ECON 203 1st EditionExam # 1 Study Guide Lectures: 1 - 14Lecture 1 (August 22)Introduction to Economics-Economics is the study of choices made by people in the presence of scarcity. The choicespeople make given the circumstances they are in. -microeconomics focuses on specific units and transactions-macroeconomics focuses on the economy as a whole-economic models are simple, general, and useful. They assume people are rational and self-interestedLecture 2 (September 9) -positive statements are statements of fact, of what is, or what would occur if somethingelse were to happen. They must be true or false. -normative statements state what should be. They can’t be true or false-fallacy of composition- occurs when something that may be good for one person is considered good for everyone-post-hoc fallacy- occurs when it is assumed that since event A happened before event B,A caused B. It is important to avoid assuming causality just because a sequence has beennoticed.-other conditions fallacy- assuming that since two events happened together in the past,that they will always occur together in the future.-misleading comparison- comparisons that are made that do not reflect the true differences between the goods. This is mostly made because people forget to account for adjustments of circumstances. -scarcity-limited resources with limited demands. Every choice made incurs a cost, whether it be money or time-scarce goods- any good that has a higher demand than is available-opportunity cost-the highest cost a person is willing to pay for a good-consumer demand-Total use value(TV)-the value each individual person puts on a good.The amount they are willing to trade to receive the good- marginal use value(MV)- the highest price a consumer will see and still be willing to pay for a goodLecture 3-consumer demand(cont.)- principle of diminishing marginal value- as consumption increases, additional units will generate less value to the consumer than previous units. -marginal value decreases with quantity-decision rule- people will buy units until MV is equal to the market price. -demand curve-the relationship between price and quantity. -first law of demand- holding other relevant factors constant, as the price of good x increases, the number of units of the good desired decreases and vice versa. -ceteris paribus conditions-price of other goods -income of consumers (normal goods-demand increases as income increases. Inferior goods-demand decreases as income increases)-everything else that may alter the perception of valueLecture 4-anything that causes the consumer to see more value in a good than before will increase demand. Anything that causes the consumer to see less value in a good than before will decrease demand. - ceteris paribus condition of price of related goods:Substitute goods- when one good can take the place of anotherCompliment goods- when the price of one good affects the demand of another-ceteris paribus condition of all other factorsWeather, season, taste, preference, information, expectation of future prices-assert decision rule for supply- producers will not make units that cost more to make than what they collect in profitLecture 5-producer supply-marginal cost- the specific cost associated with a particular unit’s production-profit- total revenue- the total cost of production -principle of rising marginal cost- as production rates increase, additional units cost more to make than previous ones-first law of supply-holding all other relevant factors constant, the higher the price of a good, the greater the quantity supplied-ceteris paribus conditions for supply-input prices -technology-everything elseLecture 6Comparative static analysis-increase in demand- raise in income( for normal goods), decline in income( for inferior goods), raise in price of substitute good, decline in price of compliment good, anything else that causes you to perceive more value than before-decrease in demand-decline in income(for normal goods), increase in income(for inferior goods), decline in price of substitute good, incline in price of compliment good, anything else that will cause you to perceive less value than before-increase in supply- decline in input prices, technological innovations, anything else that lowers the per-unit production cost-decrease in supply- increase in input prices, technological regulation/degradation, anything else that raises the per-unit production costLecture 7Consumer/Producer Surplustotal value(TV)-what consumers receiveThe total use value of Q is shadedTotal Cost (TC)=Total Expenditures(TE)=Total Revenue(TR)TE- what consumers spentTR= P*Q*= what sellers receive by selling Q* unitsConsumer surplusConsumer surplus(CS)-the difference between what consumers receive and the value spentCS=TV-TR=TV-P*QThe higher the CS, the better off consumers areProducer surplusProducer Surplus(PS)=TR-TC= P*Q-TCThe higher the PS, the better off producers areGains from tradeGains from trade= CS+PSIt’s a measure of welfare of societyLecture 8Price Ceilingblue= consumer surplus (CS)red= producer surplus (PS)yellow= dead weight loss (Welfare loss) CS= TV-TE PS= TR-TC GFT= CS+PSPrice ceiling sets a maximum price of a good below the equilibrium priceDead Weight Loss- the gains from trade that would have been generated at equilibrium, but no longer exist due to controlled marketPrice FloorA price floor is a minimum price set by lawAs unit prices of labor become more expensive, technology will be utilized in order to make workers more productiveLecture 9A price floor creates a need for an allocating scheme in order for producers to decide how/which consumers will receive the goodsociety is worse off with DWLconsumers are also worse off Lecture 10ElasticityElasticity of demand:-the level of responsiveness. How one condition changes in response to the change of another condition-Ed=(%∆Qdx)/(%∆Px)-Ed is unitless-Ed=0, perfectly inelastic-whatever the price change, and no matter the size of the price change, the Qd will not change. A violation of the first law of demand. -Ed is between 0 and -1, relatively inelastic- the percentage of price change is larger in size than the Qd. Goods and services in this area tend to have no substitutes. Consumersmay change behavior, but not by much. Lecture 11Elasticity(cont.)-Ed=-1, unit elastic- change in price and change in quantity demanded are equal in magnitude. Very rare in the real market.-Ed is between -1 and infinity, relatively