Microeconomics 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 time o Individuals choose purposefully 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 Positive statement is fact and can be proven Normative statements are based on opinions 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 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 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 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 costs o If PPC is straight there is constant tradeoff of opportunity costs o If PPC is inward there is a decreasing opportunity cost 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 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 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 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 3 o Changes in consumer income Decrease in income shifts demand left Increase in income shifts demand right o Changes in the of consumers in market Decrease in consumers shifts demand to the left Increase in consumers shifts demand to the right o Changes in the price of a related good 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 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 left o Changes in demographics o Changes in consumer preferences Larger of senior citizens will increase demand for nursing homes 1 Change in quantity supplied is a movement along the supply curve which can only be caused 2 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 Resource price increases supply shifts left because costs have risen 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 Increase in taxes raises costs for supplier Decrease in taxes drops costs for supplier o Political Unrest and Weather A hurricane can reduce the supply of oranges in Florida 1 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 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 ambiguous Increase in Supply Decrease in Demand Price decreases Quantity is ambiguous 5 Decrease in Supply Demand Quantity decreases Price is ambiguous Confusing I know Draw out the graphs in the space I left and it ll be much clearer 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 Elasticity of demand tells us how much more or less the consumer will purchase as price falls or rises o Elastic more of a change in amount purchased when price changes bigger change o Inelastic less of a change in amount purchased when price changes smaller change in quantity demanded in quantity demanded Formula for Price Elasticity of Demand Price elasticity of demand percentage change
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