ECON 201 1nd Edition Exam # 1 Study Guide Lectures: 1 - 7Vocabulary: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 themselvesPositive 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 agentsMacroeconomics is the study of the performance of an economy or outcomesProduction Possibilities Frontier (PPF): max amount of any combination of goods that can beproduced•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 unitTechnology:•Hicks-Neutral Tech. Improvement•an increase in tech. of all factors of production in equal proportions•Bias tech. shifts•particular to specific factorMarket: a mechanism for the exchange of goods and servicesDemand: 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 asincome 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 PreferencesSupply: 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 -> technologyMarket Equilibrium: when quantity supplied and quantity demanded are equal (no tendency forprice 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 elasticityElasticity 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 downPrice 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 higherPrice 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 purchasedProducer 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 surplusDWL (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 forPrice theory Central PlanningResources directs by governing body, legislation or dictatorshipSome sort of hierarchy that sets allocations “Island Economics”Very little exchange between individualsSelf 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 AnalysisNormative 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 themselvesSubjectivePositive economic questions have objective answers. They are questions that can be decisively tested, and proven right or wrongIf incomes taxes rise by 5% consumer spending on housing will fall by X%ObjectiveProduction Possibilities The production possibilities frontierThe 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 boundaryMarketsA market is a mechanism of exchange of goods and servicesNot necessarily a fixed/ centralized locationPerfectly Competitive MarketMany buyers and many sellersNo single buyer or seller can influence price If Starbucks started raising prices on coffee you could go anywhere else (ie. Next door to café roma) but there are so many buyers out there that you can’t argue Starbuck’s priceHard to influence and negotiate your wageFull information about the goods and services exchangedConsumers know what they are buyingProducers know the value of the “money” they receive Understand the quality of the product and the quality of the dollarThick market of many buyers and many sellers that are fully informed on the quality of the goodsMarkets are two-sided – Demand and SupplyPrice is determined by the interaction of supply and demand!! Joint reasoning Supply and demand interacting and complicating things DemandEconomic demand is the willingness and ability to pay for a good or service at any given priceHas 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