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ECON 1113: FINAL EXAM
economics |
the study of how people, individually and collectively, manage resources
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microeconomics |
the study of how individuals and firms manage resources
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macroeconomics |
the study of the economy on a regional,national, and international scale
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rational behavior |
making choices to achieve goals in the most effective way possible
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scarcity |
the condition of wanting more than we can get with available resources
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opportunity costs |
the value of what you have to give up in order to get something; the value of your next best alternative
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marginal decision making |
comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
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sunk costs |
cost that have already been incurred and can not be recovered or refunded
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incentive |
something that causes people to behave a certain way by changing the trade-offs they face
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efficiency |
uses the resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
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model |
a simplified representation of the important parts of a complicated situtation
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circular flow model |
a simplified representation of how the economy's transactions work together
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positive statement |
the factual claim about how the world actually works
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normative statement |
a claim about how the world should be
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Production Possibility Frontier (PPF) |
a line or curve that shows all the possible combinations of two outputs that can be produced using ALL available resources (model analyses who produces which good)
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Invisible hand |
production does not have to be organized by one central planner
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trade-off |
between producing more of one good and less of another is the opportunity cost
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Production Possibility Frontier (PPF) points |
-point inside of curve : not efficient, not using all resources. no opportunity cost
-point outside of curve : not attainable
-point on the curve : efficient. producing more but giving up more of another
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Productivity |
how much of a good can be made
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absolute advantage |
when a producer has a higher productivity for a good
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comparative advantage |
the ability to produce a good or service at a lower opportunity cost then others
(someone always has a comparative advantage)
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Gains from trade |
the improvement in outcomes that occurs when producers specialize and exchange goods and services
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specialization |
spending all of your time producing a particular good
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WITH Trade |
consumption possibilities increase (good)
-By opening up to trade gains more than it could on its own PPF
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without trade |
consumption = production (bad)
-if a country does not specialize and trade its production and consumption are both limited to point along its PPF. By specializing and achieving gain from trading.
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market |
buyers and sellers who trade a particular good or service
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competitive market |
a market which is fully informed, price-taking buyers are sellers easily trade a standardized good or services
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standardized good |
a good in which two units have the same features and are interchangeable (all goods are the same)
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transaction costs |
the costs incurred by a buyer and seller in agreeing to and executing a sale of goods and services (no costs participate)
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price taker |
a buyer or seller who CANNOT affect the market price
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Quantity demanded |
the amount of particular good that buyers will purchase at a given price during a specified period
--Must be willing and able to buy and afford it !
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Law of Demand |
All else equal,
Quantity demanded RISES as Price FALLS
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Demand curve |
shows the relationship between Price and Quantity demanded, holding all else constant
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NON-price determinants of demand
(theres 5) |
1. PREFERENCES : as preference increases, demand decreases (d-curve shifts to right)
2. INCOME : more income equals more willing to spend on some goods
3. PRICE OF RELATED GOODS : a change in price of one good can effect demand on another good
4. NUMBER OF BUYERS for a good
5. EXPECTATIONS : changes in consumer expectations of price preferences and effect demand
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substitute |
when you buy more of one, you buy less than another
redbull vs. coffee
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compliment |
goods used together
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-normal good:
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-income increases, demand increase
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What does not change the demand curve? |
price; it moves ALONG the curve
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Supply |
amount of a good or service producers offer at a given price
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Law of Supply |
Higher the price, the higher the quantity
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Non-price determents of Supply:
(5) |
1. TECHNOLOGY : influences cost of production. if price goes, cost goes up, shifts right
2. NUMBER OF PRODUCERS : more producers=more supply. less prod=less supply'
3. PRICE OF INPUTS
4. PRICE OF RELATED GOODS : price of another good effects the opportunity cost of the good you are producing
5. EXPECTATIONS of Market Price : suppliers expectations about future prices will affect the current supply
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inputs |
a good or service used to produce a good or service
"input cost decreases then production cost decreases then supply increases"
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market equilibrium |
where supply and demand intersect
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disequilibrium |
if the market price doesnt equal equilibrium then demand doesnt equal supply
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surplus (excess supply) |
a situation in which the quantity of a good that is supplied is higher than the quantity demanded
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CONSUMER surplus |
a net benefit that a consumer received from purchasing a good or service, measured by the difference between willingness to pay and the actual price
(consumers buying at a market price below willingness to pay creates value)*difference between demand curve and price
