ECON200 Study Guide Unit 1 Chapters 1 2 4 5 6 7 8 12 CHAPTER 1 TEN PRINCIPLES OF ECONOMICS Scarcity the limited nature of society s resources Economics study of how society manages its scarce resources makes decisions 10 PRINCIPLES OF ECONOMICS 1 People face trade offs ex between efficiency and equality Efficiency the property of society getting the most it can from its scarce resources most economic well being Equality the property of distributing economic prosperity uniformly among the members of society 2 The cost of something is what you give up to get it Opportunity cost whatever must be given up to obtain some item 3 Rational people think at the margin Rational people people who systematically and purposefully do the best they can to achieve their objectives Marginal changes Small incremental adjustments to a plan of action 4 People respond to incentives something that induces a person to act 5 Trade can make everyone better off 6 Markets are usually a good way to organize economic activity Market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services 7 Governments can sometimes improve market outcomes Property rights The ability of an individual to own and exercise control Market failure A situation in which a market left on its own fails to allocate over scarce resources resources efficiently Externality the impact of one person s actions on the well being of a Market power the ability of one person or group to unduly influence bystander market prices services labor input production 8 A country s standard of living depends on its ability to produce goods and Productivity the quantity of goods and services produced from each unit of Inflation an increase in he overall level of prices in the economy 9 Prices rise when the government prints too much money 10 Society faces a short run tradeoff between inflation and unemployment Business cycle fluctuations in economic activity such as employment and CHAPTER 2 THINKING LIKE AN ECONOMIST Economic Scientific Method observation theory and more observation Circular flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms Production possibilities model a graph that shows the combinations of output that the economy can possibly produce given the available factors of production Microeconomics study of house households and firms make decisions and interact ECON200 Study Guide Unit 1 Chapters 1 2 4 5 6 7 8 12 Positive statements a claim that attempts to describe the world Normative statements a claim that attempts to prescribe how the would should be CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND Competitive market a market in which there are so many buyers and sellers that each has a negligible impact on the market price Perfectly competitive market goods offered for sale are all the same so many buyers sellers that no single buyer seller has influence over market price Law of demand price up demand down price down demand up inverse rel Demand schedule a table that shows the relationship between the price of a good and the quantity demanded Change in quantity demanded only price of that same good is changing Change in demand ANOTHER determinant of demand besides prices changes INFLUENCES ON DEMAND INCOME 1 Normal good decrease in income decrease in demand vice versa Inferior good decrease in income increase in demand vice versa o Less money to spend on gas spend more on buses 2 PRICES OF RELATED GOODS Substitutes two goods for which an increase n the price of one leads to an increase in demand for the other ex ice cream and froyo Complements two goods for which an increase in the price of one leads to a decrease in demand for the other ex gas prices up less demand for cars 3 TASTES tastes and desires change 4 EXPECTATIONS expectation for future going to college so save money 5 NUMBER OF BUYERS BASICS OF SUPPLY Law of Supply price up supply up price down supply down Supply Schedule a table that shows the relationship between the price of a good and the supply Supply graph goes up from bottom left to top right inc to right INFLUENCES ON SUPPLY INPUT PRICES 1 Cost of components to create a good influence quantity willing to produce 2 TECHNOLOGY new tech lowers costs and raises productivity 3 NUMBER OF SELLERS many sellers makes larger supply CHAPTER 5 ELASTICITY AND ITS APPLICATION Elasticity A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants quantitative discussion of demand THE ELASTICITY OF DEMAND Price elasticity of demand A measure of how much the quantity demanded of a good responds to a change in the price of that good computed as the percentage change in quantity demanded divided by the peerage change in price Elastic Demand quantity demanded responds substantially to changes in the price When elasticity 1 Q moves more with P Perfectly Elastic When elasticity approaches infinity Flatter demand curve ECON200 Study Guide Unit 1 Chapters 1 2 4 5 6 7 8 12 o Demand curve is horizontal very small changes in price lead to huge Inelastic Demand quantity demanded responds only slightly to changes in price changes in quantity demanded Unit Elastic When elasticity 1 o Quantity moves proportionately to Price When elasticity 1 Q moves less with P Perfectly Inelastic When elasticity 0 Steeper demand curve closer to looking like an I o Demand curve is perfectly vertical Qdem doesn t change bc of price DETERMINANTS PRICE ELASTICITY OF DEMAND 1 Availability of close substitutes demand for something without a replacement is less elastic ex eggs 2 Necessities versus luxuries necessities have inelastic demands bc always bought no matter income clothes and luxuries are elastic bc can be given up diamonds 3 Definition of the market narrowly defined markets have more elastic demand bc easier to find close substitutes 4 Time horizon Longer time more elastic COMPUTING PRICE ELASTICITY OF DEMAND Price elasticity of demand change quantity demanded Qdemanded of a good is inversely related to price change price Larger elasticity means greater relation of Qdemanded to Price Midpoint method computes a percentage change by dividing the change by the midpoint average of the initial and final levels Most affective method in determining percentage change so that A B change is equal to B A change gives them same base same answer regardless of direction
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