Econ - Elementary Econometrics chapter 2 PDF

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Elementary Econometrics
chapter 2...

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Chapter 2 PPF    

The PPF is the boundary between production levels that are attainable and not attainable when all the available resources are being used efficiently Production efficiency occurs at Points on the PPF Along the PPF the opportunity cost of production more of one good is the amount of the other good that must be given up The opportunity cost of all goods increases as the production of the good increases

Using Resources Efficiently     

Allocative efficiency occurs when goods and services are produced at the least possible costs and in the quantities that bring the greatest possible benefit The marginal cost of a good is the opportunity cost of producing one or more unit The marginal benefit from a good is the benefit received from consuming one more unit of it, measure by the willingness to pay for it The marginal benefit of a good decreases as the amount of the goods available increases Resources are used efficiently when the marginal cost of a good is equal to its marginal benefit

Economic Growth  

Economic growth, which is the expansion of production possibilities, results from capital accumulation and technological change The opportunity cost of economic growth is forgone current consumption

Gains from Trade   

A person has a comparative advantage in production a good in that person can produce the good at a lower opportunity cost than everyone else People gain by specializing in the activity in which they have a comparative advantage and trading with others Dynamic comparative advantage arises from learning by doing

Economic Coordination    

Firms coordinate a large amount of economic activity, but there is a limit to the efficient size of a firm Markets coordinate the economic choices of people and firms Markets can work efficiently only when property rights exist Money makes trading in markets more efficient

Glossary 1. Absolute Advantage- if one person is more productive than the another person

2. Allocative Efficiency- goods or services produced at the lowest cost and in quantities that provide the greatest possible benefit. Cannot produce more of on good without giving up some of another 3. Capital Accumulation- growth of capital resources, includes human capital 4. Comparative Advantage- a person or country has it if they can perform the activity at a lower opportunity cost that anyone else 5. Dynamic Comparative Advantage- a person or country possess it as a result of having specialized in a particular area (result is learning by doing become producers with lower opportunity cost) 6. Economic Growth- expansion of the production possibilities that results from capital accumulation and technological change 7. Firm- economic unit that hires factors of production and organizes these factors to produce and sell goods and services 8. Learn by doing- people become more productive in an activity just by repeatedly producing a particular good or service 9. Marginal Benefit- the Benefit a person receives from consuming one more unit of a good or service. IT is measure as the max amount a person is willing to pay for one more unit of it 10. Marginal Benefit Curve- a curve that shows the relationship between the marginal benefit of that good consumed 11. Marginal Cost- opportunity cost of producing one more unit of a best alternative forgone, Calculated as increase in total cost diving by increase in output 12. Market- any arrangement that enable buyers and sellers to get information from and to do business with each other 13. Money- any commodity or token from is generally acceptable as a means of payment 14. Opportunity cost- highest valued alternative that we give up to get something 15. Preferences- a description of a person’s likes or dislikes 16. Production Efficiency- a situation in which good and services are produced at the lowest possible cost 17. PPF- The boundary between the combination of goods and services that can be produced at the lowest possible cost 18. Property Rights- social arrangement that govern ownership use and disposal of anything that people vale that are enforceable in court 19. Technological change- the development of new goods and of better ways of producing goods and services Explanations 

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If you can increase the production of good x without decreasing the production of another good than you are producing inside the PPF because for 0 opportunity cost, must be unemployed resources Bowed out (concave) shape of the PPF reflects the existence of increasing opportunity cost Constant opportunity cost means resources are equally productive for producing all goods

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A marginal benefit for a curve for a good shows the amount a consumer is willing to pay for one more unit of it- benefits apply to consumers; curve is downward slopping Without increase production of food, its marginal benefit decreases and marginal benefit cost increases PPF for goods is a straight line. As the production of one good increases the marginal benefit decreases and marginal cost is constant- it’s a linear PPF which means that constant opportunity cost and marginal cost With Allocative efficiency, for each good produced, marginal benefit equals marginal cost= whenever MB doesn’t equal MC, efficiency, improves by reallocating resources to produce more goods with high marginal benefits, causing decrease in their marginal benefit and increase in marginal cost The PPF for 2 goods will shift if there is a change in the quantity of resources- only changes in resources or technology The opportunity cost of pushing PPF outward is reduced current consumption The higher the portion of resources devoted to technological research in an economy the faster the PPF will shift outward- the technological change shifts PPF outward at the cost of current consumption Producing more capital goods now, shift PPF outward in the future Points inside the PPF represent: unemployed resources, whether labor, capital or land Gains from trade requires specialization based on comparative advantage Learn by doing is the basis of dynamic comparative advantage Markets enable buyers and sellers to get information and coordinate buying and selling decision through price adjustments

Chapter 3 Markets and Prices   

A competitive market is one that has so many buyers and sellers that no one buyer or seller can influence price Opportunity cost is a relative price Demand and supply determine relative prices