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shortage (excess demand) |
situation in which the quantity of a good that is demanded is higher than the quantity supplied
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PRODUCER surplus |
a net benefit that a producer receives from the scale of a good or service, measured by the difference between the producers willingness to pay and the actual price
--(selling at market price above willingness to create value)
*difference between market price and supply curve
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Total Market Surplus |
is the sum of consumer and producer surplus
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Dead Weight Loss |
loss of total surplus that results when the quantity of a good bought/sold is below market equalibrium
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price floor |
a minimum legal price at which a good can be sold
-quantity supplied and quantity demanded move in opposite directions
*protects producers income
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price ceiling |
a maximum legal price at which a good can be sold
-producers supply lower quantity
-consumers demand more quantity
*keeps cost low for consumers
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2 reasons for taxes? |
1. discourages consumption/production of a good
2. raise government revenue
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tax wedge |
difference between price paid by buyers and price receivers by seller
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Effects of tax paid by sellers |
**shift supply curve UP by amount of tax
1. Supply decreases
2. Demand stays the same
3. Equilibrium price rises, and quantity demanded falls
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Effects of tax - paid by Buyers |
**shift demand curve DOWN by amount of the tax
1. supply stays the same
2. demand increases
3. equilibrium price and Q both fall
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How to find effects of tax |
2 . Find seller and buyer prices
3. Find new equilibrium
4. Use tax wedge and new xnew *Q = tax revenue
5. look for what happens with consumer and producer surplus
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elasticity |
slope of supply/demand curve
-More Vertical = larger slope (Q less responsive to price changes)
-Horizontal = smaller slope= more elastic (Q more responsive to price)
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Profit |
=total revenue - total cost
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Total Revenue |
= quantity sold x price
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Total Cost |
amount a firm pays for inputs used to produce a good or service
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Firm's total Cost |
a firms total cost is the sum of fixed and variable costs
total cost= fixed cost + variable cost
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Fixed Cost |
+costs that don't depend on quantity produced by firms
-one time upfront cost
-are constant (does not change with Q. if firm produces nothing still incurs fixed cost)
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Variable Cost |
+depend on quantity produced
-total variable costs increase with production of addition units
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production function |
characterized the relationship between the quantity of inputs and quantity of outputs
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Marginal Product |
increase of output gained by one unit increase in inputs
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Marginal Revenue (MR) |
the additional revenue that will be generated by increasing product sales by one unit
MR= change in revenue/change in quantity
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Marginal Cost (MC) |
the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good *MC=change in total cost/change in quanity
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Characteristics of a Perfect Competitive market |
1. Full Information
2. Buyers/Sellers are price takers
3. Goods are Standardized
4. Firms can freely enter/ exit the market
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What can producers do in a PC Market? |
-producers may sell as much as they want without affecting price
-because firm is a small relative market size
-do not produce infinite quantity because of diminishing marginal product
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Where do firms produce? |
where profit is maximized
where Quantity*= (MR = MC)
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Marginal Cost Curve Production |
Produce where MC=ATC
-U-shaped.
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Short-run shut down rule? |
Produce if Price is higher than AVC .....P>AVC
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Long-run Shut down rule? |
Produce when Price > ATC
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Monopoly |
-many firms
-differentiated but similar products
*-about variety of products
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Monopolistic Competition in Short-run |
MR = MC
-set P where that Q is demanded
- Profit > 0
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Monopolistic comp. in Long-run |
-firm entry causes of substitutes
-existing firm demand shifts left
-entry continued until economic profit = 0
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Where to produce in monopoly? |
Set where P = ATC > MC
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Oligopoly |
-few firms
-some barriers to entry
-firms have significant market power
-individual firm price and quantity effect the market and other firms
*- all about number of firms
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Factors of Production |
Land
Labor
Capitol
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Demand for Labor |
Maximize profit where revenue generated by last worker equals MC of labor
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horizontal line at price level? |
represents marginal Revenue
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Labor Supply |
Choice between work and leisure
ex) wage increases, labor supply increases
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Gross Domestic Product (GDP) |
the sum of all market values of all final goods and services produced in a country
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Determinates of Demand |
-Determined by the value of the marginal product of labor
Three kinds:
1.Supply of other factors used in production process
2. Technology
3.Output prices
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Supply Determinates |
-Determined by the number of workers and their opportunity cost of providing labor
Three:
1. Culture
2.Population
3. Other opportunities
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GDP 4 Components to Measure |
1.Market Value
2.Final Goods and Services
3.Produced within Country
4.Given Period of time
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Gross National Product (GNP) |
an estimate of total value of all the final products and services produced in a given period by the means of production owned by a country's residents.
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Nominal GDP |
output valued at a current price
Formula: Q of a good in a given year x P in the same year
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Real GDP |
output valued at constant prices
Formula: Q of good x P in base year
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GDP Deflator |
measures overall change in prices in an economy; uses ratio of real and nominal GDP
Formula: GDP Deflator = (nominal/real) x 100
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