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Econ 200- Exam 1 Study GuideEconomics- 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 marketScarcity- refers to the limited nature of society’s resourcesOpportunity Cost- whatever must be given up to obtain something else- do not ignore opportunity costs when evaluating pros + consRational- 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 benefitsThinking 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 punishmentFour Principles of Economics: 1. All Decisions involve tradeoffs a. every action= giving something upb. Total cost includes opportunity costs + out of pocket expensesc. Opportunity cost doesn’t have to be money2. 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 costs3. Rational Decision Making means to thank at the margina. If a cost or benefit changes at the margin the action is likely to change4. People Respond to incentivesa. Incentive- causes an action or prevents an actionMarginal value= increase in value of the action3 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 laborDemand Schedule (Table) – a table that shows the relationship between the price of a good and a quantity demandedDemand Curve (Graph) – a graph of the relationship between the price of a good andthe quantity demanded- y axis is always price - x axis is always quantityLaw 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 demandedChange 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 demandedPositive correlation- when one increases the other increases and vice versaNegative correlation- when one increases the other decreasesDeterminants of Demand: 1. Price (inversely related)2. Prices of other goods 3. Income4. Tastes5. Demographic Factors6. Expectations7. 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 demandMarket demand curve- add curves from all buyers Determinants for supply: 1. Price (positively related) 2. Price of Inputs 3. Prices of other goods4. TechnologyQuantity 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 versaSupply Curve- always has a positive slopeMarket Supply- adding individual quantity supplied (horizontal summation)Market: a group of buyers and sellers of a particular good or serviceCompetitive 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 equalDemand will change as a result of:- Taste- Income- Number of buyers o If the number of buyers increases then the demand curve will shiftto the right- Price of related goods - ExpectationsSurplus: 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 shortageNormal 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 incomeAn 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 - Technologyo 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 - # of sellerso increase in number of seller shifts S curve to the right - expectationso 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 rightSteps 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, expectationsb. Supply- # of sellers, input prices, technology, expectations2. Which direction?3. Use supply and demand diagram to see how the shift changes equilibrium price


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UMD ECON 200 - Exam 1 Study Guide

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