ECN Exam 1 - Study guide for Exam 1 in ECN... covers Chapters 1,3,4,5 PDF

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Study guide for Exam 1 in ECN... covers Chapters 1,3,4,5...

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ECONOMICS EXAM Chapter 1 → Big Ideas 1: Incentives Matter 2: Good Institutions Align… Self-Interest with Social Interest • when markets aren’t working well, institutions can alter/ change incentives 3: Trade-offs are Everywhere • opportunity cost → the cost of what you could've had instead 4: Thinking on Margin • a little more or a little less 5: The Power of Trade • benefit of trade = increases production through speculation • division of knowledge = greater total sum • Theory of Comparative Advantage → when people specialize in goods in which they have a low opportunity cost… they trade to mutual advantage 6: The Importance of Wealth and Economic Growth • economic growth → creates wealth → enables richer/happier lives 7: Institutions Matter • the right institutions → foster growth by providing incentives 8: Economic Booms/Busts = can NOT be Avoided, CAN be Moderated • economies don’t grow at constant rate, rather booms and busts • gov. can use fiscal and monetary policy can reduce these swings 9: Prices Rise Too Much…. When Gov Makes Too Much Money • money value declines when too much is printed, causes inflation (some inflation is ok) 10: Central Banking is a Hard Job • demand for money supply (must) = how much printed ___________________________________________________________ Chapter 3 → Supply and Demand Demand → actual curve Qd → # of something demanded at specific price Demand curve: ***when demand curve cross vertical axis = maximum willingness to pay*** +negative slope +increase = shift right +movement → ONE reason = change in $ of good (same line, different point) +shift → MANY reason = demand shifters

Shifters → income, population, price of substitutes, price of compliments, expectations, tastes Normal good → benefits when income rises Inferior good → benefits when income declines ---------------------------------Supply → actual curve Qs → at specific price how much is supplied Supply curve: ***supply has upward slope because… when prices rise it is more profitable for producer to use more expenses to produce***? Shifters → technological invocations, tax and subsidies, expectations (sellers who expect prices to rise will sell less), entry/exit of producers, change in opportunity costs ***tax increases supply, subsidy decrease supply Law of Supply → as price rises, Qs rises Consumer Surplus → from demand curve, {max willingness to pay - what was paid} Producer Surplus → from supply curve, {price sold - min willingness to sell} ____________________________________________________________________ Chapter 4 → Equilibrium Equilibrium → Qd = Qs Shortage → Qd > Qs ….. prices rise Surplus → Qd < Qs ……prices fall +the closer to equilibrium = the more stable +eq. changes from supply/demand shifts +Gains from Trade (i.e. producer +consumer surp.) = maximized at eq. 3 Conditions imply gains are maximized…. -goods are bought by buyers with highest willingness to pay -goods are sold by sellers with lowest costs -between buyers and sellers no… unexploited gains or wasteful trades {unexploited gains = i.e. when you have a supply LOWER than Qd} {wasted resources = i.e. your supply is HIGHER than Qd} +free markets always go back to eq. (aka without price ceilings and floors) _____________________________________________________________________ Chapter 5 → Elasticity +Elasticity quantifies how changes in supply and demand will effect prices and quantities

+flatter = more elastic +elasticity = unit-free measure

Determinants of elasticity:

Formula → %changeQ(s or d) / %change price %change → change / average >1 = elastic...