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UConn ECON 1202 - Exam 1 Study Guide

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ECON 1202 1st EditionExam # 1 Study Guide Lectures: 1-12 I. Markets- Role/Meaning of Price and Market in the Economyo Markets are the individual decisions of buyers and sellers that determine the what, how, and for whomo Markets are public and generate priceso Markets are generally, not exclusively, a good way to organize economic activity because they create economic wealtho Prices ration or discriminate based on ability and willingness to payo Prices are signals that create incentives: They signal relative costs and values- Prices tell us something very important about the value we place on a good or service (demand) and/or the costs to produce that good or service (supply) They also creative incentives for individuals and/or companies to engagein activities and/or investments to generate incomeo Rules of the Game reflect and incorporate a society’s production decisions when it comes to what gets produced, who decides what gets produced, and who gets whatever is produced Markets Non-Markets- Factors of Productiono Lando Laboro Human Capitalo Physical Capitalo Natural Resourceso Technology o Entrepreneurso Institutions- Price Controls and Their Impact (Government imposed minimum and maximum prices)o Price controls seek to solve the economic problem by suppressing the symptom of the problem and don’t address the cause of the problemo A Price Ceiling is a legal maximum on the price at which a good can be sold Initiated when the market price is too high For it to be binding then: max P<PeThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. 5 Important Effects:- Shortages- Reduction in production quality- Goods still must be rationed (waiting lists, black markets)- Deadweights losses (loss of gains from trade)- Misallocation of resources Example: Rent Controlo A Price Floor is a legal minimum on the price at which a good can be sold Initiated when the market price is too low For it to be binding then: min P>Pe 4 Important Effects:- Surplus- Wasteful increases in product quality- Deadweight losses (loss of gains from trade)- Misallocation of resources Example: Minimum Wage- Supporters of the minimum wage see it as a way of raising the incomes of low-skilled workers- Opponents argue that it results in fewer jobs and imposes large costs on small businesses- Assuming the minimum wage does decrease employment, it must result in a deadweight loss for societyi. Loss of Employment=Deadweight Losso Effects of Price Controls: Equilibrium: Qd=Qs at Pe- Meaning: the quantity demanded equals the quantity supplied at the expected price Excess Demand: Qd>Qs at P1- Meaning: the quantity demanded is greater than the quantity supplied at a certain price- This results in a shortage in which there is too much demand and not enough being suppliedi. Prices will increase, quantity demanded will decrease, and quantity supplied will increase Excess Supply: Qs>Qd at P1- Meaning: the quantity supplied is greater than the quantity demanded at a certain price- This results in a surplus where there is no demand for the product and there is too much supplyi. Prices will decrease, quantity demanded will increase, and quantity supplied will decrease- Role of Private Property Rights, Markets, and Governmento Types of property: Real Property (your house) Personal Property (your car) Intellectual Property (your ideas)o Private Property Rights are: The right to use goods and services The right to exclude goods and services The rights to transfer goods and serviceso Your private property rights must clearly be clearly stated that you own them and must protect themo United States Institutions that try to protect private property rights: State and Federal Institutions (Independent Court System, Enforcement of Rights) U.S. Constitution 5th and 14th Amendments Copyrights and Patentso At-Will Employment Laws-employers can terminate an employee or the employee can just leaveo Just Cause Employment Laws-employers have to show a very good cause for termination- Producer and Consumer Surplus and Economic Surplus plus Deadweight Losso A Consumer Surplus is the difference between the maximum, or highest, price a consumer is willing to pay (for a good or service) and the amount actually paid for that good or service Example: Buying clothes on sale instead of paying full priceo A Producer Surplus is the difference between the minimum, or lowest, price a seller is willing to accept (to supply a good or service) and the amount actuallyreceived for that good or service Example: Selling something on EBay for a higher price than originally listed for o An Economic Surplus is equal to the consumer surplus and the producer surpluso Deadweight Loss is the loss of gains from trade which results in an economic loss when we aren’t producing at the efficient level- Tax Incidence: Statutory vs. Economic, Burden of Taxation, Deadweight loss, and Tax Revenueo Types of Taxes: Sales Taxes-18% of total state or local revenue Statutory Burden-legal or statutory obligation to collect and ay the tax tolocal or state government Economic Burden-loss of economic surplus Effect of tax is to create a wedge or divergence between what the buyer pays and what the seller sellso Economic Effects Loss of economic surplus (consumer and producer surplus) Deadweight Loss (efficiency loss) Tax revenue- Demand Curves and Their Meaningo The Demand Curve shows the relationship between quantity demanded of a good or service at various priceso Law of Demand states that the lower the price of a good or service, the higher the quantity demanded of that good or service (and vice versa) holding all elseconstant Ceteris Paribus-given everything else constant; meaning we want to isolate the effect one the one thing we are looking at without worrying about other outside effects as wello Demand “Shifters”:An increase in… Shifts the demand curve…Because…Income (and the good is normal)Increased Consumers spend more of their higher incomes on the goodIncome (and the good is inferior)Decreased Consumers spend less of their higher incomes on the goodThe price of a substitute goodIncreased Consumers buy less ofthe substitute good and more of this goodThe price of a complimentary goodDecreased Consumers buy less ofthe complimentary good and less of thisgoodTaste


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