Econ - Review Test #1 (Chapters 1-4) Yates

Assumptions in Economic Models

Make behavioral assumptions about the motives of consumers and firms. Economists assume that consumers will buy the goods and services that maximize well being/satisfaction. Firms act to maximize profits.

Normative Analysis

what ought to be

Positive Analysis

What is

positive analysis (measure cost and benefits during different courses of actions)

Do economists perform normative or positive analysis?

Macroeconomics

Study of economy as a whole (inflation, unemployment, economic growth)

Microeconomics

Study of households and firms make choices, interact in markets and how government attempts to influence choices.

Micro makes up marcro

Does Micro make up Macro or does Macro make up Micro?

Entrepreneur

someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services

Innovation

a practical application of an invention or any significant improvement in a good or in the means of producing a good.

Technology

the process used to produce a good or service

Firm, Company or Business

organization that produces a good or service

Goods

tangible products

Services

Activities done for others

Revenue

The total amount of money a business takes in during a given period by selling goods and services.

Profit

the difference between total revenue and total cost

Household

consists of all persons occupying a home. They supply the factors of production to the firms in exchange for income.

Factors of Production

Firms use factors of production to produce goods and services. Labor, Capital, Natural Resources (Land).

Capital

includes manufactured goods that are used to produce other goods and services.

Human Capital

Refers to the accumulated training and skills that workers posses.

Vertical Axis

Represents Y, Price

Horizontal Axis

Represents X, Quantity

Line Graphs

Measure relationship between two variables

Linear Line

has same slope over its entirety

Origin

where horizontal and vertical axes start

Slope

Used to measure the rate at which change are taking place

find derivative of the lin

How do you find the slope of a non-linear line?

Slope

the change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis

Area of Triangle

1/2 BH

Area of Rectangle

BH/LW

Trade-Off

producing more of one good or service means producing less of another good or service

Trade-Off

Example: Study one more hour of Econ exam means one less hour to study for another exam

Trade

the act of buying and selling

Participants of Trade

Everyday individuals, households and countries

Trade occurs

If both parties are willing to participate, what happens?

Trade

Engaging in _________ allows those involved to increase standard of living

production possibilities frontier

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

PPF point directly on the line

Efficient outcome

Inside PPF Line

Inefficient outcome

Beyond PPF Line

Unattainable due to scarcity of resource

Trade, Technological advancements, increase resource available

How to make unattainable - attainable?

Trade Off's

PPF is an economic model for visualizing how _____ works?

Increasing Marginal Opportunity Cost

Opportunity cost of each additional unit will rise.

Increasing Marginal Opportunity Cost

What exists because some machinery, workers, and resources are better suited to make one product than the other

Economic Growth

Ability to produce more goods/services than previous.

Outward

PPF shifts _________ with economic growth

Pivots

PPF _______ if increase in resource/technology is only good for one of the goods/services

Direct Trade

Bartering, good for good, service for service, good for service, minority of trades

Indirect Trade

time, knowledge, profession for medium ($) exchange, $ for desired goods/services, majority of trades

Trade

_____________allows us to consume beyond PPF, both parties must be willing and able

Absolute Advantage

ability of a firm, individual or country to produce more than its competition with the same resources/technology. Produce the same amount with less.

Comparative Advantage

Ability of a player to produce a good/service at a lower opportunity cost than the other plan

Comparative Advantage

What is the basis for trade?

Markets

Group of buyers an sellers of a good or service and the institution or arrangement by which they come together to trade

3 Basic Economic Questions

1. What will be produced? 2. How will it be produced? 3. Who will get what is produced?

Product Market

Goods, individuals are demanders and firms are suppliers

Factor Market

Inputs used to make goods and services (Labor, Capital, Natural Resources, Entrepreneur)

Market Economy (Free Economy)

Decisions of households and firms interacting in markets allocate economic resources. Consumers decide which goods and services will be produced (US)

centrally planned economy

government decides how economic resources will be allocated (Soviet Union)

Mixed Economy

most economic decisions result from the interaction between buyers an sellers in markets but in which the government plays a significant role in allocation of resources (Canada)

fluctuate

In order for free markets to work properly prices must be able to ______________.

