Econ200Exam1What is economics?Economics is the study of how society manages its scarce productsEfficiency is the property of a resource allocation of maximizing the total surplus received by all members of societyEquality is the property of distributing economic prosperity uniformly among the members of societyPositive vs. normative statementsPositive statements are claims that attempt to describe the world as it is (descriptive/facts)Ex 1 If taxes were lowered, government revenues would actually increaseEx 2 When the government taxes the rich and gives the money to the poor, it gives the rich incentive to hide their earnings from the governmentNormative statements are claims that attempt to prescribe how the world should be (ought to be/values)Ex 1 Taxes are too highEx 2 It is immoral for a government to redistribute money from one person to anotherEquilibriumEquilibrium is a situation in which the market price has reached the level at white quantity supplied equals quantity demandedCeteris paribusCeteris paribus means to hold all else constantAssociation vs. causation??Calculating slopes: direct vs. indirect relationshipsA direct relationship between two variables means that they move in the same direction. If one increases, the other increases. If one decreases, the other decreases.An inverse relationship means that the variables move in opposite directions. If one increases, the other decreases. opportunity costOpportunity cost is whatever must be given up to obtain some item.PPF: efficient, inefficient, unattainable The production possibilities frontier (PPF) is a graph that shows the various combinations of output that the economy can possibly produce given the availablefactors of production and the available production technology that firms use to turn these factors into outputEfficient: on the curveInefficient: below the curveUnattainable: above the curvelaw of increasing opportunity costThe law of increasing opportunity cost states that as production of a product increases, the cost to produce an additional unit of that product increases as well.Some resources are specialized to only efficiently produce one product so using those specialized resouces on a different product is inefficient.economic growth??comparative advantageComparative advantage is the ability to producer a good at a lower opportunity cost than another producerProducers specialize in the production of a product in which they have a better comparative advantageProducers come to terms of trade in order to trade the good they specialize for other goods.Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantageFor both parties to benefit from trade, the price at which they trade must lie between the two opportunity costsAbsolute advantage is the ability to produce a good using fewer inputs than another producer.law of demand: why does it hold?The law of demand is the claim that, other things equal, the quantity demanded of agood falls when the price of the good risesShifts in the demand curve (determinants of demand):-incomeif demand for a good falls when income falls, the good is called a normal goodif demand for a good rises when income falls, the good is called an inferior good-price of related goodssubstitutes (demand goes down)compliments (demand goes up)-tastes-expectations-number of consumersThe flatter the demand curve that passes through a given point, the greater the priceelasticity of demandindividual vs. market demand??law of supply: why does it hold?The law of supply is the claim that, other things equal, the quantity supplied of a good rises when the price of the good risesShifts in the supply curve (determinants of supply)-input prices-technology-expectations-number of sellersprice of the good itself (variable) represents movement along the supply or demandcurve.SurplusA surplus is a situation in which the quantity supplied is greater than the quantity demandedShortageA shortage is a situation in which the quantity demanded is greater than quantity suppliedLaw of supply and demandThe law of supply and demand is the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balandWelfare economicsWelfare economics is the study of how the allocation of resources affects economic well-beingconsumer surplusA consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.Well-being of the buyersDemand curve reflects the buyer’s willingness to payThe area below the demand curve and above the price measures the consumer surplus in a marketproducer surplusA producer surplus is the amount a seller is paid for a good minus the seller’s cost of providing itWell-being of the sellersSupply curve used to measure producer surplusThe area below the price and above the supply curve measures the producer surplus in a markettotal surplusconsumer surplus plus producer surplusprice controls: ceilings and floorsA price ceiling is a legal maximum on the price at which a good can be sold (buyers happy)2 outcomesa. price ceiling > price equilibrium not binding, no effectb. price ceiling < price equilibrium binding constraint, causes a shortageA price floor is a legal minimum on the price at which a good can be sold (sellers happy)2 outcomesa. price floor < price equilibrium not binding, no effectb. price floor > price equilibrium binding constraint, causes a surplusc. ex. Price floor minimum wage. Workers = supply of labor firms = demand. Minimum wage > equilibrium unemploymentwage subsidyex. Earned income tax credit perfectly elastic, elastic, unit elastic, inelastic, perfectly inelasticElasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinantsA product is elastic if quantity demanded responds substantially to changes in pricesGoods with close substitutes more elasticNecessities inelasticLuxuries elasticNarrowly defined markets more elasticGoods tend to have a more elastic demanded over long time horizons i.e. gasolineElastic when e>1Quantity moves proportionately more than the priceInelastic when e<1Quantity moves proportionately less than the pricePerfectly inelastic e=0Unit elasticity e=1Same proportionalityDemand inelastic increase in price causes an increase in total revenueSame directionDemand elastic increase in price
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