Econ 200 Exam 1 Study Guide Economics the study of how society manages its scarce resources and the study of the decisions that are made in the face of scarcity Microeconomics the study of how households and firms make decisions and how they interact within the market Scarcity refers to the limited nature of society s resources Opportunity Cost whatever must be given up to obtain something else do not ignore opportunity costs when evaluating pros cons Rational if one systematically evaluates the costs and benefits of an action before deciding on the action will only take the action if the cost outweighs the benefits Thinking on the margin evaluate marginal costs or marginal benefits when a decision is being made Incentive something that induces a person to act The prospect of a reward or punishment Four Principles of Economics 1 All Decisions involve tradeoffs a every action giving something up b Total cost includes opportunity costs out of pocket expenses c Opportunity cost doesn t have to be money 2 The cost of something is what you give up to get it a Sunk cost a cost that has already been made and cannot be recovered by thinking at the margin you ignore sunk costs 3 Rational Decision Making means to thank at the margin a If a cost or benefit changes at the margin the action is likely to change 4 People Respond to incentives a Incentive causes an action or prevents an action Marginal value increase in value of the action 3 Fundamental questions to answer in Econ 1 What to produce 2 How to produce it 3 Who gets to access what is produced Market Economy an economy that allocates resources through the decentralized decisions of firms and households Types of Markets Markets for goods and services Markets for labor Demand Schedule Table a table that shows the relationship between the price of a good and a quantity demanded Demand Curve Graph a graph of the relationship between the price of a good and the quantity demanded y axis is always price x axis is always quantity Law of demand a claim that other things being equal the quantity demanded of a good falls when the price of the good rises Dependant variable price Independent Variable quantity demanded Change in quantity demanded vs Change in demand Change in quantity demanded occurs when the price of one good changes but everything else remains the same Increase in demand at every price consumers want more and there fore the curve shifts to the right and vise verse for a decrease in demand Change in demand refers specifically to demand schedule and demand curve as opposed to quantity demanded which refers to the actual amount of goods being demanded Positive correlation when one increases the other increases and vice versa Negative correlation when one increases the other decreases Determinants of Demand 1 Price inversely related 2 Prices of other goods Income 3 4 Tastes 5 Demographic Factors 6 Expectations 7 Number of Buyers Market Demand Market demand schedule a table that shows the relationship between the price of a good and quantity demanded by all buyers Shows total demand Market demand curve add curves from all buyers Determinants for supply 1 Price positively related 2 Price of Inputs 3 Prices of other goods 4 Technology Quantity supplied the amount that sellers are willing and able to sell Law of supply when the price of a good rises the quantity supplied of the good also rises and vice versa Supply Curve always has a positive slope Market Supply adding individual quantity supplied horizontal summation Market a group of buyers and sellers of a particular good or service Competitive Market a market in which there are many buyers and many sellers so that each has a negligible impact on the market price Buyers and sellers in a competitive market are price takers meaning they must accept the price that is set by the market Price cannot go higher or lower Buyers have to take the price as it is given set by the market Price will not change demand only price will change quantity demanded Only at equilibrium will buyers and sellers both be happy Equilibrium when supply and demand are equal Demand will change as a result of Taste Number of buyers Income to the right Price of related goods Expectations o If the number of buyers increases then the demand curve will shift Surplus when quantity supplied is greater then quantity demanded When facing a surplus sellers try to increase sales by cutting the price Shortage when quantity demanded is greater than quantity supplied when facing a shortage sellers will increase the price to lower the demand above equilibrium point is a surplus and below is a shortage Normal good if the good is positively related to income An increase in income results in an increase in demand Inferior good if the good is negatively related to income An increase in income causes a decrease in quantity demanded shifting the d curve to the left examples bus staple foods cheap beer demand goes up when income goes down Direction of the shift depends on the type of good Substitutes two goods in which an increase in the price of one causes an increase in demand for the other The goods compete with eachother ex butter and margarine Complements if an increase in the price of one causes a fall in demand for the other ex computers and software Supply will change as a result of only shifts supply not demand Input prices Technology of sellers expectations o Determines how much inputs are required to produce a unit of output a cost saving technological improvement has the same effect as a fall in input prices and causes the s curve to shift to the right o increase in number of seller shifts S curve to the right o if a firm expects the price of a good it sells to rise in the future then it may reduce supply to save some of the inventory for later and therefore supply shifts to the left A fall of input prices makes production more profitable at each output price so firms supply a larger amount at each price and therefore the s curve shifts to the right Steps to take in order to decide how demand and supply curves are shifting 1 Decide whether it shifts demand or supply a Demand of buyers income price of related goods tastes expectations 2 Which direction b Supply of sellers input prices technology expectations 3 Use supply and demand diagram to see how the shift changes equilibrium price and quantity Always be careful to distinguish between a shift in a curve and a movement along the curve Price Ceiling a law that specifies
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