Property Rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Tangible - Land

Intangible - Copyright/patent

Confidence and incentives

Protection allows individuals to have _____ and _____ to take risks. Without Economic Efficiency is reduced and economy will be operating inside PPF.

Supply and Demand Model

predicts changes in quantities and prices

3 Assumptions of Supply and Demand Model

1. Many Buyers and Sellers. 2. All firms are selling identical products. 3 No barriers preventing new firms from entering market

Law of Demand

Holding everything else constant, when the price of a product falls the quantity demanded of the product will increase. Price increases, quantity demanded decreases.

Demand Schedule

Table that shows the relationship between price and quantity of a product that is being demanded.

Demand Curve

This curve shows relationship between Price & Quantity at any given price Level

Negative Slope of Demand Curve

Due to inverse relationship between price and quantity.

Demand

Measures desirability of a good/service at a particular single price point (shift of curve)

Demand

Demand increase shift right

Demand decrease shift left

Quantity Demanded

measures how much is desired at each different price level (movements along curve)

Quantity Demanded

Price increase Quantity Demanded decrease

Price decrease Quantity Demanded increase

5 Demand Curve Shifters

Price of Related (substitutes & compliments)

Income (normal & inferior)

Population/Demographics

Expected Future Prices

Taste/Preference

Substitutes

P(a) increase Demand (b) increase

P(a) decrease Demand (b) decrease

(Positive)

Compliments

P(a) increase Demand (b) decrease

P(a) decrease Demand (b) increase

(Inverse)

Normal

Income increase Demand increase shift right

Income decrease Demand decrease shift left

(positive)

Inferior

Income increase Demand decrease shift left

Income decrease Demand increase shift right

(inverse)

Population/Demographics

Population increase Demand increase shift right

Population decrease Demand decrease shift left

(positive)

Expected Future Prices

Expected Price increase Current Demand Increase shift right

Expected Price decrease Current Demand decrease shift left

(positive)

Taste/Preferences

Analyze individual. Preferences change and as they do demand follows

Law of Supply

Holding everything else constant, Price increases Quantity Supplied increase. Price decreases Quantity Supplied decrease (positive)

Supply Schedule

List of prices and quantities associated with them

Supply

Aggregate, increases and decreases in how willing a firm is to provide a certain good or service.

Supply

Supply increase curve shifts right

Supply decrease curve shifts left

Quantity Supplied

the amount of a good or service that a firm is willing and able to supply at a given price, ceteris peribus

5 Supply Curve Shifters

Prices of Inputs

Prices of Substitutes in Production

Expected Future Price's

Number of Firms

Technological Changes

Prices of Inputs

Price of Input increases Supply decreases shift left

Price of Input decreases Supply increase shift right

(inverse)

Prices of substitutes in production

P(a) Increases Supply (b) Decrease shift Left

P(a) Decreases Supply (b) increases shift Right

(inverse)

Expected Future Prices's

Expect Price increase Supply decrease shift left

Expect Price decrease Supply increase shift right

(Inverse)

Number of Firms

# of firms increase supply decrease shift right

# of firm decrease supply increase shift left

(inverse)

Technological Changes

Positive changes supply increases shift right

Negative changes supply decrease shift left

Market Equilibrium

a situation in which quantity demanded equals quantity supplied

Market Equilibrium

where supply and demand curves intersect at a single point

Equilibrium

Markets are continuously moving towards _______.

Shortages

situation in which quantity demanded is greater than quantity supplied

Shortage

When firms increase price providing incentive to supply more, satisfies more customers. Price increase, increase quantity supplied, decreasing quantity demanded back to equilibrium

Surplus

situation in which quantity supplied is greater than quantity demanded

Surplus

price points resulting in _______, firms will lower price to get rid of excess, consumers will buy more due to lower price, eliminating surplus and putting market into equilibrium.

Increase Increase Increase

Demand ____ Equilibrium Price _____ Equilibrium Quantity (Shortage)

Decrease Decrease Decrease

Demand ____ Equilibrium Price _____ Equilibrium Quantity (Surplus)