McLeod Econ 102 Final Exam Study Guide numbers refer to how many questions on the exam will pertain to that subject 1 What is economics is the study of how people allocate their scarce resources a Economics to satisfy their unlimited wants b Positive vs normative economics i Positive are testable statements ii Normative ought to do c Microeconomics vs Macroeconomics makes statements about what is or what will be They makes statements about what we should or we i Micro the study of decision making by individual economic agents firms households government 1 3 main questions a what to produce b how to produce c for whom to produce ii Macro the study of the economy as a whole 1 Main topics a Unemployment b Output c Overall prices d Economic growth 2 Production Possibilities Curve a graph showing all possible combinations of goods and services that can be produced with a given amount of resources and a given technology a Downward slope represents Opportunity Costs i Law of Increasing Marginal Opportunity Costs 1 Resources are not equally well suited to the production of different goods As you produce more and more of one type of good you have to use resources that are less and less well suited to the production of that type of good So you have to use more and more resources to produce additional units of that type of good 2 PPC is drawn assuming a society is using all of its resources and using the resources efficiently ii Shifts of the PPC 1 Increase in our resources and increase in technology cause an outward shift 2 Economic growth iii Points inside the curve 1 Represent unemployment or inefficiency 2 Not using all our resources or not using them efficiently iv Points outside the curve 1 Cannot be produced with the amount of resources given 2 Absolute Comparative Advantage b Absolute advantage i one country has an absolute advantage in the production of a good over another country if it can produce a given amount of the good using fewer resources than the other country can c Comparative advantage i one country has a comparative advantage in the production of a good over another country if it can produce a given amount of that good at a lower opportunity cost than the other country d Opportunity Cost i The value of the next best alternative that we give up forego when we make a choice 5 Supply and Demand 1 Demand a Law of Demand There is an inverse relationship between price and quantity demanded When one of those things goes up the other goes down person would buy during a given period of time at a given price the amount of a good or service that a c Change in Qd vs Change in D b Quantity Demanded i A change in Qd is represented by a movement along the demand curve point A to point B It occurs because of a change in the price of a good ii A change in demand is represented by a shift of the demand curve It is caused by a change in something other than the price of a good 1 Change in preferences 2 Change in income a Normal goods increase in income causes an increase in demand b Inferior goods increase in income causes a decrease in demand 3 Change in price of a related good a Compliments increase in price of 1 good causes a decrease in demand for the other b Substitutes increase in the price of 1 good causes an increase in demand for the other 4 Changes in expectations future prices income 5 Change in the number of consumers a Law of Supply there is a positive or direct relationship 2 Supply between Price and Qs ceteris paribus the amount of a good service that a firm will produce and offer for sale in a given period of time at a given price c Change in Qs vs Change in Supply b Quantity Supplied i A change in Qs is represented by a movement along a given supply curve pt A to pt B It occurs because of a change in price of a good ii Change in Supply is represented by a shift of the entire supply curve It occurs because of a change in something other than price 1 a change in the cost of production 2 a change in the price of inputs 3 a change in technology 4 a change in the number of firms in the market 5 Gov t policies taxes and subsidies 6 Weather natural disasters 3 Equilibrium a A situation where there is no tendency for change b Equilibrium price the price which Qd Qs i Suppose Qd Qs excess demand or shortage 1 If Qd Qs there is a tendency for price to rise ii Suppose Qd Qs excess supply or surplus 1 If Qd Qs there is a tendency for price to fall iii Only if Qd Qs is there no tendency for price to change 4 Price Floor good or service a A minimum price set by the gov t that buyers have to pay for a i 5 Price Ceiling If it is above equilibrium price it will cause a surplus a A maximum price set by the gov t that sellers can charge for a good or service i If it is below equilibrium price it will cause a shortage 4 Elasticity 1 The degree to which consumers producers change their demand amount supplied in response to price or income changes a Price elasticity of demand b Midpoint formula c Point slope formula d Total revenue P x Q i ii iii If P increases then Q decreases so it s not clear what happens to the product of those 2 numbers P and Q If demand is inelastic P increase TR increase and if P decrease then TR decrease If demand is elastic P increase TR decrease and if P decrease then TR increase iv TR will be MAXIMIZED where E 1 2 Determinants of E a Availability of Substitutes b Proportion of a Consumer s budget that is spent on the good ceteris paribus the more substitutes that are available the more elastic the demand ceteris paribus the larger the proportion of a consumer s budget the more elastic ceteris paribus the longer consumers have to adjust to a price change the more elastic the demand c The length of time that consumers have to adjust to a price change 3 Income Elasticity of Demand 4 Cross Price Elasticity of Demand 5 Price Elasticity of Supply 4 Cost of Production 1 Production Function shows the maximum amount of output that a firm can produce from a given amount of inputs 2 Short Run a period of time in which at least one input is fixed a Capital is typically the fixed input b Labor is variable c Marginal Product of Labor MPL the additional output that is produced when the firm hires an additional unit of labor i MPL change in quantity change in Labor d Short Run Costs of Production i Fixed costs …