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Virginia Tech ECON 2005 - Mid Term 1

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Mid Term 1 Material:-Econ is a science—the study of….-Positive Statement  Causation. This can be proved.Normative Statement  Opinion, cannot be proved. -Fallacy of Composition  Just because it’s good for you, doesn’tmean it’s good for everyone. Example: Stealing someone’s internet is good for you but isn’t good for the person you’re stealing it from. -Ignoring Secondary Effects  People don’t anticipate the unintended consequences of their decision or action.-Self Selection  Choosing what group you want to be in when being studied—going to Chipotle and asking if the customers like Chipotle or Moe’s better.-Opportunity Cost  Measures of the value of the next best thing—the value of the thing you gave up to do something else. -Sunk Costs  Costs that you cannot get back. Example: standing in line for a half na hour at the grocery store—you cannot get back the thirty minutes.-Marginal Analysis  As you go, you think of the next value of the next unit. A product becomes worth less to us as we gain more of it. -Law of Diminishing Marginal Returns-If we’re getting something for free, we keep consuming it until our marginalutility equals zero-Comparative Advantage  Producing something because you have the lower opportunity cost of producing that good—you don’t lose as much-Absolute Advantage  One person is absolutely better than someone else at producing a prodct-PPF Curves  Anything on the curve itself is producing at its full potential and is reaching maximum efficiency.-Anything that’s under the curve is producing inefficiently and has someresources that are unemployed-Anything outside of the curve is unreachable-Slope = Marginal rate of transformation-Bowed Out = Increasing opportunity cost—as you make more of one good,you’re giving up more of the other one-What shifts the PPF?TechnologyResourcesRules-Economic Systems  How price affects the market economy-What shifts the Demand Curve?Income, tastes, price of related goods, expectations, number andcomposition of consumersWhen you change the PRICE, it moves along the demand curve-What Shifts the Supply Curve?Technology, Prices of inputs, Price of alternative goods, producerexpectations, number of producersA change in prices moves along the supply curve-If price goes up, you want to sell more, If prices goes down, you want to sellless. If the demand curve shifts out, it’s a price increase, so they change theamount of their supplyALWAYS TRY TO BE AT EQUILIBRIUM WITH SUPPLY AND DEMAND-Price floors  lead to surpluses-Price Ceilings  Lead to shortagesElasticities:-Elastic Demand  If the prices goes up by 10%, then the demand for the product will go down by 10%-Inelastic Demand  If the prices goes up by 10%, quantity demanded will go down less than 10%.-People’s demand for a good isn’t affected by changes in price-If your income goes up, you buy more of a normal good and less of an inferior good.-Normal good: stuff you want; luxury-Inferior good: Ramen noodles, Mac and Cheese-Cross Price Elasticity-If the price of y rises, people will buy more of x  SUBSTITUTES-If the price of y lowers, people will buy more of x  COMPLEMENTS-If we have an elastic demand, and we raise our price, total revenue will fall-If we have an inelastic demand, and we raise our price, total revenue will increaseEQUATION TO KNOW*-Price Elasticity of Demand (Q2-Q1)/(Q1+Q2) / (P2 – P1)/(P1+P2)-Consumers want to spend their money in a way so they get the most utility possible-When you consume more and more of something, you get less and lessmarginal utility-If price goes up, buy less of EVERYTHING Income Effect-If price goes up, buy less of THAT ONE THING Substitution Effect-On a Graph:- Consumer Surplus  Above the price and below the demand curve- Producer Surplus  Below the price and above the supply curve- Total Surplus  CS + PS- Deadweight Loss  Whenever equilibrium is not “right”Goods and Services are scarce because resources are scarce-Labor –any human input into something (physical or mental)-Capital—physical thing that is used to produce something-Natural Resources *(land) –anything you take directly from the earth-Enrepreneurial ability—brings everything together and manages it-We can see, feel, and touch a good but a service is intangible-Almost all goods and services are scarce because EVERYTHING HAS A COST-“There are no free lunches”-Households are the consumers—individual people-They are the consuming unit and indirectly own their own stuff-Firms demand labor-Demand resources and produce goods and services-Circular Flow Model –among decision makers we see a flow of resources, products, income, and revenue. -Main interaction is between Households and Firms-Households supply resources to resource market and earn an income-Demand goods and services from product market, spend income-Firms demand resources to produce goods and services; pay for resources-Supply goods and services to product market; earn revenueModel  A simplified explanation on how things work –tells something interesting about what’s going on—relationship between price and quantityScientific Method:1. Identify the question and define relevant variables2. Specify assumptions3. Formulate a hypothesis4. Test itMarginalism  The process of analyzing the additional or incremental costs or benefits arising from a choice or decision-Ice cream stores like to have “free ice cream” days. More people show up for this day in poor neighborhoods than in rich ones. -Rich neighborhoods have a high opportunity cost to get this ice cream on thespecific day because they have a full paying job and can’t leave itAbsolute Advantage  To be “absolutely” better at something.Comparative Advantage  To be comparatively better at something—having the lower opportunity cost of producing something compared to someone else-Specialization says that if we all specialize in what we’re good at then as a group we can produce more stuff. Economics  The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided-Goal for a PPF curve is to be on the curve itself—outside of the curve is impossible and inside the curve means you’re not efficient and not using enough of your resources. -If we start producing more of one item we’re giving up producing more ofanother—Law of Increasing Opportunity


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