ECONS 101 1st Edition Exam 1 Study Guide Lectures 1 8 Lecture 1 1 15 Normative Positive Analysis In economic analysis questions of efficiency and equity rely on the use of economic models Distinguishing between Normative and Positive Analysis o Normative Analysis Concerned with what ought to be o Positive Analysis Concerned with what is Economics should be about Positive Analysis which measures the costs and benefits of different courses of action o Positive Analysis shows the consequences of a particular policy o Whether to do it or not is Normative Analysis Lecture 2 1 20 Production Possibilities Frontier PPF A PPF is a curve showing the maximum attainable combination of two products that may be produce with available resources and current technology The point of a graph is to help us visualize o Scarcity o Choice o Efficiency no missed opportunities o Opportunity Cost what must be given up in order to get a good o Economic Growth the ability to increase the production of goods and services Lecture 3 1 22 Production Possibilities Frontier PPF Scenario Cont On the PPF you are being productively efficient o To produce more of one good you must give up some of another A point below the PPF is inefficient o You can improve in some way without sacrificing anything else Opportunity Cost OC o The value of what is foregone in order to have something else Marginal Cost MC o The additional cost of producing one more unit of a good or service Law of increasing costs as we keep increasing production the opportunity cost of production increases o The more resources already devoted to an activity the smaller the payoff Lecture 4 1 27 Production Possibilities Frontier PPF Scenario Cont Types of PPF and Opportunity Cost o The example had a bowed out PPF as shown in other notes This was due to increasing marginal costs Different Opportunity Costs along the PPF Must measure the Opportunity Cost between the points the slope of a line o Potential for a Linear PPF Constant marginal costs Constant Opportunities along the PPF Measuring the Opportunity Cost between a set of points should be the same for the all the points Economic Growth Trade o A combination can be reached beyond the PPF o The PPF allows us to visualize a model of economic growth and trade Two Constraints Technology and Resources Investment to accumulate capital or change technology o Comparative Advantage and Trade Shifting the PPF Innovation Growth through investment o Sacrifice some consumption to increase productivity Shifts PPF curve to the right Moving beyond the PPF Trade Comparative Advantage and Trade Together o Two or more individuals countries firms o Specialize in the good or service that yields the lowest opportunity cost Lecture 5 1 29 Graphing in Economics Ingredients of a Graph o Functional Form Y mx d m 0 Negative Sloped Line Y mx c m 0 Positive Sloped Line o Slope change in y Dy m slope change in x Dx o Components of Slope change in y Dy y1 y0 o Geometry Areas Lecture 6 2 3 Supply Demand Equilibrium Demand Quantity Demanded o The amount of the good or service a consumer is willing and able to purchase at a given price o Demand Curve The relationship between the PRICE of a product and the quantity demanded Market Demand and Law of Demand o Law of Demand Ceteris Paribus PRICE of a product FALLS The Quantity Demanded INCREASES o The demand by all the consumers yes every last one o Slopes down and to the right Supply Price will determine whether or not a supplier can at least cover the cost of production marginal cost o We assume increasing marginal costs As you produce one more unit of a good or service the cost increases Quantity Supplied o The amount a firm is willing and able to supply at a given price o Supply Curve The relationship between the PRICE of a product and the quantity of the product supplied Market Supply and Law of Supply o Law of Supply Ceteris Paribus PRICE INCREASE The Quantity Supplied INCREASES o The supply by all producers of a given good or service o Slopes up and to the right Increasing marginal costs Equilibrium Market Equilibrium occurs when Quantity Demanded is the same as Quantity Supplied o Equilibrium Market Price Lecture 7 2 5 Movement on the Curve Any changes in price and quantity will lead to a movement along the curves Price and Quantity are the two variables endogenous By the Law of Demand or Supply a change in price leads to an increase or decrease in Quantity Demanded and an increase or decrease in Supply Demanded o If Supply shifts and Demand remains constant then there is a movement along the Demand curve a changed in Quantity Demanded o If Demand shifts and Supply remains constant then there is a movement along the Supply curve a change in Quantity Supplied Surpluses and Shortages A market that is not in equilibrium moves towards equilibrium When it is not there is a surplus or shortage o Surplus Quantity supplied is greater than quantity demanded market price is above equilibrium price o Shortage Quantity demanded is greater than quantity supplied market price is below equilibrium price Lecture 8 2 10 Consumer and Producer Surplus Supply and Demand o Predicting changes in the market before they occur o Advice on strategy for firms and government o Work towards affecting Supply and Demand Consumer Surplus o The dollar benefit consumers receive from buying goods or services in a particular market The difference between the highest prices a consumer is willing to pay WTP and the price the consumer actually pays o Total consumer surplus in a market is equal to the sum of all the individuals consumer surplus The total area below the demand curve and above the market price Producer Surplus o The dollar benefit firms receive from selling in a particular market Profit difference between revenue and cost The difference between the lowest prices a firm would be willing toaccept WTA and the price it actually receives o Producer Surplus is the area of the triangle under the price and above the Supply Curve What does Consumer and Producer Surplus Measure Each is a net benefit to one side of the market Consumer Surplus CS benefit to consumers from participating in a market savings o CS WTP Price Producer Surplus PS benefit to producers from participating in a market profit o PS Price WTA Total Surplus TS Welfare the sum of Consumer and Producer Surplus o TS CS PS