Res Econ Study Guide Chap 1 Principles of Economics Key Terms Trade off have to give something up in order to gain Effieciency maximum benefits from scarce resources Equality benefits are distributed equally between society s members Opportunity cost amount given up to gain one unit of another item Marginal change small adjustment to plan of action Market economy allocation of resources is decided by consumer behavior Incentive something that induces a person to act reward punishment and firms Invisible hand consumers and producers act in self interest and move the market towards equilibrium price and quantity Property rights individuals can own and control scarce resources Market failure market fails to produce efficient allocation of resources Externality impact one s decision on well being of bystander Market power single person firm is influencing market prices i e Productivity amount of goods and services produced by each unit of labor monopolies input Key Concepts 1 Markets are effective if competitive using invisible hand of market a Maximize output with scarcity of resources b Demand increases price increases supply increases c Demand decreases price decreases supply increases 2 Problems with competitive markets a Hidden costs air pollution b Equality vs Efficiency poverty minimum wage c Depletion of natural resources d Market power of big business cheap production high market price 3 Government can react to market failures by a Direct regulation b Use of incentives c Combination of both 4 Trade offs and history a Example Spend all time studying for econ OR split time between econ b Example 2 guns vs butter the more nation spends on national defense less money spent on consumer goods 5 Opportunity costs a Example Opportunity cost of going to college Tuition books time wages from job b Example 2 Opportunity cost of going to another store for an item is the time it takes to get there price of the item is it worth it a Is marginal benefit greater than the marginal cost a Example Gas prices increase incentive to drive smaller fuel efficient 6 Marginal changes 7 Incentives cars 8 Market economies a Firms decide who to hire what to make b Households who to work for what to buy c Everyone acts in their own self interest and market moves towards equilibrium price and quantity 9 Normative vs positive statements a Normative recommendation of what should be subjective b Positive factual statements objective Chap 2 Thinking Like an Economist Key Terms Factors of production resources used to produce goods and services Production possibility frontier graph that shows various combinations of output given available factors Key Concepts 1 Circular flow models a Economy is simplified to show two decision makers firms and households b Firms produce goods services using factors of production input land labor capital buildings machines c Households own factors of production and consume goods and services produced by firms 2 Production possibility frontier a Shows opportunity cost of one good is measures in terms of another good b Above the curve not possible given resources on the curve efficient below the curve resources are not being used efficiently c Slope of the line opportunity cost Chap 4 Supply Demand Key Terms Markets groups of buyers and sellers of a particular good service Monopoly one seller and one seller sets the price Substitutes o Demand pairs of goods that are used in place of one another o Supply goods produced using the same resource Complements o Demand pairs of goods that are used together o Supply by product it is produced together Equilibrium the point at which supply and demand curves intersect Surplus supply exceeds demand Shortage demand exceeds supply Market demand sum of all individual demands Market supply sum of supplies of all sellers Key Concepts 1 Demand Curve a Quantity demanded the amount of a good service that buyers are c Demand schedule table that shows the relationship between price and demand holding all other variables constant willing AND able to purchase b Law of demand i Price increases demand decreases ii Price decreases demand increases d Shifts in the demand curve i Demand increases curve shifts right ii Demand decreases curve shifts left e Factors that affect demand curve i Income ii Price of related goods 1 Normal good income decreases demand decreases income increases demand increases Inferior good income increases demand decreases 2 1 Substitutes example frozen yogurt price increases demand for ice cream increases 2 Complements example price of hot fudge decreases demand for ice cream increases iii Tastes preferences iv Expectations 1 If you like something demand increases 1 Example if you expect prices to drop tomorrow demand decreases today v Number of buyers 1 Increase in buyers increase in demand Variables Price of good Income Related goods Tastes Expectations Number of buyers 2 Supply curve What happens to curve Movement ALONG curve Shifts curve Shifts curve Shifts curve Shifts curve Shifts curve a Quantity supplied amount sellers are willing AND able to supply b Law of Supply i Price increases quantity supplied increases ii Price decreases quantity supplied decreases c Shifts in the supply curve i Supply increases curve shifts right ii Supply decreases curve shifts left d Factors that affect the supply curve i Input prices 1 2 Input price increases supply decreases less profit Input price decreases supply increases 1 Technology reduces costs of production increase in 1 Price of good expected to increase current supply 1 Number of sellers increases supply increases 1 Supply decreases resource is being used for to produce 1 Supply increases as a byproduct of producing other ii Technology supply iii Expectations decreases iv Number of sellers v Substitutes other good vi Complements good Variables Price of good Input price Technology Expectations Number of sellers Substitutes complements 3 Equilibrium What happens to the curve Movement ALONG curve Shifts curve Shifts curve Shifts curve Shifts curve Shifts curve a Market clearing price equilibrium price the price that sellers and buyers are happy with b Changes in equilibrium i Decide if event shifts demand or supply curve ii Decide with direction curve shifts increases decreases iii Use this to determine how shift change equilibrium price and quantity ALONG supply curve iv Supply position of supply curve VS Quantity supplied shift v Demand position of demand curve VS Quantity demanded