ECON 251 1nd EditionExam # 1 Study Guide Lectures: 1 - 10Lecture 1 (August 20)Terms:Economics: the study of rational human behavior under scarcity.Scarcity: when the resources available cannot cover the needs.Because of scarcity, people must make decisions on how to use the available resources.Lecture 2 (August 22) Terms:Normative: judgment kind of analysisPositive: factual kind of analysisOpportunity Cost: value of the best alternativeSunk Cost: irreversible cost; example: depreciationExplicit Cost: monetary costImplicit Cost: example: lost wages, time (relevant costs that you don’t specifically spend money onMarginal Benefit: benefit of an additional unit (MB)Marginal Cost: cost of an additional unit (MC)Absolute Advantage: a person/group of people who produce a product (or service) fasteror in a larger quantity under the same circumstancesComparative Advantage: produce at the lowest costNote: you cannot include sunk costs as part of rational economic decisions.Marginal Benefit and Marginal Cost:Rules of Comparative Advantage:1. If one person (or group of people) has comparative advantage in one task, the other person MUST have comparative advantage in the other task.2. No one can have comparative advantage in everything (even if they have the absolute advantage in everything).Lecture 3 (August 27) Terms:Production Possibilities Frontier (PPF): graph of the maximum output that can be producedPoint of specialization: point in which one person is doing all of one taskInefficient: points below the PPFUnattainable: points above the PPFEfficient: points on the PPFProduction Efficiency: producing a combination of goods as cheaply as possibleAllocative Efficiency: resources are used where they are most highly valuedDemand: maximum quantity a consumer is willing and able to purchase at various prices Law of Demand: inverse relationship between price and quantity demandCharacteristics of Individual PPFs:1. Always has a negative slope (something always has to be given up)2. The magnitude of the slope reflects the marginal cost (MC) of “x”, with “x” being the product.Characteristics of Economy-Wide PPF:1. Negative slope2. Magnitude of slope reflects MC of “x”3. Slopes gets steeper as “x” increases (unless both people have the same costs). MC rises as “x” risesShifts are any change in level of resources or productivity of resources such as:- Increase in natural resources- Increase in labor- Increase in capital- Increase in entrepreneurship- Increase in technologyLecture 4 (August 29) Terms:Normal Goods: goods where the demand rises when income rises and visa-versaInferior Goods: goods where the demand rises when income fallsSubstitutes in Consumption: goods that are used in place of one anotherComplements in Consumption: goods that are used in combination with each otherSubstitutes in Production: goods that can be produced with the same resourcesComplements in Production: goods that are produced together (by-products)Surplus: when there is more quantity supplied than the quantity demandedShortage: when there is more quantity demanded than the quantity suppliedEquilibrium: when the quantity demanded equals the quantity suppliedSupply: the maximum quantity a seller is willing and able to sell at various pricesLaw of Supply: the positive relationship between price and quantity suppliedQs: Quantity suppliedIncrease in Demand = Shifts the curve to the right- More quantity for a particular price- Different than an increase in quantity when the price decreasesDecrease in Demand= Shifts the curve to the leftFactors that Change Demand1. Income2. Change in prices of “related goods”3. Chang in expectations4. Change in the number of buyers5. Tastes and preferencesAn increase in supply shifts the supply curve to the right.A decrease in supply shifts the supply curve to the left.Changes in Supply1. Change in input prices2. Change in prices of “related goods” in production3. Changes in expectations4. Change in the number of sellers5. Change in technologySupply and Demand together:Lecture 5 (September 3) Terms:Elasticity: “responsiveness”Price Elasticity of Demand: ƐdChanges in EquilibriumDemand increase (shift right)- Q increases even though P also increased because the demand shifted (due to the increased income)- P rises because D increased- Consumers want to buy the amount of Q3 but at the price of P*- But because the P rose, consumers back off to Q’Decrease in the supply (shifts left)A decrease in supply causes an increase in the price and a decrease in the quantityAn increase in supply causes a decrease in price and an increase in quantityDO NOT GRAPH BOTH THE DEMAND AND THE SUPPLY SHIFT ON THE SAME GRAPHExample: the market for calculatorsA decrease in the cost of producing calculators: an increase in supply and an increase in demandInc S = dec P* + inc Q*Inc D = inc P* + inc Q*P is indeterminateWe know that prices have fallen, therefore we can conclude that:Inc S > Inc DPrice elasticity to demand: the responsiveness of consumers to a change in price.Less response = “less elastic D” More response = “more elastic D”|(% ∆Qd% ∆ P)| = price elasticity of demand = Ɛd(absolute value)The Ranges of Ɛd1. Ɛd > 1 = Demand is elastic2. Ɛd < 1= Demand is inelastic3. Ɛd = 1= Demand is unit elasticDeterminates of Ɛd1. Availability of substitutes for products2. Portion of budget/income required to purchase3. TimeƐd = abs(∆ Qdavg Qd∆ Pavg P) = ∆ Qd∆ P*avg Pavg QdLecture 6 (September 5) What is Ɛd? When:Qd = 1/2P + 6(P = -2Qd + 12)P $2 (change) $4Qd 5  4Ɛd = 19 /22/3 = 2 /92/3= 1/3 D is inelastic because 1/3 < 1- What if Ɛd > 1? abs(%ΔQd) > abs(%ΔP)o An increase in price  decrease in Qd is “big” Decrease in revenueo A decrease in price  increase in Qd is “big” Increase in revenueo Revenue follows Qd- What if Ɛd < 1? abs(%ΔQd) < abs(%ΔP)o An increase in price  decrease in Qd is “small” Increase in revenueo A decrease in price  increase in Qd is “small” Decrease in revenueo Revenue follows P - What if Ɛd = 1? revenue is maximized bo Because abs(% ∆Qd% ∆ P) = Ɛd = 1Other Elasticities- Income elasticity = % ∆Qd% ∆ Income > 0- Cross-Price Elasticity (also called Cross Elasticity) = % ∆Qdx% ∆ Py- Price Elastic of Supply = % ∆Qs% ∆ Po Three Ranges:1. Ɛs > 1  Supply is elastic2. Ɛs < 1  S is inelastic3. Ɛs = 1  S is unit elasticDeterminates