ECON 102 1st Edition Exam 1 Study Guide Lectures 1 11 Lecture 1 August 21 Intro to ECON 102 Key Terms Economies Economy Market Economy Invisible Hand Microeconomics Market Failure Recession Macroeconomics Economic Growth Types of Economies o Market Economy Used by USA UK Other leading economies o Mixed Economy Prominent during the Cold War Era o Command Economy Decisions made by Central Planner Communist Eg Cuba First Principles Individual Choice is the decision by an individual of what to do which necessarily involves a decision of what not to do Basic Principles 1 Resources are scarce 2 The real cost of something is what you must give up to get it 3 How much is a decision at the margin 4 People usually take advantage of opportunities to make themselves better off Lecture 2 August 23 Principles of Individual Choice Key Terms Specialization Interaction Choices Principles of Interaction among individual choices Continued from Basic Principles 5 There Are Gains from Trade 6 Market Moves toward Equilibrium 7 Resources Used as Efficiently as Possible 8 Markets Usually Lead to Efficiency 9 Government Intervention can improve Welfare How markets fail Individual actions have side effects not taken into account by the market externalities One party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources for itself Some good cannot be efficiently managed by markets o Eg Freeways in Los Angeles Principles the underlying economy wide interactions 10 One person s spending is another person s income 11 Overall spending sometimes gets out of line with the economy s productive capacity 12 Government policies can change spending Lecture 3 August 26 Simplified Representations of Reality Key Terms Model Simple Assets Complex Assets MBS Feasible Production Possibility Frontier o Illustrates the trade offs facing an economy that produces only two goods o Shows the maximum quantity of one good that can be produced for any given production of the other good o Linear Production Possibility Frontier Constant Cost o 2 x 2 Model 2 open economies and 2 goods Linear PPF Lecture 4 August 28 Models Positive and Negative Economics Key Terms Bartering Household Firm Positive Economics Normative Economics Forecast Circle Flow Diagram This model represents the transactions in the economy by flows around a circle Using Models Economists can determine correct answers for positive questions but typically not for normative questions which involve value judgments The exceptions are when policies designed to achieve a certain prescription can be clearly ranked in terms of efficiency It is important to understand that economists don t use complex models to show how clever they are but rather because they are not clever enough to analyze the real world as it is Don t Confuse Comparative Advantage with Absolute Advantage Lecture 5 August 30 Competitive Market and Law of Demand Key Terms Demand Schedules Demand Curve Substitutes Complements Normal Goods Inferior Goods Competitive Market Many buyers and sellers Same goods or services Demand schedule Shows how much a specific good or service consumers will want to buy at different prices Laws of Demand As Price rises Quantity drops As Price drops Quantity rises Other things remain constant o Prices of related goods o Incomes o Tastes and preferences o Changes in expectations Demand Curve A graphical representation of the law of demand it slopes downward Movement along the demand curve o A change in price is represented by movements along the demand curve o Demand is still the same but the quantity demanded changes as the price changes Shifts in demand curve o A shift of the demand curve will occur either to the right or left when anything other than the price of the good has changed o These factors do not show what is happening on the curve Lecture 6 September 4 Demand Functions and Supply Curves Key Terms Supply Schedule Supply Curve Input Equilibrium Equilibrium Price Demand Function Q F P I T E P C Shift Variables o o o o o o o Q Quantity demanded of x P Price of x I Income Normal Inferior T Tastes and Preferences E Expectations P Price of related goods Substitutes Compliments gas automobile C Number of Consumers Supply Function Q F P P T N E P Equilibrium Price Q Equilibrium Quantity Q Q most cleaning conditions Q Q Excess Supply SS Q Q Excess Demand DD Lecture 7 September 6 Market Responses and Outcomes How a Market responds to a change in demand o An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity How a Market responds to a change in supply o An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity Prediction of Outcome when supply and demand curves shift in opposite directions o When demand increases and supply decreases the equilibrium price rises but the change in the equilibrium quantity is ambiguous o When demand decreases and supply increases the equilibrium price falls but the change in the equilibrium quantity is ambiguous Prediction of Outcome when supply and demand curves shift in similar directions o When both demand and supply increase the equilibrium quantity rises but the change in equilibrium price is ambiguous o When both demand and supply decrease the equilibrium quantity falls but the change in equilibrium price is ambiguous Lecture 8 September 9 Intervention in Efficient Markets Key Terms Price Ceiling Price Floor Quantity Ceiling Quantity Floor Price Controls Price Ceiling o Designed to help buyers protect them o Ceiling should be below equilibrium price o Rent control set a maximum rent that can be charged per unit of housing Inefficiencies of rent control 1 Quantity transaction is lowered 2 Inefficiency and allocation 3 Lower quality lower standards 4 Wasteful resources 5 Black markets Price floor o Designed to help sellers o Government intervention in agricultural markets to assist farmers o Floor should be above equilibrium price Effects of price floor 1 Lower quantities 2 Waste of resources 3 Black markets 4 Inefficient allocation to sellers 5 Inefficient high quality Quantity Controls Quantity Ceiling o Designed to help sellers Quantity floor o Quantity floors are not very common because the government can t