Demand   

Supply

Demand is the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same The higher the price of a good, other things remaining the same, the smaller is the quantity demanded- law of demand Demand depends on the price of related goods, expected future prices, income, expected future income and credit, population and preferences

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supply is the relationship between the quantity supplied of a good and its price when all other influence on selling plans remain the same the higher the price of a good, other things remaining the same, the greater the quantity supplied- law of supply supply depends on the price of factors of production used to produce a good, the price of related goods produced, expected future prices, the number of suppliers, technology, and the state of nature

Market Equilibrium   

at the equilibrium price, the quantity demanded equals the quantity supplied at any price above the equilibrium, there is a surplus and the price fall at any price below equilibrium, there is a shortage and the price rises

Predicting changes in Price quantity   

An increase in demand brings a rise in the price and increase in the quantity supplied. A decrease in demand brings a fall in the price and a decrease in the quantity supplied An increase in supply brings a fall in the price and an increase in the quantity demanded. A decrease in supply brings a rise in the price and a decrease in the quantity demanded An increase in demand and an increase in supply bring an increased quantity but an uncertain price change. An increase in demand and a decrease in supply bring a higher price but an uncertain change in quantity

Definitions 1. Change in Demand- a change in buyers plans that occurs when some influence on those plans other than the price of the good change (shift of demand curve) 2. Change in Supply- a change in the suppliers plans that occurs when some influence on those plans other than the price of a good changes (shift of supply curve) 3. Change in the quantity demanded- a change in buyers plans that occurs when the price of a good changes but all other influence on buyers plans remain the same (movement along the demand curve) 4. Change in the quantity supplied- a change in sellers’ plans that occurs when the price of a good changes but all other influences on seller’s plans remain unchanged (movement along supply curve) 5. Competitive market- a market that has many buyers and sellers and no single buyer or seller can influence price 6. Complement- a good that is used in conjunction with another good 7. Demand- the entire relationship between the price of a good and the quantity of it when all other influences on buyers plans remain the same (demand curve, described by demand schedule) 8. Demand Curve- a curve that shows the relationship between the quantity demanded of a good and its price when all other influences of consumers planned purchaces reaming the same

9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Equilibrium Price- Price at which the quantity demanded equals the quantity supplied Equilibrium quantity- the quantity bought and sold at the equilibrium price Inferior good- a good for which demand decreases as income increases Law of demand- other things remaining the same, the higher the price of a good , the smaller is the quantity demanded of it; vice versa Law of supply- other things remaining the same, the higher the price of a good, the greater is the quantity supplied of it Money price- a number of dollars they must be give up in exchange for a good or service Normal good- a good for which demand increases as income increases Quantity demanded- the amount of a good or service that consumers plan to buy during a given time period at a particular price Quantity supplied- the amount of a good or service that producers plan to sell during a given time period at a particular price Relative Price- the ratio of one good or service to the price of another good or service. A relative price is an oppurtonatiy cost Speculative bubble- a process in which the price is rising because expectations that it will rise bring a rising actual price Substitute- a good that can be used in place of another good Supple- the entire relationship between the price of a good and the quantity supplied of it when all other influences of produces planned sales remain the same (supply curve) A curve that shows the relationship between the quantity supplied of a good and its price when all other influences on producers planned sales reaming the same

Explanations         

A relative price is: the ratio of one good to another, opportunity cost, a quantity of a “basket” of goods and services forgone, determined by demand and supply In an increase of good A causes the demand curve for good B to shift leftward; and b are compliments in consumption Increase in demand for a commodity: increase in income, decrease in income, decrease in price of complement, increase in preferences for a commodity Movement along a supply curve: cut prices and increase in sales remarkable An inferior good, then , ceteris paribus, a decrease in income will cause a rightward shift along the demand curve A decrease in quantity demanded is represented by a movement upward and to the left along the demand curve The price of the good itself is not held constant along a demand curve The fact that a decline in the price of a good causes producers to reduce the quantity of the good supplies is the law of supply A factor in production can be used to produce either good A or good B then A and B are substitutes in production

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An increase in the cost of machinery used to produce x will shift the supply curve for good x leftward Movement along the supply curve- productive should rise, so we are planning for an increase in output If an increase in the price of a causes the supple curve for good b to shift rightward than they are complement of each other If the market for Twinkies is an equilibrium: equilibrium quantity equals quantity demanded The price of a good will tend to fail if: surplus at current price, current price above equilibrium, quantity supplied exceeds the quantity demanded at current price A surplus can be eliminated by allowing the price to fall A shortage is the amount by which quantity demand exceeds quantity supplied An increase in demand combined with a decrease in supply causes an increase in the equilibrium price Normal good- an increase in income will decrease the price of coffee and decrease the quantity demanded for coffee( demand shift leftward) An increase in Pepsi( substitute for coffee) will increase the price of coffee and the quantity supplied of coffee Technological improvement lowers the cost of producing coffee at the same time preferences for coffee decreases. The equilibrium quantity of coffee will rise or fall depending of the relative shifts of demand and the supply curve A and B are complementary goods as production in A decreases the Price of A will fall the Price of B will rise

