ECO - EXAM 1 Cheat Sheet - Lecture notes 1-5 PDF

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Summary

This are the lecture notes hightlighted and condensed to be used as a studyguide cheat sheet for exam 1. This exam was the hardest. The vocab on this was on the exam exactly.

DR.M...

Description

Economics — The study of how society chooses to manage its scare resources to satisfy ! !

its wants.!

Economy — A type of organization that produces goods and services and then allocates good and services to its members. ! !

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Oikonomia’”—Meaning household management!

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We have mostly “mixed systems” in todays modern society!

The two key questions every economy must answer! #1. What are we going to make with our resources?! #2. Once we’ve made something how of we decide who gets to enjoy it?! Scarcity— Means that we don’t have the resources necessary to fulfill all of our wants.! Trade-offs and Opportunity Costs— Because of scarcity we have to make choices about which desires to satisfy and which to leave unfulfilled! Opportunity Costs— What must be sacrificed to obtain something else. ! !

Economists avoid measuring opportunity costs scarcity in terms of money!

Explicit— Costs measured in dollars and typically involves exchange in money! Implicit— Costs do NOT involve money difficult to measure but still important ! Public Policy— The collection of laws regularity measures and actions centering around a particular topic that originates with some body of government! Incentives— Inducements to act in certain ways! !

Makes some options appear more attractive and other less so…!

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People may be convinced to act in ways that they ordinarily wouldn’t!

Collective Action Problem— When naturally occurring incentives encourage sufficient numbers of people to act in a way that makes everybody worse off.! The problem is that no individual has any incentive to act in the best interests of the group.! Positive Economics— A description of a current state, it can be proved or disproved….”the way things are” ! Normative Economics— An option of what a state should be; It can neither be proved nor disproved! Benevolent Social Planner! A hypothetical economic figure! !

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She takes a birds eye view of our affairs!

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Considers everybody equally!

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Philosophically rejects any policy that makes someone richer at the greater expense of someone else!

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Is a positive economist, one that we will look to often when we evaluate the origins of and solutions to social problems. !

The Supply and Demand Model! Assumptions of the model ! #1. There are many buyers and sellers participating in the market such that competition among them limits the power of both buyers and sellers! #2. The goods offered for sale are identical, thus sellers compete only on the basis of price! #3. All buyer and al sellers have perfect information about the market! The Law of Demand— The inverse relationship between the price of a good or derive and the quantity of that good or derive that consumer want to buy.! The Demand Curve— A curve that shows how many units of a good or service consumers are willing to buy at various prices! !

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As price decreases any given buyer might purchase more.!

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The demand curve plots the quantity consumers want to buy at various prices. As the price of a good or service increases

the quantity demand decreases.! The Law of Supply— The positive relationship between the price of a good or service and the quantity of that food or service that sellers are willing to offer for sale.! !

—When the price of a good rises, there is an increase in quantity supplied, and when the price of a good falls, there is a

decrease in quantity supplied ! !

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-Price goes up supply goes up. !

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-Price goes down, supply goes down!

Supply Curve— A curve that incited how many units of a good or service sellers are willing to offer for sale at various prices! !

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-Occurs because some producers are more efficient than others.!

Market Equilibrium— A condition in a market where there is no upward or downward pressure on price, and where quantity demand earls quantity supplied.! Shortage— A condition in which the quantity of a good or serve demand at the existing price is greater than the quantity supplies! Surplus— A condition in which the quantity of a good or service supplies at the existing price is greater than the quantity demand.! Change in Demand! Increase in Demand— A condition in which buyers increase the number of units of a good or service they are willing to purchase at each price.! !

One point to another….Quantity Demand!

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Shifting the Line……Demand Changes! !

Change in Supply ! Increase in Supply— A condition in which sellers increase the number of units of a good or service they are willing to produce at each price.! Substitutes— Goods that can serve in place of one another! Normal Goods— A good than consumers buy more of as their incomes rise! Inferior Goods— A good that consumers buy less of as their incomes rise! Price of Inputs— Resources that are used in the production of a good or service! Technology— The efficiency with which firms convert inputs into outputs! Price of Substitutes in Production— Different goods that can be produced with the same inputs.! Price elasticity of demand— The sensitivity of consumers buying behaviors to changes in prices, ! Elastic— The percentage change in quantity is larger than the percentage change in price! Inelastic— The percentage change in quantity is smaller than the percentage change in price! Unitary Elastic— The percentage change in quantity is equal to the percentage change in price! Extreme ElasticitY! Perfectly Inelastic— When price changes have no effect on the quantity demand ! Perfectly Elastic— When any price increase eliminates quantity demand ! Relationship between Slope and Elasticity! !

-Specifically, at a given price level Elasticity is greater the flatter the curve!

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-On a linear ( a straight line) curve Elasticity is greater at a higher price!

Positive slope = supply! Negative slope = demand! !

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-If demand is inelastic, reducing supply will only drive up prices !

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-However if demand is elastic, reducing supply will decrease demand!

