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# KU ECON 142 - Exam 1 Study Guide

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Exam # 1 Study Guide Lectures: 1 - 5Exam 1 Study GuideEcon 142Economics: choices people (person, company, country) make to attain their goals given their scarce resources- Definition of microeconomics: study of the economy for one person, firm, or industry Three main ideas: -people are rational-people respond to economic incentives-decisions are made at the margin (optimal decisions)◦Margin: a small increment, one more unit, extra or additionalBenefits vs Costs: only do something if the benefits are GREATER than the cost. Normative vs Positive: positive: what is, actual facts and truths. Normative: opinionsOpportunity cost: the HIGHEST valued alternative that you did not do. A. Example from sample questions: You've enrolled in a class that meets for 48 hours during the semester. The price you paid for the class was \$1000. Instead of attending class you could have waited tables for \$14/hour, or engine tune-ups for \$15/hour. Waiting tables would be: \$14*48= \$672. Engine tune-ups:\$15*48=\$720. Opportunity cost is the highest value of what you did not do, so the opportunity cost would be the engine tune-ups for \$720.Market Economy: a good or service produced or not produced based on demand and supply. A market is a set of buyers and sellers whose actions affect the price of a product or service.A centrally planned economy is when economic decisions are made by the state or government.Productive Efficiency vs Allocative Efficiency: Productive efficiency is when goods and services are produced for the lowest cost. Allocative efficiency occurs when the marginal benefit equals the marginal cost. Demand Curve- The demand curve will always slope down.- Law of demand: at lower prices, a larger quantity will be demanded. At higher prices, smaller quantities will be demanded. As the price changes the quantity demanded will change. All elseheld equal (ceberis paribus)- Change in price causes movement ALONG the curve which changes the quantity demanded.Things that Affect the Demand Curve: whole curve shifts=change in demandEcon 142- Change in income: if income increases, demand shifts right. If income decreases, demandshifts left. Inferior good: ramen, Nominal good: steak- Change in price of related goods: compliments-buy together and use together like hot dogbuns and hot dogs. Substitutes-buy only one. - Change in taste or preferences- Change in expectations: if a buyer expects price to be higher in the future, demand will shift right. The buyer would demand more before price goes up (gas)- Population and Demographics: the number of buyers affect demand. If population decreases, demand will decrease.Supply Curve- Supply is looking at the suppliers (Walmart/farmers) Not the demand which looks at the BUYERS- What the Supply Curve Looks like- The Supply Curve consists of price which is the y-axis and quantity which is the x-axis. This standard price/quantity graph is the same setup as the Demand Curve.- Unlike the demand curve, the supply curve slopes up. What Causes the Supply Curve to Shift**Remember, change in PRICE causes movement along the curve which causes a change in quantity supplied. Anything else causes a change in supply.**- Technology Change- Change in the price of inputs (price of input increases, supply shifts left)- Change in expectation (if price is expected to decrease in the future, suppliers will supplymore today)- Change in the number of firms (sellers) (Increase in sellers causes a right shift)- Change in price of substitutesDemand and Supply-Equilibrium- Demand and Supply curves both belong together. Where the two curves intersect is calledthe EQUILIBRIUM. Anything above the equilibrium, suppliers will lower the price. If below the equilibrium, suppliers will increase the price.- Equilibrium is where the quantity DEMANDED is equal to the quantity SUPPLIED.- Inverse demand function: P =a-b*Q- a is the y-intercept- b is slopeDemand Function: Q is on the left side of the equationInverse Supply function: P = a+b*QSupply Function: Q is on the left side of the equationTake two equations to solve for equilibriumExample:P=90-.5*Q and P=10+1.5*QSo solve for Q10+1.5*Q = 90-.5*QThen plug the number you found into Q to solve for P from the original equationsChapter 4: Consumer/Producer SurplusConsumer Surplus: the difference between price consumer HAS to pay and price consumer WOULD BE WILLING to pay. Pg 102 The triangle to the left of the equilibrium, top quadrant.Measuring consumer surplus: 1/2(b*h) area of a triangleIf supply curve shifts left or right, you will have to recalculate consumer surplus using the new curve.Changes to Consumer Surplus- Shifting either curve-or both curves- can affect the value of consumer surplus- If consumer surplus increases, consumers as a whole are better off- If consumer surplus decreases, consumers as a whole are worse offProducer Surplus: difference between lowest price a firm would accept and the price it actually receives. Pg 105. The triangle under consumer surplus, left of the equilibrium.Producer surplus and consumer surplus represent economic surplus.Pg109: Deadweight Loss: the reduction in economic surplus that results when the market isn't efficient-economists obviously hate this and does not do any good. Pg 108When putting a tax on something, you shift the supply curve back (left). When that happens, consumer surplus is reduced and harms the consumer.If taxes are cut, income increases, demand shifts right. Then consumer surplus is increased.Price Ceiling: a level above which the price cannot rise. (When the government interferes with the market. Sometimes they make it better.) Shortage: the triangle under the equilibrium. Pg 112. **If the price ceiling is above the equilibrium, price doesn't affect anything**Using Supply and Demand*Government intervention in the marketmost markets, demand/supply set the pricesometimes the government steps in and affects the pricePrice Ceiling: government cap on how much money an object can be supplied for pg 112Price Floor: government level of which a product has to be aboveleads to surplus > more being supplied than being demanded pg 110)a price floor below the equilibrium price does nothing to distort the marketReal world example of price floorsgovernment-mandated prices for commodities like sugar and cornand…MINIMUM WAGEIf a price floor is imposed of \$27, what is the Q demanded, what is the Q supplied, what is the surplus or shortageP=33-2*Q27=33-2*Q2Q=33-27Q = 3P=12+1.5Q27=12+1.5Q1.5Q=27-12

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