ECON 1123 1st Edition Exam 1 Study Guide Lectures 1 10 Lecture 1 Junuary 12 Concepts covered Economic Analysis We begin to make our Economic Analysis with Observations that become data then we develop explanations theories then we test the theories Empirical More Data More theories more empirical testing etc Model Building An economic model is a stylized representation of reality Ceteris Paribus In empirical data many economic conditions are changing at the same time The simplifying assumption of ceteris paribus means that we focus on one KEY relationship at a time and all other economic conditions held conceptually constant Definitions Efficiency Positive Economics is doing the best with what you ve got Equity Normative Economics is dealing with what is fair or just Productive Efficiency producing goods at the lowest possible cost Allocative Efficiency distributing goods to the people who value them the most Labor human abilities used to produce material goods and services Capital human made aids to production examples machinery tools factories goods used to produce other goods Land all natural resources useable in production Entrepreneurship human resources and technology that bring all of these other economic resources together entrepreneurs also bear risk Note A key assumption is the entrepreneurs try to maximize profits The goal is to maximize the total revenues and minimize the total costs Good ideas will produce positive profits and bad ideas will produce negative profits Lecture 2 January 14 Concepts covered Characteristics of Competitive Markets A Many independently active buyers and sellers B Individual buyers and sellers have no control over market price price takers C Freedom of Entry and Exit into and out of the market no technological and institutional barriers to entry and exit D Highly homogeneous products Characteristics of Imperfectly Competitive MarketsA B C D Fewer independently acting buyers and sellers Some control over market price Restrictions on entry or exit Heterogeneous products not all the same quality price Market StructuresA B C D Pure Competition many sellers homogeneous products Monopolistic Competition several sellers differentiated products Oligopoly Few Sellers differentiated products Pure Monopoly One Seller Unique Products Note In any of these market structures the sellers objective is to maximize the profit as decided by comparing marginal revenues MR with marginal costs MC Choosing at the Margin your choice is based on a benefit versus cost comparison If the benefit the cost then the action should be taken You compare marginal benefit MB to the marginal cost MC Definitions Market An institutional arrangement for the exchange of economic goods and services Output Markets outputs of economic goods and services being exchanged for money Buyers of outputs are households suppliers of outputs are firms Resource Markets economic resources are exchanged for money Demanders of resources are firms sellers of resources are households Household an individual but not necessarily just one person it could be a family Firms competitive firms Monopolistically or oligopolistically The suppliers of goods the households need Lecture 3 January 21 Concepts covered Determinants of Demand Note These are not ALL of the things that could influence demand but they are the most IMPORTANT Price of the output resource how much it the resource costs is going to help you decide how much to buy Buyer s Incomes Tastes Psychological and or cultural and biological and or other reasons for buying This could be determined by season holidays anything that makes a certain product sell more or less Buyer s expectations about future prices and or future incomes If you think prices will be going up in the future you will be more likely to buy and vice versa Number of Buyers Prices of Related outputs or related resources Compliments outputs or resources that are generally used together substitutes outputs or resources that fill the same need Demand Curves We make a demand curve under ceteris paribus which means we keep all other determinants of demand constant and change the one we want to see the effect of Note If you change the demand the whole graph shifts but if you change the quantity demanded that is not a shift of the graph rather just a shift up or down on the existing demand curve Also the line that the demand curve follows is called a demand schedule Determinants of Supply Supply The quantities of an output or resource people are willing and able to sell during some time period supply is also a flow a movement over time A Price of the output or resource B Prices of the resources used to produce the output cost of production C Technology knowledge about producing like if they develop a new way to produce the same good for a lower cost D Number of Sellers E Sellers expectation about future prices Can influence their current selling behavior Definitions Demand The quantities of an output or resource that people are willing and able to buy during some period of time Flow variable variable measured over time period Law of Demand As the price of the output or resources increases the quantity decreases and vice versa Lecture 4 January 26 Concepts covered Supply A Graphical View When drawing a supply diagram the vertical axis will have the price per unit labeled as Q1 The horizontal axis will have your quantity over time labeled as Q T Note When drawing diagrams in this class you must always label the axis The supply schedule will most always increase to the right and the demand schedule decreases to the right This means that the graph of these together should make an X shape The point where the two schedules intersect is called the equilibrium point This will give us both the equilibrium price and the equilibrium quantity This point is usually where we stay unless there is some type of law that permits us If the price is decreased lower than the equilibrium point there are more people out there willing to buy at the new low price but fewer people willing to sell This excess demand is what causes shortages Note Sellers want to sell things at the highest possible price buyers want to buy things at the lowest possible price These may seem like conflicts of interest but these conflicts are reconciled when we reach the equilibrium price Demand Supply and Price Determination in Competitive Markets In Competitive Markets non equilibrium prices and quantities are temporary and self