Econ Test 1 notes PDF

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Notes from class for the first test....

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ECON INTRO ScarcityEconomics-

the limited nature of society's resources the study of how society manages its scarce resources -how people decide what to buy Microeconomics- the study of how households and firms make decisions and how they interact in markets Macroeconomics- study of how economy wide phenomena, including inflation, unemployment, and economic growth There are some basic principles that guide all theories in Economics Principles

1. People face tradeoffs All decisions involve tradeoffs - Going to a party the night before your midterm, leaves less time for studying - Having more money to buy stuff requires working longer hours, leaves less time for leisure 2. Society faces an important tradeoff- Efficiency vs. equality Efficiency- when society gets the most from its scarce resources Equality- when prosperity is distributed uniformly among society's members The Opportunity Cost of any item is whatever must be given up to obtain it 3. Rational people think at the margin -Rational people- systematically and purposefully do the best they can to achieve their objectives -Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan 4. People Respond To Incentives Incentive- something that induces a person to act, pr Notes: 1/17 Not self-sufficient, people specialize in certain products Specialization- important, you don’t have to do everything yourself

Market: a group of buyers and sellers - what goods to produce? -how to produce them? -how much? -who gets them? Government NEEDS to enforce property rights (aka police) Market failure because… Externalities Too much market power Public policy may promote efficiency or equity The OPPORTUNITY COST of any item is whatever must be given up to obtain it Incentive- Something that induces a person to act

Notes: January 22 Chapter 2- Thinking like and Economist Assumptions and Model Assumptions simplify the complex world to make it easier to understand Model: a highly simplified representation of a more complicated reality (used to study economic issues) ex. Road map The Production Possibilities Frontier (PPF): A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Ex. Two goods: computer and wheat , One resource: labor hours , Economy has 50,000 labor hours per month available for production

The PPF and Opportunity Cost Recall: The opportunity cost of an item is what must be given up to obtain that item. Moving along PPF involves shifting resources (labor) from the production of one good to another. Society faces a trade off: Getting more of one good requires sacrificing some of the other. The slope of the PPF tells you the opportunity cost of one good in terms of the other.

Finding slope= “rise over run” 600-0/ 0-300= -2 Notes: January 24

Lower opportunity cost= Less steep PPF (lower slope) Economic Growth and the PPF - w/ additional resources or improvement in technology, the economy can produce more computers, wheat, or both - Economic Growth shifts the PPF outwards (both computers and wheats are moved up) The Shape of the PPF - The PPF could be a straight line or bow shaped - Depending on what happens with the opportunity cost as economy shifts resources from one industry ● If the opp cost remains constant ● PPF is a straight line Why the PPf might be bow- shaped - As the economy shift resources from beer to mountain bikes - It would be bow shaped because opportunity cost for mountain bikes is higher than it is for beer - So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other. - The PPF would also be bow shaped when there is some other resource, or mix of resources with varying opportunity cost - In conclusion, bow shaped= when opportunity costs for one item is higher than another?? (check on this) Chapter 3 Interdependence - One of the 10 principles from chapter 1: Trade can make everyone better off Ex Problem- Draw PPF for japan Japan has 30,000 hrs of labor 1 computer= 125 hrs 1 ton of wheat= 25 hrs labor Answers What Kind of Slope? Straight

Max Computers? 240 Max Wheat? 1200 What is Japans opportunity cost to produce computers? Opportunity Cost= -5. Why? Bc Rise/ Run so (1200-0)/ (0-240)=-5 Absolute Advantage: the ability to produce a good using fewer inputs than another producer Notes: January 27 Chapter 3- Interdependence and the Gains from Trade If the PPF is a straight line, what does it say about the opportunity cost? It is stagnant; stays the same. Absolute Advantage: The ability to produce a good using fewer inputs than another producer. The US has an absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the US vs 25 in Japan. The US also has an absolute advantage in computers: it takes 100 labor hrs in the US vs 125 in Japan. 1. Suppose the US produces 3400 tons of wheat. How many computers would the US be able to produce w/ its remaining labor? US has 50,000 hrs 3400 tons of wheat x 10 labor hrs/ton= 34,000 hrs 50,000 - 34,000= 16000hrs left 16000 / 100hrs per computer= 160 computers can be made. Exports: good produced domestically and purchased by foreign buyers Imports: Goods produced abroad and purchased by domestic residents

2. Suppose the US exports 700 tons of wheat to japan, and imports 110 computers from japan. How much of each good is consumed in the US? Plot this combination on the US PPF?. Computers= 270 How many computers are consumed in Japan? 130 The goal of the trade is to produce ABOVE THE PPF; you trade if you GAIN from it

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Notes: January 29 Two countries can gain from trade when each specializes in the good it produces at lowest cost. Recall: another measure of cost is opportunity cost Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer Lesson: Absolute advantage is not necessary for comparative advantage When each country specializes in the goods in which it has a comparative advantage total consumption in all countries is higher, the worlds … ???? January 31 Demand curve shifters -

Demand for a normal good is positively related to income. Demand for an inferior good is negatively related to income

Two goods are substitutes if the increase in the price of one causes an increase in the demand of another Ex- pizza and hamburgers An increase in the price of pizza causes an increase in the demand of hamburgers Shifting hamburger demand curves to the right Two goods are complements if an increase in the price of one causes a fall in demand for the other. Example: french fries and ketchup Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Demand Curve Shifters: Expectations Expectations affect consumers buying decisions. Example: If people expect their incomes to rise their demands for meals at expensive restaurants may increase now.

