximum production possibilities on the axes, and is called the frontier line. The frontier line can change with changes in production factors.Positive and normative statements: While positive statements attempt to describe the world objectively (descriptive analysis), normative statements state how the world ought to be (prescriptive analysis.) Lecture 4 (September 2)Absolute advantage: The ability to produce a good using fewer inputs than another producer.Comparative advantage: The ability to produce a good at a lower opportunity cost than anotherproducer.Lecture 5 (September 4)The Supply and Demand Model: Our method of understanding the interactions of buyers and sellers in market settings. The main idea of this model is to help determine market price and quantity, and answer questions such as “how do changes affect markets?” The supply/demand model also allows economists to observe and track buyer/seller behavior in order to see patterns and create economic theories. Price taking: When a competing business observes the prices of their competition, and then they lower their prices to undercut the competition. When economists discuss demand, a common subject is the demand equasion: QD X= f (PX, I, PO, T, E, X)Px : the price of the product in questionI : incomePo : prices of other products that could affect the market in questionT : consumer tastes or preferences for a goodE : symbolizes expectations about future events X : all other possible variables that could affect the market, such as temperature or media popularity Economists divide the variables into two groups: price (Px), and everything else. Demand curve: A graphic representation of the relationship between demand (quantity demanded) andthe market price. Law of Demand: When prices rise, buyers purchase fewer units, and when prices fall, they buy more. Demand shifters: A change in income, change in other prices, or a change in consumer tastes. Lecture 8 (September 18)Elasticity measures exactly how responsive the market is to changes in important factors. Surge Pricing: when demand goes up, prices automatically go up.Elasticity versus Cost Differences: A coffee shop that charges ten cents more per cup to dine-in with coffee than for to-go coffee, is probably more likely adjusting for the cost difference in whether they have to wash a cup.The elasticity equation states that the elasticity of demand will be equivalent to the percent change in quantity, divided by the percent change in price. Price Elasticity of Demand: Ԑd = %∆Quantity = (Q1 – Q2)/((Q1 + Q2)/2)%∆Price (P1 – P2)/((P1+P2)/2)There are three factors in determining elasticity value:1. Time: How long does a household have to adapt to the change in the price?2. Substitutes: Are there any close substitutes for this product; are there many of these substitutes?3. Significance: How large of a proportions of a household’s budget is spent on the product?Lecture 9 (September 23) Cross price elasticity: How the change in price of one good affects the demand for another good.Elasticity notes: - When a product is relatively inelastic, raising prices will increase revenue because demand will not change very much.- For elastic products, lowering prices will raise revenue, because they will increase demand.Market equilibrium reflects the way markets allocate scarce resources. The question of whetherthe market allocation is desirable can be addressed by welfare economics.Lecture 10 (September 25) Consumer Surplus Consumer Surplus is the difference between a consumer’s willingness to pay for a product and the market price of the product. On a graph, Consumer Surplus is represented by the area beneath the demand curve and above the market price. Essentially, this is the benefit that buyers receive from a good as perceived by the buyersProducer Surplus Producer Surplus is the area between