ECON 201 1nd Edition Exam 1 Study Guide Lectures 1 7 Vocabulary Economic Problem How to allocate resources to the uses that most benefit society Market Price directs resources Adam Smith s Invisible Hand Central Planning Resources directed by governing body legislation or dictatorship Island Economies Very little exchange between individuals ex brushing teeth Normative economic questions can t be answered objectively Questions about right and wrong best fair etc individuals answer for themselves Positive economic questions have objective answers and can be tested ex If taxes rise 5 consumer spending on housing falls x Microeconomics is the study of the behavior of individuals institutions economic agents Macroeconomics is the study of the performance of an economy or outcomes Production Possibilities Frontier PPF max amount of any combination of goods that can be produced any level of production within the PPF is attainable any level outside the PPF is unattainable production on the PPF is efficient resources are fully employed and the economy can t produce any greater combo Marginal Cost the additional cost of producing one more unit Technology Hicks Neutral Tech Improvement an increase in tech of all factors of production in equal proportions Bias tech shifts particular to specific factor Market a mechanism for the exchange of goods and services Demand the max consumers are willing and able to pay for a good or service Law of Demand at higher prices consumers demand a lower quantity downward sloping demand curve Changes in Demand Income Normal Good a good or service that consumers are willing and able to buy more of as income rises Inferior Good a good or service that consumers are willing and able to buy less of as income rises Relative prices of other goods Complementary Goods an increase in the price of one causes a decrease in the demand of the other Substitute Goods an increase in the price of one causes an increase in the demand for the other Tastes and Preferences Supply the willingness and ability of the producers to sell goods and services to a market Law of Supply at higher prices producers are willing and able to sell more to the market upward sloping supply curve Changes in Supply ONLY COST OF PRODUCTION technology Market Equilibrium when quantity supplied and quantity demanded are equal no tendency for price to change Equilibrium Price the price that equates the quantity supplied and quantity demanded Elasticity tells us the size or economic magnitude of shocks how much is measured by elasticity Elasticity of Demand tells us the responsiveness of consumers to change in price Q P Graphing Elasticity elastic demand curve looks like a straight line across inelastic demand curve is straight up and down Price Floor A situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply at a higher price the Qd is much lower and Qs much higher Price Ceiling A situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply Consumer Surplus the difference between the maximum the consumers are wiling and able to pay and what they actually have to pay for every unit purchased Producer Surplus difference between what producers receive in payments and what they re willing to accept for each unit transacted area below the price above the supply curve for each unit transacted Income Elasticity is incomes rise the demand curve shifts to the right but how much does the demand go up Q I Total Welfare consumer surplus producer surplus DWL Dead weight loss eliminating transactions when the willingness to pay exceeds the cost of production Lecture 1 January 8 Introduction The Economic Problem How to allocate resources to the uses that most benefit society The Market a main source Let individuals see the relative prices of individual activities and that s how they decide what to pay for Price theory Central Planning Resources directs by governing body legislation or dictatorship Some sort of hierarchy that sets allocations Island Economics Very little exchange between individuals Self production and self consumption Method for deciding how much time and money you are going to commit to your own production brushing your own teeth Normative vs Positive Economic Analysis Normative economic question cannot be answered objectively Issues of fairness Good it would be good if we rose the taxes on gasoline questions about what is right best or fair are normative issues that each individual decides for themselves Subjective Positive economic questions have objective answers They are questions that can be decisively tested and proven right or wrong If incomes taxes rise by 5 consumer spending on housing will fall by X Objective Production Possibilities The production possibilities frontier The maximum amount of any combination of goods that can be produced Production the amount produced Possibilities what is possible Frontier the edge or limit or boundary Markets A market is a mechanism of exchange of goods and services Not necessarily a fixed centralized location Perfectly Competitive Market Many buyers and many sellers No single buyer or seller can influence price If Starbucks started raising prices on coffee you could go anywhere else ie Next door to caf roma but there are so many buyers out there that you can t argue Starbuck s price Hard to influence and negotiate your wage Full information about the goods and services exchanged Consumers know what they are buying Producers know the value of the money they receive Understand the quality of the product and the quality of the dollar Thick market of many buyers and many sellers that are fully informed on the quality of the goods Markets are two sided Demand and Supply Price is determined by the interaction of supply and demand Joint reasoning Supply and demand interacting and complicating things Demand Economic demand is the willingness and ability to pay for a good or service at any given price Has a need on a survival level diabetic that needs insulin cancer patient that needs therapy Law of Demand at higher prices fewer units or smaller quantity of a good or service are demanded Changes in Demand Need to know their preferences tastes Demand is determined by preferences Lecture 2 January 13 Continuing from Thursday s lecture Changes in Demand Preferences Tastes Relative prices for other goods Choice of what movie to