Chapter 4 Price Elasticity of Demand    

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Elasticity is a measure of the responsiveness of the quantity demanded of a good to a change in its price, other things remaining the same Price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in the price The larger the magnitude of the price elasticity of demand the greater is the responsiveness of the quantity demanded to a given price change If demand is elastic, a cut in price leads to an increase in total revenue. Of demand is unit elastic, a cut in price leaves total revenue unchanged. If demand is inelastic a cut in price leads to a decrease in total Revenue Price elasticity of demand depends on how easily one good services as a substitute for another, the proportion of income spent of the good and the length of time elapsed since the price change

More Elasticity’s of Demand

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Cross elasticity of demand measure the responsiveness of the demand for one good to change in the price of a substitute or a complement, other things remain the same The cross elasticity of demand with respect to the price of a substitute is positive. The cross elasticity of demand with respect of the price of a complement is negative Income elasticity of demand measures the responsiveness of a demand to a change in income, other things remaining the same. For a normal good, the income elasticity of demand is positive. For an inferior good, the income elasticity of a demand is negative When the income elasticity of demand is greater than 1 (income elastic) the percentage of income spent of the good increases as income increases When the income elasticity of demand is less that 1 (income inelastic and inferior) the percentage of income spent of the good decreases as income increases

Elasticity of Supply      

Elasticity of supply measure the responsiveness of the quantity supplied of a good to a change in its price other things remaining the same The elasticity of supply is usually positive and ranges between 0 (vertical supply curve) and infinity (horizontal supply curve) The elasticity of supply demands on resources substitution possibilities and the time frame for the supply decision Momentary supply refers to the response of the quantity supplied to a price change at the instant the price changes Long run supply referrers to the response of the quantity supplied to a price change after some of the technological feasible adjustment in production have been made short run supply refers to the response of the quantity supplied to a price change after some of the technological feasible adjustments in precaution have been made

Definitions 1. Cross Elasticity of Demand- the responsiveness of the demand for a good to change in the price of a substitute or complement, other things. Remaining the same 2. Elastic demand- demand with a price elasticity greater than 1: other things ramming the same, the percentage change is in the quantity demanded 3. Elastic of supply- the responsiveness of the quantity supplied of a good to change in the price, other things remaining the same 4. Income elasticity of demand- the responsiveness of demands to a change in income other things remaining the same. It is calculated as the percentage change in the quantity 5. Inelastic elasticity of demand- the responsiveness of demand to a change in income, other things reaming the same. IT is calculated as the percentage change in the quantity 6. Inelastic demand- a demand with a price elasticity between 0 and 1 and the percentage change in the quantity demanded less than the percentage change 7. Perfectly elastic demand- demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in a response to a tiny change

8. Perfectly inelastic demand- demand with a price elasticity of zero. The quantity demanded constant when the price changes 9. Price Elasticity of demand- a units free measure of the responsiveness of the quantity demanded by a good to a change in its price, when all other influences on a buyers plans remain the same 10. Total Revenue- the value of a firms sales by a firm in a given period of time 11. Total Revenue Test- A method of estimation the price elasticity of demand by observing the change in the total revenue with results from a change in the price, when all other influence on the quantity sold remain the same 12. Unit elastic demand- demand with a price elasticity of 1: the percentage change in the quantity ,demand equals the percentage change in price Explanations     

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If the price elasticity of demand is 2, a 1 percent decrease in price will increase the quantity demand 2% If price elasticity of demand is 0, then as the price falls quantity demanded does not change A perfectly vertical demand curve has a price elasticity of zero A union leader who claims the “higher wages increase living standards without causing unemployment” believes that the demand for labor is perfectly inelastic Reflects elastic demand for a product=”my customers are real bargain hunters. Since I set my projects just a few cents below my competitors’ clusters have flocked to the store and sales are blooming” If the demand for photocopiers are price inelastic we predict sales will rise and total revue will fall A decrease in tuition fees will decrease the university’s total revenue if the price elasticity of demand for university education greater than 0 but less than 1 If the demand for orange juice is price elastic, a severe frost that destroys large quantities of oranges will likely reduce the equilibrium quantity of juice as well as total consumer spending on it If 4% rise in the price of peanut butter causes total revenue to fall by 8% demand for peanut butter is elastic Tina=increase price of CD’s, Brian does not want this, we can conclude that Tina thinks the demand for CDs is price inelastic and Brian thinks it is price elastic If the jets decrease ticket prices and find the total revenue does not change, the price elasticity of demand for tickets is equal to 1 The fact that butter has margarine as a close subsitute in consumption makes the demand for butter more elastic A given per...