Microeconomics Final Exam Overview (Calhoun)Chapter 1: The Economic ApproachChapter 2: Tools of EconomistsChapter 3: Supply, Demand and the Market ProcessChapter 7: Consumer Choice and ElasticityChapter 8: Costs and the Supply of GoodsChapter 4: Supply and Demand (Applications and Extensions)Chapter 5: Difficult Cases For the Market and the Role of GovernmentChapter 9: Price Takers and the Competitive ProcessChapter 10: Price Searcher Market with Low Entry BarriersChapter 11: Price Searcher Markets with High Entry BarriersChapter 13: Earnings Productivity and the Job MarketMicroeconomics Final Exam Overview (Calhoun)Chapter 1: The Economic Approach- Adam Smith wrote The Wrath of the Nations where he discussed the invisible hand- 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 No such thing as free lunch- you are always giving up your timeo Individuals choose purposefully- people are rationalo Incentives mattero Individuals think on the margino More info leads to better choices, but more info increases costso Secondary effectso Valuation is subjectiveo Good theories should be able to predict behavior (for average individual not a “unique” individual)- Positive statement is fact and can be proven- Normative statements are based on opinions- Pitfalls to avoid in economic thinkingo Violation of the ceteris paribus condition “other things constant”o Good intentions do not always lead to good outcomeso Association is not causationo Fallacy of Composition What is good for you is not necessarily good for the groupChapter 2: Tools of Economists- Voluntary trade creates value for both partieso Transaction costs reduce gains from tradeo Middle mad increase gains from trade thus creating value- Property Rightso Private- allow the right of exclusive use, to protect and to transfer/sell propertyo Common- 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- 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- PPC is bowed outward because of the law of increasing opportunity costso If PPC is straight- there is constant tradeoff of opportunity costso If PPC is inward- there is a decreasing opportunity cost- Factors that shift PPC outwardo Increase in resourceso Technological improvementso Improving legal systems in order to allow resources to be utilized most efficientlyo More hard work (less leisure)o *Encouraging business investment (with tax cuts) will also tend to shift PPC outwardover time- Specialization and Division of Laboro 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- Law of Comparative Advantage- in order to maximize output, individuals (businesses, countries) should produce goods for which they have the low opportunity costChapter 3: Supply, Demand and the Market Process- Change in quantity demanded is a movement along the demand curve that can only be caused by a change in price- 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:2o Changes in consumer income Decrease in income- shifts demand left Increase in income- shifts demand righto Changes in the # of consumers in market Decrease in consumers- shifts demand to the left Increase in consumers- shifts demand to the righto Changes in the price of a related good Substitute Goods- two goods are substitutes if an increase in the price of thefirst good leads to an increase in the demand for the second good Price of Svedka increases, people will buy more of Three Olives and the price of Three Olives will then increase 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 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 higher- demand shifts to the right If future prices are expected to be lower- demand shifts to the lefto Changes in demographics Larger # of senior citizens will increase demand for nursing homeso Changes in consumer preferences1. Change in quantity supplied is a movement along the supply curve which can only be caused by a change in price of that good2. 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 increases- supply shifts left because costs have risen Resource price decreases- supply shifts right because costs have fallen3o Change in technology- gains are made since costs will be lower because production becomes cheapero Changes in Taxes Increase in taxes- raises costs for supplier Decrease in taxes- drops costs for suppliero Political Unrest and Weather A hurricane can reduce the supply of oranges in Florida1. Market prices are determined where the supply and demand curves intersecto Equilibrium occurs when quantity supplied = quantity demanded When equilibrium is reached, all gains from trade have been realized- How markets respond to changes in supply and demand:o Shifting One Curve : Increase in Supply- Price decreases; Quantity increases Decrease in Supply- Price increase; Quantity decreases Increase in Demand- Price increases; Quantity increase Decrease in Demand- 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 & Demand- Quantity increases; Price is ambiguous Decrease in Supply, Increase in Demand- Price increase; Quantity is ambiguous4 Increase in Supply, Decrease in Demand- Price decreases; Quantity is ambiguous Decrease in Supply & Demand- Quantity decreases; Price is ambiguous Confusing I know! Draw out the
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