February 3 Supply Quantity supplied of any good is the amount that sellers are willing and able to sell. Law of supply: The claim that the quantity supplied of a good rises when the price of a good rises, they equate? Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied Ex: starbucks supply of lattes Market supply versus individual supply ● The quantity supplied in the market is the sum of quantities supplied by all sellers at each price. ● Suppose that starbucks and peets are the only two sellers in this market Supply curve shifters ● The supply curve shows how price affects quantity supplied, other things being equal ● These “other things” are non price determinants of supply. ● Changes in them shift the S curve Supply curve shifters: Input Prices Examples of imput prices: wages, prices of more materials A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity Supply curve shifters: # of sellers An increase in the number of …. Supply curve shifters: technology Technology determines how much input is required to produce a unit of output… Supply Curve Shifters: Expectations Ex- Events in the middle east lead to expectations of higher oil prices S curve shifts left February 4 The quantity demand of any good is the amount of the good that buyers are willing and able to purchase Law of demand: the claim that the quantity of a good falls when the price of a good

rises, other things equal The quantity supplied of any is the amount that sellers are willing and able to sell. Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal Summary: variables that influence the S curve Notes: February 7 Variables that influence buyers-- price, number of buyers, income, tastes, expectations Variables that influence sellers-- price, input prices, technology, number of sellers, expectations In the market economy, prices adjust to balance supply and demand. These equilibrium prices indicate Determine the effect of any event 1) Decide whether the event shifts S curve, D curve, or both (NOT GRADED ON GRAPH BUT STILL IMPORTANT TO KNOW) 2) Like 3 more steps Example Increase in gas prices gas and car are related good D curve shifts D curve shifts right because high gas price makes hybrids more attractive relative to other cars Notice P rises producers supply a larger quantity of hybrids, even though the S curve has not shifted // be careful to distinguish b/w a shift in a curve and a movement along the curve Change in supply: a shift in the S curve Change in the quantity supplied: a movement along a fixed S curve occurs when P changes Change in demand: a shift in the D curve Change in the quantity demand: a movement along a fixed D curve Example 2: new technology reducing cost of producing hybrid cars S curve shifts S shifts right because event reduces cost The shift causes price to fall and quantity to rise

TEST REVIEW Scarcity: limited resources Efficiency : means the society is getting the maximum benefits from its scarce resources Market failure: the market fails to allocate society's resources efficiently Opportunity cost: any item is whatever must be given up to obtain it Microeconomics: study of how household and firms make decisions and how they interact in markets Macro: is the study of economy-wide phenomena, including inflation unemployment and economic growth Focus on first 5 of the economic principles 1. People face tradeoffs 2. The cost of something is what you give up 3. Rational people think at the margin 4. People respond to incentives 5. Trade can make everyone better off

The production possibilities frontier: The PPF is a graph that shows the combinations of two goods the economy can possibly produce given the available resources PPF: Feasibility Points on the PPF -possible -efficient: all resources are fully utilized Points under the PPF -possible -not efficient: some resources underutilized Points above the PPF -NOT POSSIBLE Yes the PPF can shift due to the production and resources and technology The PPF and opportunity cost The slope of the PPF tells you the opportunity cost of one good in terms of the other - If the opp. cost remains CONSTANt PPF is a straight line PPF might be Bow-shaped PPF is bow-shaped when different workers have different skills and/or mix of resources *How to find slope* Exports & Imports Eports: goods produced domestically and purchased by foreign buyers Imports: goods produced abroad and purchased by residents Absolute Advantage The ability to produce a good using FEWER INPUTS than another producer - If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade - A country will Comparative advantage The ability to produce a good at a LOWER OPPORTUNITY cost than another producer - Absolute advantage is not necessary for comparative advantage ! - Gains from trade arise from different absolute/ comparative advantages and then specialization. Countries can obtain a good at a price below their opportunity cost Demand- buyers choice The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase

Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises Supply The quantity supplied of any good is the amount that the sellers are willing and able to sell Law of supply: the claim that the quantity supplied of a good raises when the price of the good rises Change in supply: a shift in the S curve Change in the quantity supplied: a movement along a fixed S curve TEST 2 Chapter 5 Price elasticity of demand -- measure how much responds to change =percentage change in demand/ percentage change in price Determines price of elasticity: necessity or a luxury? Broad or narrow? 0.1 eggs inelastic 0.2 healthcare inelastic 0.5 rice 0.7 housing inelastic 1.6 Beef elastic Price elasticity and total revenue 1. Direction of price 2. Whether elastic on inelastic February 24th Government policies that alter the private market outcome - Price controls - Price ceiling: a legal maximum on the price of a good or service ex. Rent control - Price floor: a legal minimum on the price of good or service ex. Minimum wage March 2nd

How does a tax affect consumer surplus, producer surplus, and total surplus?

REVIEW Read chapter 5, 6, 7, kind of 8 Price Elasticity of Demand- measures how much QD responds to a change in P Price of elasticity of demand - Quantity demand/ percent of change price Percentage changes: end value- start value/ midpoint average x 100% Price of elasticity of supply- measures how much quantity supply responds to change in price Price changes first Price elasticity of supply- Quantity supply/ percent of change price elasticity> 1 elastic elasticity 1 % change in Q > % change in P Income elasticity of demand- measures the response of Qd to change in consumer income Income elasticity of demand= percentage change in QD/ Percentage change in income For normal goods, income elasticity >0 For inferior good, income elasticity < 0 Government policies that alter the private market outcome Price ceiling: rent Price floor: minimum wage Effect on tax Buyer pays more Seller pays less Equilibrium quantity goes down Difference in price for buyers and sellers is tax and goes to the government Consumer surplus CS= willing to pay - price A buyers WILLINGNESS TO PAY Area of the the triangle = ½ base x height

Producer surplus Cost- value of everything a seller must give up to produce good Cost measures willingness to sell PS= P- cost...