Number of and Closeness of Substitutes— The more substitutes there are a for a good, the less likely you are to pay higher prices for it and the more likely you will choose a substitute.! Time— The longer you have to purchase a good the more likely you will wait longer to purchase that good.! Percent of Budget— The more of your budget a good consumes, the more likely you will settle for something else instead ! 2.1 Cost Benefit Analysis! Cost Benefit Analysis — A method decision makers use to evaluate choices amountg competing alternatives

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Marginal Costs— The additional costs you expect to incur if you undertake an activity ! Marginal Benefit— The additional benefit you expect to receive if you undertake an activity! Marginal Analysis— Arriving at a decision by comparing marginal costs and marginal benefits! Estimating the Value of Life! Cost Justified Precaution— A safety measurer whose benefits outweighs its costs! The lost income approach— Estimating the value of an injured or deceased person’s life by adding up that persons lost future earnings.! Compensating Differential— The extra pay people earn in exchange for undertaking risky or otherwise undesirable work! Calculating the Value of Life!

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3.1 What is Game Theory ! Game Theory— A method of analyzing the strategic interactions that occurs between number of people, firms organizations and even counties! Strategic Interactions— Anticipating the decisions others will make in response to your decisions! Mutual interdependence— The characteristics of games whereby the outcome of the game depends not only of what you do but on what the other player do in response ! Economic Model ! Economic Model — A strutted and simplified version of reality used to explain real world behavior! Player — A rational entity with preferences ! Strategy— a predetermined set of actions to take in response to other players actions! Information — Amount of knowledge about the stately and actions of the game! Preferences— Desired outcomes of a game by a player! Playoff— The utility received from and outcome ! Equilibrium—The wsolution to a game! Nash Equilibrium— An outcome where both players are plating their best strategy, given the strategy chosen by the opponent! Cell by Cell inspection— Examines each possible outcome (cell) of the game and determine if its a Nash Equilibrium! Dominant Strategy— One row/ cells outcomes dominate the others! Prisoners Dilemma— A game in which each player has a dominant stately of defecting and each ends up worse off than if they had both cooperated! Pure Coordination— Where it only matters that player coordinate on an outcome, not on which outcome they coordinate! Battle of the Sexs— A game in which both player want to coronet but each player prefers coordination on a different outcome.! Tough Strategy— A Strategy that pursues the players preferred Nash equilibrium! Weak Strategy— A Strategy that leads to a non preferred Nash equilibrium! Games of Chicken— A version of the battle of the sexes game that results in disaster if each player plays his or her tough strategy! !

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Neither player has dominate strategy………The coordinate or they fail!

! Chapter 1 Quiz Answers! You purchase a new backpack for $75. The cash you sacrificed is a(n) ________.! > Explicit Cost! The U.S. tax code allows homeowners to deduct the interest they pay on their home loans from their taxable incomes. What effect is this policy likely to have on the size of the average home! > The size of the average home is likely to be larger under this policy.! Which of the following is not a fundamental question that every economy has to answer?! > Why are some people rich and other people poor?! Your philosophy professor always grades exams on a curve, so that the top score in class becomes an A. The morning of a big exam, one of your classmates makes the following suggestion to the class: "Let's all leave our papers blank. That way, even though we'll all get zeros, everyone will get an A.” Is this to work?! > No, although everybody has agreed to the plan, individuals will have an incentive to answer the exam.! Your instructor takes $1 each from 10 of your classmates and gives all $10 to you. Generally speaking, the benevolent social planner! > Neither approves nor disapproves of this transaction! Chapter 2 Quiz Answers! A lawnmower manufacturer estimates that the probability of a fatal accident caused by the design of its product is 1/10,000 and that the value of a life lost is $1 million. The manufacturer can change the design to eliminate that chance for $8080 per mower and stands ready to incorporate all cost-justified precautions.! > The total cost of changing the design per 10,000 mowers is $800000! > Will the manufacturer change the design? YES! > What would the benevolent social planner think about the manufacturer's decision if the true probability of a fatal accident is not 1/10,000 but 1/1515,000?! Given the "true" probability of an accident and the value of a life of $1 million, what is the expected cost of NOT implementing the design change per 10,000 mowers is $666667! > Would the benevolent social planner agree with the manufacturer's decision? NO! A ladder manufacturer can make a ladder more stable by adding wider feet to the product. Adding wider feet costs $6 per ladder. The manufacturer estimates that this will prevent 4 injury-causing falls for every 1,000 ladders sold and that, on average, each injury causes $1,800 of harm.! > The manufacturer should add the wider feet because they are cost-justified! Cost-benefit analysis is a tool that is used! > By individuals, businesses, and governments! When determining the value of human life in wrongful death suits, the courts generally use the! > Lost Income Method! "There is no difference between you driving your car on public streets and Ford selling a product that it knows will sometimes explode."! > Is this statement true or false? TRUE! > What unmentioned factor might your answer depend on? EVALUATING COSTS & BENEFITS! Chapter 3 Quiz Answers! THE PAYOFF MATRIX summarizes the players, their strategies, and the results of their choices in a compact table.! The only game archetype you studied in which players have dominant strategies is the PRISONER”S DILEMMA game.! You and your significant other are trying to decide what movie to watch on Friday night. You like action; your significant other likes comedy. But most of all, you both like to be together. If you choose an actionmovie, there is the possibility that your significant other will get bored and leave. If you choose a comedy, there is the possibility that you will get bored and fall asleep.!

Which of these best describes the process by which you arrive at a decision? > Strategic interaction...