Econ Super Study GuideChapter 1Vocab:Scarcity - Limited nature of society resourcesEconomics – Study of how society manages its scarce resourcesEfficiency – the property of society getting the most from its resourcesEquality – The property of distributing economic prosperity uniformly among the members of society.Opportunity cost – Whatever must be given up to obtain some itemRational people – people who systematically and purposefully do the best they can to achieve their objectives.Marginal Change – A small incremental change to a plan of action.Incentive – Something induces a person to act.Sunk Cost – A cost that has already been commited and cannot be recovered.First Four Principles of Economics:I. All People face tradeoffsIn order to get something you want, you have to give up something else. Whether its time, money, or something else. Nothing is free.II. The cost of something is what you give up to get itTo evaluate tradeoffs, one must compare costs + benefits. Costs are not always monetary, consider opportunity costs.III. Rational people think at the marginRational people calculate what is going to give them the best opportunities and rewards for the lowest cost. This is done by comparing marginal costs and benefits. Economists assume most people are rational.IV. People respond to incentivesLecture Notes:Rational people look for the maximum difference between benefits and costs.Individuals and firms can make better decisions by thinking at the margin. A rational decision maker continues to take an action if and only if the marginal benefit is at least as large as the marginal cost. In order to find the best total difference between cost and benefits (Profit) think at the margin and make small incremental changes as long as marginal benefit >= marginal cost.PQContinue producing until you reach the equilibrium (star).Chapter 4 – Supply and DemandVocab:Market – A group of buyers and sellers of a particular good or serviceCompetitive market – a market in which there are many buyers and sellers so that each has a Tiny impact on the market price.The demand curve – the relationship between price and quantity demanded. The lower price the more demandedQuantity demand – the amount of a good that buyers are willing to purchaseLaw of demand – When other things are held equal, the quantity demanded of a good falls when price rises. Change in Quantity Demanded – change in price of a good. Represents a movement along the demand curveMarginal CostMarginal BenefitChange in demand – causes a shift in the demand curve Demand schedule – a table that shows the relationship between price and quantityMarket Demand – The horizontal sum of all of the individual demands for the product.Quantity supplied – The amount of a good that sellers are able and willing to sellLaw of supply – Quantity of a good rises when the price risesEquilibrium – the point where supply and demand intersectSurplus – when market price is greater than the equilibrium price, the quantity demanded may be lower than what is supplied.Shortage – Too little supply to match the demandShifts in demand curve:Income – the less income you have the lower your demand may beNormal good – Increase in income causes an increase in demandInferior good – Increase in income causes a decrease in demandPrices of related goods – When the price of one good falls, the demand for another good may rise or fall if they are related.Substitutes – two goods for which an increase in the price of one good leads to an Increase in the demand for anotherCompliments – two goods for which a decrease in the price of one good leads to an increase in the demand for anotherTastes – Your desire for a good may rise or lower based on tasteExpectations – Your predictions of your income, price, or other factors may lead you to buy more or lessNumber of buyers – More buyers, larger market demand.Shifts in Supply Curve:Input prices – price of what goes into the goodTechnology – better technology reduces costsPrices of other goods – if other goods are cheaper you should lower pricePQNotes:Equilibrium Price Equilibrium QuantityDemand Increase rises risesSupply increase falls rises- If supply and demand both shift, then you will know happens to either the price or the quantity but not to both, whichever shift is greater, will change the unknown factor.- An increase in Quantity demanded is not the same as an increase in demand, price affects quantity demanded, and not demand.- If the prices in one city are lower than another, people may be induced to move into thecity with lower pricesChapter 5 – Elasticity and its applicationVocab:Elasticity – How much buyers and sellers respond to changes in market conditionsPrice Elasticity of Demand – A measure of how much the quantity demanded of a good respondsto a change in the price.Supply, increase in supplyDemand, Increase in demandOld Equilibrium, New equilibrium% Δ Qty / %Δ Price Elastic goods – respond substantially to a change in priceInelastic goods – respond very little to changes in priceTotal Revenue – The amount paid by buyers and receiver by sellers. P * Q = TRInelastic demands have higher revenue than elastic demandsIncome Elasticity of Demand – Measures how the quantity of demanded of a good responds to achange in income.%Δ Qty / %Δ IncomeCross Price Elasticity – How much the Quantity demanded of one good responds to the change in price of another.%Δ Qty good 1 / %Δ good 2Price Elasticity of Supply – How much the quantity supplied responds to a change in price%Δ Qty / %Δ PriceNotes:Inelastic: E<1 Elastic: E>1Perfectly Inelastic: E = 0 Unit Elastic: E=1`Midpoint Method: (ΔQty / Average Qty) / (ΔPrice / Average Price)- When demand is inelastic, price and Total revenue move in the same direction- When demand is elastic, price and Total revenue move in opposite directions- If demand is unit elastic, total revenue remains constant when price changesChapter 6: Supply Demand and Government PoliciesVocab:Price Ceiling – A legal maximum on a price for a goodPrice floor – a legal minimum on a price for a goodTax Incidence – The manner in which the burden of a tax is sharedLecture Notes:- Prices should generally be left to the market. The government can help, but by changing prices it often hurts the economy more than helping it.- The tax burden falls more heavily on the side of the market that is less elastic.- Taxes levied
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