FINAL EXAM STUDY GUIDE 1 Key Ideas of Economics 4 key principals o Opportunity Cost Principal The cost of a good or service is the value of the best alternative that is given up to acquire that good or service o Net Marginal Benefits Principal Rational people will take action only when the marginal benefits outweigh the marginal costs of that action Marginal 1 additional o Invisible Hand Principal When institutions work efficiently the actions of individuals trying to maximize their individual net benefit will result in the best outcome for society Paradoxical Self interested behavior CAN benefit everyone o Benefits from Trade Principal Specialization from trade makes all parties better off It is always more efficient to divide tasks based on what individuals countries are better at and trade those goods services rather than for everyone to try to do every task on their own Economic Models and the PPF Economic models simplified models that improve our understanding that issues of trade ultimately affect us o Enables one to focus on changes made on single individual variables o Ceteris Paribus Leaving all else the same when examining variable changes The Production Possibilities Frontier A model that shows all possible combinations of goods services a country can produce given its limited resources o Typically displayed as a graph FINAL EXAM STUDY GUIDE 2 o Slope opportunity cost is always negative Any point along the PPF is a production possibility where all resources are being used efficiently Any point inside the PPF shows a production combination where some resources are idle Any point outside the PPF shows a production combination that is not achievable given the countries limited resources o An increase in production technology or resources of one good allows the PPF to extend outward along its axis and gives the country more production possibilities Comparative Advantage and Gains from Specialization Specializations in trade make everyone better off both countres and individuals Production Possibilities and Absolute Advantage o Absolute Advantage When an individual country is over all more efficient at producing goods Opportunity cost of any good what could have been made with those same resources including time o Comparative Advantage When an Individual country has a lower opportunity cost of producing a good Supply and Demand part one Market a place where buyers and sellers engage in trade o Competitive scarcity of a good will cause sellers to raise their prices could happen if there is in an increase in buyers Decrease in the number of sellers FINAL EXAM STUDY GUIDE 3 Surplus of goods will cause sellers to lower prices Decrease in the number of buyers Increase of the number of sellers o Equilibrium price market clearing price No shortage or surplus Amount of goods sought by buyers is equal to the amount offered by sellers Sellers adjust prices to get to this equilibrium Economists forecast changes in market situations Any change in the economy that leads to a decrease of supply will lead to an increase in the price and vice versa Decrease in demand will lead to a decrease in price and vice versa Ceteris paribus assumption The assumption that all other factors besides the one examined remain the same Demand Demand curve Explains the relationship between price and quantity demanded graph o Demand schedule same info just as a table o Combining multiple individual demand curves will portray Market Demand for a given good How many buyers will buy the good and at what prices o Demand refers to all possible combinations of price and quantity in a market Changes in price does not indicate change in demand Only a change in one of the demand combinations Law of Demand FINAL EXAM STUDY GUIDE 4 o When price INCREASES quantity demand for that product DECREASES o When price DECREASES quantity demand for that product INCREASES This is why the demand curve is downward sloping Preferences and Market Demand o Individual preferences will be other variables that determine price and demand If changes in preferences increases demand the demand curve will shift right If changes in preferences decrease demand the demand curve will shift left o Income and the price of related goods are additional variables Increased income raises demand for normal goods and drops demand for inferior goods Decreased income will drop the demand for normal goods and raise the demand for inferior goods Complement goods buyers like to consume together an increase in price of one good will cause a decrease in the quantity demand for both Substitute ex soda VS juice Increase in the price of one good encourages buyers to buy the other good Market Supply Supply Curve o Explains the relationship between price and quantity supplied Similar to the demand schedule and curve Curve is upward facing Market Supply Curve o The combination of multiply supply curves FINAL EXAM STUDY GUIDE 5 Contains data showing quantities that sellers are willing to sell and at what prices The Low Hanging Fruit Principal o Movements along the supply curve o Individuals supply products when the price exceeds their costs The cost of providing is low as first but as both cost of selling and opportunity cost raise the product price is also raised Its easier to grab fruits that are lower in the tree first When the price of a good increases the quantity supply of that good increases as well This explains why the supply curve is upwards sloping Changes in Technology and Supply Curve o Advances and efficiency cause the supply curve to shift right When the price of a good changes the quantity supply changes but SUPPLY does not Anything that changes cost will change supply o If the change increases cost supply goes down o If the change decreases cost the supply goes up When supply curve increases it shifts right When the supply curve decreases it shifts left Cost supply Value demand Supply cont The Equilibrium Price Market clearing price o The point at which both the demand and supply curve intersect o Same number of a given good are bought and sold No pressure to change the price No surpluses and no shortages Shortages and Surplus o Any price that is lower than the equilibrium price will create a shortage Shortage creates an incentive to increase the price in a market o Any price that is higher than the equilibrium price will create a price A surplus creates an incentive to decrease the price in a market Forecasting Price and Quantity in an Economy o