FSU ECO 2023 - Chapter 1: The Economic Approach

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Microeconomics*Final*Exam*Overview*(Calhoun)*Chapter*1:*The*Economic*Approach*!x Adam!Smith!wrote&The&Wrath&of&the&Nations&where!he!discussed!the!x Economic!way!of!thinking7!how!economists!analyze!human!behavior,!how!they!try!to!understand!human!choices.!Based!on!8!guidelines:!invisible!hand!o There!will!always!be!tradeoffs7!opportunity!costs! No!such!thing!as!free!lunch7!you!are!always!giving!up!your!time!o Individuals!choose!purposefully7!people!are!rational!o Incentives!matter!o Individuals!think!on!the!margin!o More!info!leads!to!better!choices,!but!more!info!increases!costs!o Secondary!effects!o Valuation!is!subjective!o Good!theories!should!be!able!to!predict!behavior!(for!average!individual!not!a!“unique”!individual)!x Positive!statement!is!fact!and!can!be!proven!x Normative!statements!are!based!on!opinions!x Pitfalls!to!avoid!in!economic!thinking!o Violation!of!the&ceteris&paribus!condition! “other!things!constant”!o Good!intentions!do!not!always!lead!to!good!outcomes!o Association!is!not!causation!o Fallacy!of!Composition! What!is!good!for!you!is!not!necessarily!good!for!the!group!Chapter*2:*Tools*of*Economists*!x Voluntary!trade!creates!value!for!both!parties!!2!o Transaction!costs!reduce!gains!from!trade!o Middle!mad!increase!gains!from!trade!thus!creating!value!x Property!Rights!o Private7!allow!the!right!of!exclusive!use,!to!protect!and!to!transfer/sell!property!o Common7!allows!multiple!people!to!claim!ownership!rights! Property(rights(are(important(because(they(create(incentives(to(protect,(conserve(resources,(and(distribute(them(to(people(who(value(them(x 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!x PPC!is!bowed!outward!because!of!the!law!of!increasing!opportunity!costs!o If!PPC!is!straight7!there!is!constant!tradeoff!of!opportunity!costs!o If!PPC!is!inward7!there!is!a!decreasing!opportunity!cost!x Factors!that!shift!PPC!outward!o Increase!in!resources!o Technological!improvements!o Improving!legal!systems!in!order!to!allow!resources!to!be!utilized!most!efficiently!o More!hard!work!(less!leisure)!o *Encouraging!business!investment!(with!tax!cuts)!will!also!tend!to!shift!PPC!outward!over!time!x Specialization!and!Division!of!Labor!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!x Law!of!Comparative!Advantage7!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*!x Change!in!quantity!demanded!is!a!movement!along!the!demand&curve!that!can!only!be!caused!by!a!change!in!price!x 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! Decrease!in!income7!shifts!demand!left! Increase!in!income7!shifts!demand!right!o Changes!in!the!#!of!consumers!in!market! Decrease!in!consumers7!shifts!demand!to!the!left! Increase!in!consumers7!shifts!demand!to!the!right!o Changes!in!the!price!of!a!related!good! Substitute!Goods7!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!¾ Price!of!Svedka!increases,!people!will!buy!more!of!Three!Olives!and!the!price!of!Three!Olives!will!then!increase! Complementary!Goods7!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!¾ 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!! If!future!prices!are!expected!to!be!higher7!demand!shifts!to!the!right! If!future!prices!are!expected!to!be!lower7!demand!shifts!to!the!left!o Changes!in!demographics!!¾ Larger!#!of!senior!citizens!will!increase!demand!for!nursing!homes!o Changes!in!consumer!preferences!x Change!in!quantity!supplied!is!a!movement!along!the!supply!curve!which!can!only!be!caused!by!a!change!in!price!of!that!good!x Change!in!supply!is!a!shift&of&the&entire&curve!which!can!be!caused!by!factors!other!than!a!change!in!the!price!such!as:!o Changes!in!resource!prices! Resource!price!increases7!supply!shifts!left!because!costs!have!risen! Resource!price!decreases7!supply!shifts!right!because!costs!have!fallen!!4!o Change!in!technology7!gains!are!made!since!costs!will!be!lower!because!production!becomes!cheaper!o Changes!in!Taxes! Increase!in!taxes7!raises!costs!for!supplier! Decrease!in!taxes7!drops!costs!for!supplier!o Political!Unrest!and!Weather!¾ A!hurricane!can!reduce!the!supply!of!oranges!in!Florida!x Market!prices!are!determined!where!the!supply!and!demand!curves!intersect!o Equilibrium!occurs!when!quantity!supplied!=!quantity!demanded! When!equilibrium!is!reached,!all!gains!from!trade!have!been!realized!x How!markets!respond!to!changes!in!supply!and!demand:!o Shifting!One!Curve Increase!in!Supply7!Price!decreases;!Quantity!increases!:! Decrease!in!Supply7!Price!increase;!Quantity!decreases! Increase!in!Demand7!Price!increases;!Quantity!increase! Decrease!in!Demand7!Price!decreases;!Quantity!decreases! Remember:((A(market(is(just(a(group(of(buyers(and(sellers(of(a(particular(good!(o Shifting!Both!Curves Increase!in!Supply!&!Demand7!Quantity!increases;!Price!is!ambiguous!:!!!! Decrease!in!Supply,!Increase!in!Demand7!Price!increase;!Quantity!is!ambiguous!!!!!5! Increase!in!Supply,!Decrease!in!Demand7!Price!decreases;!Quantity!is!ambiguous!!!! Decrease!in!Supply!&!Demand7!Quantity!decreases;!Price!is!ambiguous!!!!9 Confusing(I(know!(Draw(out(the(graphs(in(the(space(I(left(and(it’ll(be(much(clearer!(x The!Invisible!Hand!means!that!self7interested!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!in7!the!drive!for!free!markets!!Chapter*7:*Consumer*Choice*and*Elasticity*!x


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FSU ECO 2023 - Chapter 1: The Economic Approach

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