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OU ECON 1123 - Exam 1 Study Guide

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ECON 1123 1st EditionExam # 1 Study Guide Lectures: 1 - 10Lecture 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 gotEquity-(Normative Economics) is dealing with what is fair or just. Productive Efficiency- producing goods at the lowest possible costAllocative Efficiency- distributing goods to the people who value them the mostLabor- human abilities used to produce material goods and servicesCapital- human made aids to production (examples: machinery, tools, factories—goods used to produce other goods)Land- all natural resources useable in productionEntrepreneurship- human resources and technology that bring all of these other economic resources together, entrepreneurs also bear riskNote: A key assumption is the entrepreneurs try to maximize profits. The goalis 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 sellersB. 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 Markets-A. Fewer independently acting buyers and sellersB. Some control over market priceC. Restrictions on entry or exitD. Heterogeneous products (not all the same quality, price)Market Structures-A. Pure Competition: many sellers, homogeneous productsB. Monopolistic Competition: several sellers, differentiated productsC. Oligopoly: Few Sellers, differentiated productsD. Pure Monopoly: One Seller, Unique ProductsNote: 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 servicesOutput 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 mostIMPORTANT-Price of the output resource (how much it the resource costs is going to help you decidehow 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 willbe 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 SupplySupply- The quantities of an output or resource people are willing and able to sell duringsome time period (supply is also a flow- a movement over time)A. Price of the output or resourceB. 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 SellersE. 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 periodLaw of Demand- As the price of the output or resources increases, the quantity decreases and vice versaLecture 4 (January 26)Concepts covered:Supply: A Graphical ViewWhen drawing a supply diagram, the vertical axis will have the price per unit, labeledas ($/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 axisThe supply schedule will most always increase to the right, and the demand scheduledecreases 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


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