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UI ECON 1100 - Exam 1 Study Guide
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Econ 1100 1st EditionExam # 1 Study Guide Lectures: II-VIILecture II (January 28)Vocabulary:- Absolute Advantage is the ability of a party to produce a larger number of a good product orservice than competitors while using the same amount of resources.- Comparative Advantage occurs when one producer is able to produce a good at a loweropportunity cost than another producer.- Opportunity Cost is (opposite/good).Example of Comparative Advantage:Comparative Advantage Prod Poss Line Opportunity Cost Before Trade Specialization TradeAfterTradeGains fromTradeFarmerMeat81 Meat = 4 Potato 4 055 1Potato 321 Potato = 0.25 Meat16 32 -15 17 1Comparative Advantage inPotatoRancherMeat241 Meat =2 Potato 18 24 -5 19 1Potato481 Potato = 0.5 Meat 12 0 15 15 3Comparative Advantage inMeatTotal Meat22 24Total Potato28 32Total Gain in Meat 2 2Total Gain in Potato4 4Copyright © 2011, Stacey BrookLecture III (January 30)Vocabulary:- Demand is classified as “consumer behavior.”- Income Effect occurs when income is held constant.- Diminishing Marginal Utility is the decreasing change in economic satisfaction.- Change In Quantity Demanded is a movement along existing demand curve.- Substitution Effect insists that if a product has a high price it will have low demand and at alow price it will have a high demand.Law of Demand- There is a negative relationship between priced and demand- Market price increases; quantity demand decreases• ^P->vQD- Market price decreases; quantity demand increases• vP->^QDChange in Demand:-Only reason that a change in quantity demanded takes place is due to a change in the price ofthat good or service- Reasons For A Change In Demand• Number of Customers• Consumer PreferencesLecture V (February 4)Abbreviations:- P* stands for market equilibrium- Q* stands for market equilibrium quantityVocabulary:- Market equilibrium occurs where quantity demanded is equal to quantity supplyMarket Equilibrium:- What if current price (P1) is greater than the market equilibrium price (P*)• In this case, manufacturers are willing to supply more of the product than consumers arewilling to buy• Causing a surplus (Q^s1 -Q^D1)- Lower price (sale), more demand- Lower supply as well- What if current price (P2) is less than the market equilibrium price (P*)• In this case, manufacturers are not supplying as much of the product asconsumers are willing to buy• Causing a shortage (Q^D2 - Q^s2) • Raise price, lose demandChange in Market Equilibrium:- Steps to dealing with it• Determine whether to shift the demand curve, the supply curve, or both• Which direction does the curve(s) shift?• Use the supply and demand model to find the new equilibrium price andequilibrium quantity- Suppose there is a change in demand (only)• Suppose increase in demand (demand curve shits to right)- Demand increases, P and Q increase• Suppose decrease in demand- Decrease in demand, P and Q decreases- Suppose change in supply (only)• Increase in supply- Supply increases, P decreases and Q increases• Decrease in supply- Supply decreases, P increases and Q decreasesLecture VI (February 6)Simultaneous Change of Demand and Supply:- Suppose an increase in both demand and supply• Cannot with certainty determine equilibrium price• Equilibrium quantity (Q**) will increase- Suppose decrease in both demand and supply• Cannot with certainty determine equilibrium price• Demand and supple both shift to the left• Equilibrium quantity will decrease- Suppose increase in demand and decrease in supply• Equilibrium price will rise• Cannot with certainty determine change in equilibrium quantity- Suppose decrease in demand and increase in supply• Cannot with certainty determine change in equilibrium price• Equilibrium price will fallLecture VIII (February 11)- Total revenue test• Relationship between the price elasticity of demand and total revenue• Total revenue (TR) is equal to quantity (Q) multiplied by price (P)• If the price elasticity of demand is elastic (calculation of absolute value of elasticity of demand > 1), if market price goes up, the total revenue decreases and if the market pricegoes down, the total revenue increases• If price elasticity of demand is inelastic (calculation of absolute value elasticity of demand <1), if market price goes up, the total revenue increases and if the market price goes down, thetotal revenue decreases• If price elasticity of demand is unit elastic (calculation of absolute value elasticity of demand= 1), if market price goes up, the total revenue has no change and if the market price goesdown, the total revenue has no change- Total Revenue Test Examples• Rice Seed/ Hybrid Technology and Rice Farmers Income- If demand for rice is price inelastic, an increase in technology leads to a decrease in themarket price.- A decrease in market price results in a decrease in total revenue to rice farmers.• Watch market- If the watch market is elastic, then a decrease in market price will lead to an increase intotal revenue.• Illegal Drugs- Drug Interdiction Policy• If price elasticity of illegal drugs is inelastic, under drug interdiction policy, this results in market prices rising and therefore a rise in total revenue, increasing the incentive to joint the market.- Drug Education Policy• If price elasticity os inelastic, under a drug education policy, this results in lower prices and therefore lower total revenue, reducing the incentive to be in the market.Remember:Elasticity:Es = Change in Quantity Supplied ÷ Change in Price(Qi + Qf) ÷ 2 (Pi + Pf) ÷


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UI ECON 1100 - Exam 1 Study Guide

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