ECON 224 1st EditionExam # 1 Study Guide Lectures: 1 - 12Intro to EconomicsLearning Objectives:1. Economics: the study of how people, institutions, and society make economic choices under conditions of scarcity. a. Scarcity- anything that is limited (ex. Money, natural resources, and time)2. Opportunity costs: the value of the good, service or time forgone to obtain something else (what you give up)3. Positive4. Compare/Contrast Micro and Macro Economicsa. Microeconomics: explores the decisions of the consumer worker or a businessb. Macroeconomics: concerned with the economy as a whole or major components of the economyi. States, nations and global Demand and Supply Part 11. Market: place of interaction between buyers and sellers a. Exchange goods and services for moneyb. Can be local, national, or international c. Face to face or online (EBay/Craigslist)d. Price of goods and services are determined in markets2. Demand: amount consumers are WILLING and ABLE to purchase at a given pricea. Willing: have to have a preferenceb. Able: can you afford it?3. Individual vs. Market Levela. Individual level: what you decideb. Market level: what does society decide (ex. Sardines price)c. Every time you spend a dollar you are voting for that product4. Law of Demand: Other things equal, as price falls, the quantity demand rises, and as the price rises the quantity demand fallsa. Others things equal assumption= when price changes everything else in your life and economy stay constanti. Preferences stay the same- always willing or unwilling to purchaseii. Income remains the sameb. Quantity demand and price are inversely related5. Price Elasticity of Demand: Measure how responsive to price changes are the buyers a. Shows the slope of the demand curve b. Test score sale example: Teacher is willing to sell 100 test score for the first test but each person only needs one. Did not matter how low of theprice on the test score because there is no reason for people to buy more than one.c. Price sensitive= small change in price change can lead to a large change indemand (pottery barn example) elastic demand6. Elastic vs. Inelastic Demanda. Elastic Demand= in the price sensitive group for their marketb. Inelastic Demand= consumers do not change demand or change their demand only slightly for large changes in pricei. Gas, insulin= need it regardless of priceii. Insensitive to price changec. The more substitutes an item has the more elastic demand- we can change our behavior d. The more specific the market, the greater the elasticity (blue jeans are more elastic than clothing)e. EXAMPLES: i. Laundry detergent vs. laundry machine1. Laundry machine= more elastic2. Affects income= higher percent of income the more elastic the demand. People will continue to use old machines or go to the laundry mat if the price of machines doubles, difficult to find the funds to purchase the goods. ii. Groceries vs. meals at a restaurant 1. Meal at a restaurant more elastic2. Luxury items= elastic demandiii. Gas price doubles tomorrow vs. 3 years from now1. Doubles tomorrow is more elastic2. No time to prepare. The more time available to change behavior the less elasticf. Extreme cases= demand at $0 same as demand $100i. Ex. Insuling. Steeper the slope= inelastici. Hint= looks like an I h. Flatter the slope= elastici. Elastic= when a business decrease prices (offers a sale) they have the ability to increase profiti. Price went down demand increased profit increasedii. People are more willing to buy things they want but don’t really need when the price is cheaper therefore lowering the price increases the number of customersj. When product has inelastic demand, lowering the price decreases profit i. People need the product so no matter what the price is they will still buy it, therefore the number of customers stays the same so lowering the price lowers the profit7. Supplya. The amount suppliers are WILLING and ABLE to sell at a given pricei. Willing- ex. CVS no longer is willing to sell cigarettes no matter he priceb. Can be depicted as a schedule or curvec. When sellers like high prices= upwards sloping curved. When prices get too low may still have the ability but become unwillingi. Ex. I Love Lucy burger clipe. Law of Supply: Other things equal, as price falls, the quantity supplied falls, and as the price rises the quantity supplied increasesi. When you pay less the quality of work lessensii. People will work harder at a job that pays $20 per hour than a job that pays $5 per houriii. Same as the law of demand only difference is in law of supply price and quantity are directly related1. Law of demand= inverse2. Law of supply= same directionf. Price Elasticity of Supplyi. Measures sellers’ responsiveness to price changesii. Elastic supply= producers are responsive to price changes1. Huge change in quantity supply with small change in price changesiii. Inelastic supply= producers are not responsive to price changesiv. Time is the most important determinant1. Immediate (Market period)2. Short Run- hire more workers3. Long run- bigger changes= can hire new workers/build a factoryv. When thinking about supply elasticity consider how easy it is for them to change the amount they are selling1. Antiques- no matter the price range we can not create morea. Supply can never increaseg. Market Equilibriumi. Equilibrium occurs where the supply curve and demand curve intersect ii. Fluctuate until buyers and sellers meet at equilibriumiii. Equilibrium Price (P*)= the price where the supply and demand curves intersect1. At the equilibrium price the quantity demanded= quantity supplied iv. Equilibrium Quantity (Q*)= the quantity where the demand and supply curve intersectv. As price falls1. Quantity demand increases2. Quantity supply fallsvi. Surplus= stuff left over; seller willing to sell more than consumer iswilling to buy1. Price goes down but demand did not go upvii. Shortage= consumer demand is greater than the supplier is willingor able to supply1. Ex. Concert ticketsDemand and Supply: Part 2 (When the Market Changes)1. Changes in Supplya. A change in the cost of productioni. A change in resource priceii. A change in technology- usually lowers cost of productionb. A change in number of sellersi. Ex. CVS stopped selling cigarettesii. Shifts supply curve to the leftc. A change in the price of related goodsi. Bourbon and horse exampleii. A change in producer expectations2. Change in Quantity Supplieda. A change in supply