Econ 101 Study Guide Midterm 1 Study Guide 1 Statistical Problems discussed by Darrell Huff Small samples sizes Inappropriate use of mean median mode Unrepresentative samples Gee whiz graph visually deceptive or sensationalized graph Misleading pictograph A semi attached figure a fact or finding that only tangentially relevant to the Post hoc ergo propter hoc fallacy inferring a casual relationship from a mere argument being made correlation Bell shaped curve mean median mode almost exact same value if it doesn t go below zero the mean is significantly higher 2 Why are all economists in favor of reducing or eliminating farm subsides They damage the economy They are prone to fraud and scandal They damage the environment The vast majority go to the largest farms They transfer earnings of average taxpaying families well off farm businesses They are a serious hurdle to progress on global trade agreements that could Some farm programs raise food prices and hurt consumers directly If they ended U S agriculture would continue to thrive They have more stable finances today and are able to better deal with a free help productive U S exports market in agriculture than the past 3 Economics the study of how individuals and society choose to use the scarce resources that nature and previous generations have provided scarcity choice household management 4 Oikonmia 5 Why study economics To learn a way of thinking To understand society To understand global affairs To be an informed citizen 6 Fundamental Problem of Economics are not 7 Three basic economic questions What gets produced How is it produced Who gets what is produced human wants are unlimited but resources 8 Microeconomics 9 Macroeconomics studies the behavior of decision making units individual firms agents households national economy and the global economy income unemployment inflation statements of how the economy does work scientific data statements of how economy should work opinions 10 Positive Statements 11 Normative Statements 12 Economic Model studies the behavior of economic aggregates focuses on the Is a formal statement of a theory Make assumptions Expressed in words equations graphs Describes relationships between variables of interests Is an abstraction of simplification of reality 13 Ceteris Paribus 14 Arithmetic mean all else being equal sum of all observations divided by n House prices we would expect this to be higher than the median 15 Geometric mean 16 Correlation similar patterns the nth root of the product of all the observations describes a situation in which two variables happen to occur in If an increase in A is associated with an increase in B then positive corr If an increase in A is associated with a decrease in B the negatively corr CORRELATION DOES NOT IMPLY CAUSTATION most desirable alternative when the choice is made 17 Opportunity Cost 18 Normal Rate of Return keep owners and investors satisfied risk free asset or bond explicit costs is the rate of return on a investment that is sufficient to costs for which are countable and are more easily qualified explicit costs implicit costs include opportunity costs harder to count normal rate of 19 Accounting Costs rent wages utilities Explicit costs 20 Economic Costs Implicit costs return always positive Economic costs accounting costs 21 Total Revenue TR 22 Accounting Profit 23 Economic Profit price x quantity TR accounting costs TR economic costs Accounting profit economic profit 24 Rate of Return expressed as a percentage of the total investment the annual flow of net income generated by an investment Rate of return net income generated total investment x 100 implies positive accounting profit Companies need this at 25 Zero Economic Profit least to stay in business in the long run question 26 Absolute Advantage whoever has the higher valued intercept for the good in 27 Comparative Advantage look at the slopes Steeper slope indicates a comparative advantage in the good on the vertical axis Shallow slope indicates a comparative advantage in the good on the horizontal axis 28 Terms of Trade the ratio at which goods are exchanged between producers in order to be beneficial to both parties the terms of trade must be a ratio that lies between their two opportunity cost ratios Any terms of trade works both sides benefit Affected by o The relative bargaining power of the two parties o The presence of competition 29 Law of Demand the quantity demanded of that good demand curves slope downward there is a negative relationship between the price of a good and Price of a good increases fewer units are demanded Price of a good decreases more units are demanded 30 Law of Supply quantity supplied of that good supply curves slop upward there is a positive relationship between the price of a good and the Price of a good increases more units supplied Price of a good decreases fewer units supplied 31 Market Equilibrium demanded are equal or in balance the condition that exists when quantity supplied and quantity At equilibrium there is no tendency for the market price to change quantity demanded exceeds quantity supplied at the quantity supplied equal to quantity demanded 34 Excess Supply surplus 32 Equilibrium Price 33 Excess Demand shortage current price price tends to rise until equilibrium is restored current price price tends to fall until equilibrium is restored willing to pay for a good and its current price 35 Consumer Surplus the difference between the maximum amount a person is quantity supplied exceeds quantity demanded at the Ex Consumers are willing to pay 5 for a hamburger If the price is only 2 50 consumers receive a consumer surplus of 5 2 50 2 50 36 Total Consumer Surplus level willing to accept to supply a good and its current market price 37 Producer Surplus the difference between the minimum amount a producer is the area below the demand curve and above the price Ex Producers are willing to accept as little as 75 cents for hamburgers Since the price is 2 50 they receive a producer surplus of 2 50 75 1 75 per hamburger 38 Total Producer Surplus 39 Social Welfare market price is at equilibrium the area above the supply curve and below the price level the sum of consumer and producer surplus is highest when the situation in which welfare is maximized the market system distributes goods and services on the basis of 40 Efficiency 41 Price Rationing willingness and ability to pay Benefits o At the equilibrium price total surplus will be maximized o The firms