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Exam 2 Review Dr Calhoun Spring 2012 Things to Review From Chapters 1 2 and 3 Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Objective positive fact based not influenced by personal opinion Subjective normative an opinion based on personal preferences and value judgments Rationing allocating a limited supply of a good or resource among people who would like to have more of it Opportunity cost the highest valued alternative that must be sacrificed as a result of choosing an option Marginal used to describe the effects of a change in the current situation marginal cost is the cost of producing an additional unit Positive study of what is among economic relationships involves potentially verifiable or refutable propositions It doesn t need to be correct just needs to be testable Normative what ought to be cannot be proven false because they are based on judgment ex We should have fewer parking lots and more green space on campus Microeconomics the branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units suh as individual households or business firms Markets general use price as the rationing device Competition is a natural outgrowth of the need to ration scarce goods We may some day eliminate poverty but scarcity will always be with us Adam Smith Wealth of the Nations stressed the concept of the Invisible hand principle which is free exchange and competitive markets harnessing self interest as a creative force Transaction costs the time effort and other resources needed to search out negotiate and complete an exchange Private property rights rights exclusively held by an owner and protected against invasion by others They can be transferred sold or mortgaged at the owner s discretion They include 1 exclude others 2 use or abuse the property without the owners permission 3 The right to exclusive use of the property sole possession use and right to Legal protection against invasion from other individuals who would seek to The right to transfer sell exchange or mortgage property 1 Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others Private owners have a strong insentive to care for and properly manage what they own Private owners have an incentive to conserve for the future particularly if the property is expected to increase in value Private owners have an incentive to lower the change that their property will cause damage to the property of others Productions possibilities curve a curve that outlines all possible combinations of total output that could be produced assuming 1 A fixed amount of productive resources 2 A given amount of technical knowledge 3 Full and efficient use of those resources Points inside the curve are inefficient Points outside the curve are unattainable All output possibilities on the curve are efficient Curve can be shifted outward by an increase in the economy s resource base advancements in technology an improvement in rules government or by working harder and giving up current leisure Creative destruction the replacement of old products and production methods by innovative new ones that consumers judge to be superior Capitalism productive resources are owned privately and allocated through market prices Socialism ownership and control of basic means of production rest within the state resource allocation is determined by centralized planning rather than market forces As the price increases consumers by less When the price decrease consumers will wish to purchase more Consumer Choice and the Law of Demand A basic principle of economics if something becomes more costly people will be less likely to buy it Law of Demand an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase Substitutes goods that perform similar functions explains law of demand Demand Schedule a table listing the various quantities of something consumers are willing to buy at different prices Demand Curve used to illustrate the gains to costumers price slopes downward Shows the degree of responsiveness of consumer purchase to a change in The availability of substitutes is the main reason why the demand curve Everything can be replaced with something else 2 Can be used to show the difference between the marginal value and total The more responsive is elastic flatter The less responsive buyers are to a change in price the more inelastic value of a good steeper Change in quantity demand Movement along the demand curve caused by a change in the price of the good Change in demand shift of the demand curve a change in anything other than the price of a good a change in consumer income Consumers Surplus the difference between the maximum price consumers are willing to pay and the price they actually pay The net gain derived by the buyers of the good Changes in the price of closely related products influences the choices of the As cities grow and shrink as international markets open up to domestic When to products perform similar functions or fulfill similar needs they are Factors that Cause a Change in Demand 1 Changes in Consumer Income 2 Changes in the numbers of Consumers in a Market firms changes in the number of consumers affect the demand for products 3 Changes in the Price of a Related Good consumer substitutes Complements products that are usually consumed jointly a decrease in the price of one will cause an increase in demand for the other Bread and butter hot dogs and hot dog buns 4 Change in Expectations demand of a product 5 Demographic changes 6 Changes in Consumers Tastes and Preferences When consumers hold expectations of the future it also can effect the current The height of the supply curve at any quantity shows the minimum price Law of Supply states that there is a direct relationship between the price of a good or service and the quantity of it that producers are willing to supply Supply Curve as the price of a product increase other things constant producers increase the amount of the product supplied to the market necessary to induce suppliers to produce the unit that is the opportunity cost of producing it Producer Surplus the difference between the price suppliers actually receives and the minimum price they would be willing to accept exchange Factors that cause a change


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FSU ECO 2023 - Exam 2

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