ECON 203 Exam 1 Study Guide Lectures 1 6 Lecture 1 Economics is the study of rational decision making under restraints Scarce Resources Social Capital How much trust is there between employers and employees to maximize production Financial Capital What you use to trade for Goods what lets you purchase physical capital Physical Capital Tools that people use that help them increase production Human Capital The skills that individuals have that help them increase production Resource A source or supply from which benefit is produced Efficiency Society getting maximum benefit from its scarce resources Equality the distribution of benefits across society as a whole Ten Principles of Economics People face tradeoffs Making decisions requires trading off one goal against another Cost of something is what you give up to get it opportunity cost People think at the margin rational people make decisions by comparing marginal benefits vs marginal costs People respond to incentives variables positive or negative that cause people to act Trade can make everyone better off Trade allows each person to specialize in what they do best and to enjoy a greater variety of goods and services Markets are usually a good way to organize economic activity market economies allocate resources through the decisions of many households and firms they act as if invisible hand guides them to desirable market outcomes Government can sometimes improve market outcome enforce property rights individuals can own and control scarce resources government can intervene to promote efficiency and equality as well as to stop market failure A Countries standard of living depends on its ability to produce goods and services Price rises when the government prints too much money inflation Society faces a short run trade off between inflation and unemployment printing more money causes income demand to increase causing prices and hiring to increase Lecture 2 The Main Economic Problem is resource Scarcity Resources depend on the time and technology what is useful to society Command Control Communism A Central Government Authority decides how to allocate resources for a certain production level point on the PPC and then pass that down to the companies to produce that point no more no less In this way of thinking it s supposed to establish unified production for the good of the people Pure Free Market Economics Pure Capitalism The Market spontaneously organizes itself letting the laws of supply and demand dictate production levels in order to produce a functioning economy One of the main tools Economists use to show Production Possibility Curve PPC This shows all conceivable combinations of how to allocate resources when narrowed down to two goods to produce This graph shows what happens in the SHORT RUN Points on the curved line B C D show all conceivable combinations of resources IF the economy is running at MAXIMUM efficiency Points inside of the line A show all combinations of resources IF the economy is running at LESS than maximum efficiency Points outside the curved line X are UNATTAINABLE since it is running at more than max effieciency Economic Growth is shown when the Curved line moves OUTWARD into PREVIOUSLY UNATTAINABLE area Lecture 3 Ideologies help economists choose a feasible combination of goods and allocation of resources to achieve the desired level of production Ideologies can produce different economies production levels with the same options Economies use their Markets as an Organizing Factor Monopoly One seller with many buyers monopolies completely control the market for a good can increase or decrease price without constraints other sellers Competitive markets Many sellers and many buyers Competitive markets abide by the laws of supply and demand since competition keeps prices similar if one seller decides to increase price buyers will go elsewhere forcing seller to lower price Demand factor In Economies the quantity demand for a good is inverse to the price the HIGHER the price LESS people will buy the LOWER the price the MORE people will buy Lecture 4 Economists assume things to help them analyze certain factors and variables they ignore other factors in order to focus on the variable they want to look at in class we looked at things through a Perfectly Competitive Market Markets provide a way to allow people with different goals and views to reach an assignment to benefit both parties Demand is your desire wish for a product backed up by money Financial Capital Elasticity Equation Q E P Q 2 Q 1 E P 2 P 1 If E is more than absolute value of 1 it is elastic If E is less than absolute value of 1 it is inelastic If E is equal to absolute value of 1 it is unitary elastic Perfectly Competitive Market Simplified Market many buyers and sellers so that everyone follows the law of supply and demand sellers can only sell at Market Price buyers can only buy at market price price takers No Special deals Demand Curve Plotting the Demand Schedule on an axis line graph using points from the Demand Schedule Market Demand The sum of all consumers at a certain price Elasticity Markets Responsiveness to any stimulus Economists term for responsiveness Shift variables are other factors that affect the outward or inward shifting of the demand curve Income if you have more income you buy more goods at all prices outward shift if you have less goods you buy less goods at all prices inward shift Tastes Desires If you like something you will buy more of it outward shift if you don t like something you will buy less or none at all inward shift Prices of Related goods Substitute and Complementary 1 Substitute goods Goods that can act as a replacement for one another hamburgers hot dogs if the price for one of these goes up then the consumption tends to go down while the consumption for the substitute good tends to go up 2 Complementary Goods Goods that are generally used together cereal milk if the price for one of these goes up then the consumption for that good and its complementary good tends to go down Expectations if people expect one thing to happen they may react a certain way by consuming more of one good and less of another or consuming more or less in general If you expect to have more income than you might buy more goods at higher prices Demand Curve for James Coffee 12 10 Price 8 Column2 6 4 2 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 Quantity Demanded Demand Curve Plotting the Demand Schedule on an axis line graph