Introduction to Microeconomics ECON UA FINAL STUDY GUIDE CUMULATIVE Microeconomics Principles Hall Lieberman 6th ed CLASS GRAPHS AND CHARTS INCLUDED CYCLE ONE INTRODUCTION SUPPLE AND DEMAND AND RELATED CONCEPTS 1 4 OF THE FINALS MATERIAL 4 resources of economics 1 land physical land space and everything underneath land and natural resources 2 labor time people spend producing goods 3 capital long lasting tool that labor uses to make stuff physical tools human capital skills training knowledge in itself is a production of land and labor 4 entrepreneurship innovator put together the elements Every economy has to deal with resource allocation 1 what is going to be produced 2 how is it going to be produced 3 who gets it 3 main methods of resources allocation 1 command government decides i e north korea 2 tradition precedent 3 market do what you want with what you ve got Market system resource allocation mostly via the market and mostly private ownership of services Market decision Benefits vs costs Costs education Tuition room and board books and supplies transportation and others out of pocket payments opportunity cost what you give up when you make a choice transportation and room and board are things you d be giving up with or without going to college so they are not part of opportunity costs explicit costs money paid out tuition and books and supplies implicit costs money not paid out time second best choice money you could earn if not in college foregone income Production Possibilities Frontier PPF Curve the shows maximum quantity of one good that we can produce for given quantities of other goods Laws of increasing opportunity cost more of something you produce the greater the opportunity cost of producing still more economies can operate below inside their PPFs but not beyond frontier 1 poor institutional arrangements productively inefficient 2 recession Economic growth 1 population growth PPF shifts outward 2 technological advance isn t necessarily a parallel growth it depends on how each sector is developed If all resources are thrown in to the rice industry only one of the intercepts would change increase How our choices influence economic growth what are we going to produce Major resource re allocation early mid 1990s end of cold war early 2000s 9 11 domestic security building defense line in the last decades there has been a dramatic growth in health care due to aging population Models abstract representations of reality Assumptions of models simplifying exclusions that won t affect the outcome I e there are no trees just makes the model easier to deal with critical every road on that map is open Supply and demand model that helps us understand how prices are determined in many markets prices are market signals helps us explain why and how are we producing Case study market for gasoline in the US Demand Qd hypothetical quantity number of gas buyers would like just desire not ability to buy in the US each month given their constraints price income Flow variable a fact that exists with a time period Qd Stock variable a fact that exists at a moment in time Qd D Pgas income wealth Psubstitute Pcomplement expPgas tastes law of demand price and quantity demanded are inversely related Ceteris paribus all else remains constant if P of good changes move along D curve If anything else that affects Qd changes D curve shifts Supply Qs hypothetical quantity number of gallons of gas suppliers would like to sell in the US each month given their constraints inputs and going price Qs Q Pgas Pinput Palternate different good or same good in different market of firms expPgas technology known and available methods for producing goods and services from inputs law of supply price and quantity supplied are directly related if the price of the good changes we move along the S curve If anything else that affects Qs changes the S curve shifts intersection of the demand and supply curve is called the equilibrium Equilibrium is a point of rest US gas example cont Exogenous variable determined outside of the model and treat it as a given data changes outside the model and see how it affects the model data such as mass transit data gasoline substitute prices Endogenous variable determined in the model Reason people build the model to determine the endogenous variable price and quantity Equilibrium set of values for endogenous variables that won t change unless an exogenous variable changes Comparative statics change one or more exogenous variables shifts in supply or demand curve and observe change in our endogenous variable P Q Government intervention Price floor minimum price at which a product is allowed to sell protect the sellers many governments impost price floors on agricultural products short run problem unpredictable weather unstable total revenue unstable farmer income Changes how much of their crops survive long run problem technological advances falling prices falling total revenue falling farmer incomes creates surplus long lasting excess supply when the quantity supplied and quantity demanded are different the economy resorts to rule of markets short side wins can t make people buy more or sell more how to deal with surplus so the price floor can be maintained 1 government buys the surplus 2 artificially shift the demand curve to the right getting the public to buy more of a certain crop with advertising campaigned 3 pay farmers not to grow crops new farm bill substitute grown crops Who benefits 1 mostly large corporations 2 rich individual farmers 3 city farmers invested in farmlands but doesn t live on a farm Minimum wage price floor problem to be addressed poverty wage floor take out problems that come with low skills Poverty low pay unemployment federal law laborers must be paid more than 7 25 per hour President Obama has proposed raising the minimum wage to 10 10 per hour Minimum wage varies in different states Mayor De Blasio proposes for NYC to have its own minimum wage law Exemptions workers on small farms seasonal workers commission workers people who work inside homes nannies baby sitters housekeepers tipped employees Unskilled labor market not skilled looking for menial labor 3 labor markets unskilled covered labor market wage floor causing an excess labor supply and causes slight unemployment jobs can t decrease drastically gainers those who get jobs and are paid more losers those who lose or don t get jobs there are far more gainers so this is still a favorable policy the