Econ Exam 1 Chapters 1 6 Oct 1st 2015 Chapter 1 Economics and Life Economics the study of how people individually and collectively manage Micro the study of how individuals and firms manage resources Macro the study of the economy on a regional national or international scale Rational Behavior making choices to achieve goals in the most effective way resources possible Key Questions What are the wants and constraints of those involved Scarcity the condition of wanting more than we can get with available resources What are the trade offs Opportunity Cost the value of what you have to give up in order to get something the value of your next best alternative Marginal Decision Making comparison of additional benefits of a choice against the additional costs it would bring without considering related benefits and costs of past choices Sunk Costs costs that have already been incurred and cannot be recovered or refunded How will others respond Incentives something that causes people to behave in a certain way by changing the trade offs they face Positive incentive makes people more likely to do something Negative disincentive makes people less likely to do something Why isn t everyone already doing it Efficiency use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society Reasons why others may not be doing it Innovation too new no one else has taken advantage of it because it did not exist Market Failure something prevents them from capturing the benefits of the opportunity or imposes additional costs Intervention often government interference prevents normal transactions to take place Goals other than Profit idea won t produce a profit Correlation Causation Correlation a consistently observed relationship between two events or variables can be positive or negative Causation a relationship between two events in which one brings about the other Correlation without causation no cause and effect relationship Omitted Variables other factors are left out Reverse Causation causing variable is unknown Models Model A simplified representation of the important parts of a complicated situation Circular Flow Model a simplified representation of how the economy s transactions work together Models 1 Predict cause and effect 2 Makes clear assumptions 3 Describes the real world accurately Positive Analysis A factual claim about how the world actually works Normative Analysis A factual claim about how the world should be Chapter 2 Specialization and Exchange Production Possibilities Frontier a line or curve that shows all the possible combinations of two outputs that can be produced using all available resources Slope of the PPF represents opportunity cost Slope y x wheat shirts 2 1 opportunity cost of x Opportunity cost of producing one shirt is two bushels of wheat Inverse slope x y 1 2 opportunity cost of y Opportunity cost of producing one bushel of wheat is shirt Efficient Points Combinations of production possibilities that squeeze the most output possible from all available resources on line Shifting the PPF An increase in available resources shifts the entire frontier outward An improvement in technology for one good rotates the frontier outward Absolute and Comparative Advantage Absolute Advantage the ability to produce more of a good or service than others can with a given amount of resources Comparative Advantage the ability to produce a good or service at a lower opportunity cost than others can only have CA in one item Specialization Specialization spending all of your time producing a particular good based on advantage Gains from trade the improvement in outcomes that occurs when producers specialize exchange goods and services comparative and Terms of Trade there is room for trade as long as the two countries differ in opportunity cost and they set a price that falls between the two opportunity costs Chapter 3 Markets Market Economy an economy in which private individuals rather than a centralized planning authority make the decisions Market buyers and sellers who trade a particular good or service Competitive Market a market in which fully informed price taking buyers and sellers easily trade a standardized good or service 1 Standardized good any two units of the good have the same features and are 2 Full Information market participants know everything about the price and 3 No transaction costs there is no cost to participating in exchanges in the interchangeable features of the good market 4 Participants are price takers neither buyers nor sellers have the power to affect the market price Demand Quantity demanded the amount of a particular good that buyers will purchase at a given price during a specified period Law of Demand a fundamental characteristic of demand which states that all else equal ceteris paribus quantity demanded rises as price falls Demand Schedule a table that shows the quantities of a particular good or service that consumers will purchase demand at various prices Demand Curve a graph that shows the quantities of a particular good or service that consumers will demand at various prices Non Price Determinants of Demand 1 Consumer Preference personal likes and dislikes that make buyers more or less inclined to A Buy USA ad appeals to national price increases demand for US made purchase a good sneakers An outbreak of E Coli decreases demand for spinach 2 Prices of Related Goods Substitutes and Compliments Substitutes goods that serve a similar enough purpose that a consumer might purchase one in place of the other Compliments goods that are consumed together so that purchasing one will make consumers more likely to purchase the other A decrease in the price of hot dogs increases demand for relish compliment A decrease in taxi fares decreases the demand for subway rides substitute 3 Incomes The larger the paycheck the more money you can afford to spend Normal Goods goods for which demand increases as income increases cell phone Inferior Goods goods for which demand decreases as income decreases ramen An economic downturn lowers incomes increasing the demand for ground beef inferior An economic downturn lowers incomes decreasing the demand for steak 4 Expectations Changes in consumer expectations about price normal A hurricane destroys part of the world papaya crop causing expectations that prices will rise and increasing the current demand for papayas An announcement that a new
View Full Document
Unlocking...