Microeconomics Final Exam Overview Calhoun Chapter 1 The Economic Approach cid 120 Adam Smith wrote The Wrath of the Nations where he discussed the invisible hand cid 120 Economic way of thinking how economists analyze human behavior how they try to understand human choices Based on 8 guidelines o There will always be tradeoffs opportunity costs cid 131 No such thing as free lunch you are always giving up your time Individuals choose purposefully people are rational o o o Incentives matter Individuals think on the margin o More info leads to better choices but more info increases costs o Secondary effects o Valuation is subjective individual cid 120 Positive statement is fact and can be proven cid 120 Normative statements are based on opinions cid 120 Pitfalls to avoid in economic thinking o Violation of the ceteris paribus condition cid 131 other things constant o Good intentions do not always lead to good outcomes o Association is not causation o Fallacy of Composition cid 131 What is good for you is not necessarily good for the group Chapter 2 Tools of Economists cid 120 Voluntary trade creates value for both parties o Good theories should be able to predict behavior for average individual not a unique 2 o Transaction costs reduce gains from trade o Middle mad increase gains from trade thus creating value cid 120 Property Rights o Private allow the right of exclusive use to protect and to transfer sell property o Common allows multiple people to claim ownership rights cid 153 Property rights are important because they create incentives to protect conserve resources and distribute them to people who value them cid 120 Production Possibility Curve PPC shows the maximum combinations of two goods that can be produced from a set of fixed resources holding technology constant and assuming all resources are being used efficiently cid 120 PPC is bowed outward because of the law of increasing opportunity costs o o If PPC is straight there is constant tradeoff of opportunity costs If PPC is inward there is a decreasing opportunity cost cid 120 Factors that shift PPC outward o Increase in resources o Technological improvements o More hard work less leisure over time cid 120 Specialization and Division of Labor o Improving legal systems in order to allow resources to be utilized most efficiently o Encouraging business investment with tax cuts will also tend to shift PPC outward o An individual that focuses on one specific task instead of a series of tasks can become better at his job which increases output which leads to an increase in profit cid 120 Law of Comparative Advantage in order to maximize output individuals businesses countries should produce goods for which they have the low opportunity cost Chapter 3 Supply Demand and the Market Process cid 120 Change in quantity demanded is a movement along the demand curve that can only be caused by a change in price cid 120 Change in demand is a shift of the entire curve which may be caused by anything other than a change in price of that particular good such as 3 o Changes in consumer income cid 131 Decrease in income shifts demand left cid 131 Increase in income shifts demand right o Changes in the of consumers in market cid 131 Decrease in consumers shifts demand to the left cid 131 Increase in consumers shifts demand to the right o Changes in the price of a related good cid 131 Substitute Goods two goods are substitutes if an increase in the price of the first good leads to an increase in the demand for the second good cid 190 Price of Svedka increases people will buy more of Three Olives and the price of Three Olives will then increase cid 131 Complementary Goods two goods are complements if an increase in the price of the first good leads to a decrease in the demand for the second good cid 190 Price of pot increases the demand for Jimmy John s on 4 20 will decrease The price of Jimmy John s will decrease Why I gotchu you re going to spend more of your money on weed which leaves less money for munchies food Jimmy Johns o Changes in expectations cid 131 cid 131 If future prices are expected to be higher demand shifts to the right If future prices are expected to be lower demand shifts to the left o Changes in demographics o Changes in consumer preferences cid 190 Larger of senior citizens will increase demand for nursing homes cid 120 Change in quantity supplied is a movement along the supply curve which can only be caused cid 120 Change in supply is a shift of the entire curve which can be caused by factors other than a by a change in price of that good change in the price such as o Changes in resource prices cid 131 Resource price increases supply shifts left because costs have risen cid 131 Resource price decreases supply shifts right because costs have fallen o Change in technology gains are made since costs will be lower because production 4 becomes cheaper o Changes in Taxes cid 131 Increase in taxes raises costs for supplier cid 131 Decrease in taxes drops costs for supplier o Political Unrest and Weather cid 190 A hurricane can reduce the supply of oranges in Florida cid 120 Market prices are determined where the supply and demand curves intersect o Equilibrium occurs when quantity supplied quantity demanded cid 131 When equilibrium is reached all gains from trade have been realized cid 120 How markets respond to changes in supply and demand o Shifting One Curve cid 131 Increase in Supply Price decreases Quantity increases cid 131 Decrease in Supply Price increase Quantity decreases cid 131 Increase in Demand Price increases Quantity increase cid 131 Decrease in Demand Price decreases Quantity decreases cid 153 Remember A market is just a group of buyers and sellers of a particular good o Shifting Both Curves cid 131 Increase in Supply Demand Quantity increases Price is ambiguous cid 131 Decrease in Supply Increase in Demand Price increase Quantity is ambiguous cid 131 Increase in Supply Decrease in Demand Price decreases Quantity is ambiguous 5 cid 131 Decrease in Supply Demand Quantity decreases Price is ambiguous cid 57 Confusing I know Draw out the graphs in the space I left and it ll be much clearer cid 120 The Invisible Hand means that self interested individuals will produces what is valued by society the most without the direction of a central authority Basically the Government should stay the f out of our business which is what Adam Smith believed in the drive for free markets Chapter 7 Consumer Choice and Elasticity
View Full Document
Unlocking...