ECON 10004 Midterm Review

Page 1: Introduction to ECON 10004 Midterm Exam Review

• Note: The review is not a complete study method. All students must have knowledge of all topics discussed throughout the semester.

Page 2: Scarcity

• Definition of Scarcity: The fundamental concept in economics representing insufficient resources to satisfy all desires.

• Implication: Scarcity means that not all wants can be met, including time, leading to choices in production and consumption.

Page 3: Production

• Meaning of Production: Activities converting resources into consumable products.

• Resources/Factors of Production: Inputs used in the production of desired goods.

Page 4: Production Possibilities Curve (PPC)

• Definition: A graphical representation showing all possible combinations of two goods that can be produced, reflecting trade-offs in resource allocation.

Page 5: PPC Example: Clothing and Food

• Combinations:

  • A: 0 Clothing, 8 Food

  • B: 1 Clothing, 6 Food (Opportunity Cost: 2 Food)

  • C: 2 Clothing, 4 Food (Opportunity Cost: 2 Food)

  • D: 3 Clothing, 2 Food (Opportunity Cost: 2 Food)

  • E: 4 Clothing, 0 Food (Opportunity Cost: 2 Food)

Page 6: Efficiency with PPC

• Productive Efficiency: Achievable when maximum output is produced with available resources and technology; all points on the PPC exhibit this.

• Allocative Efficiency: Refers to a production mix that maximizes consumer satisfaction.

Page 7: PPC Example: Newsprint and Automobiles

• Combinations:

  • A: 0 Newsprint, 30 Automobiles

  • B: 1 Newsprint, 29 Automobiles (Opportunity Cost: 1 Automobile)

  • Continue until G: 6 Newsprint, 0 Automobiles (Opportunity Cost: 14 Automobiles)

Page 8: Law of Increasing Opportunity Costs

• Concept: As production increases for one good, the opportunity cost of producing additional units generally rises, leading to a convex PPC.

Page 9: Opportunity Cost Analysis

• To obtain 1 million additional tonnes of newsprint, the opportunity cost is represented by the quantity of automobiles forgone, demonstrating non-constant and increasing opportunity costs.

Page 10: PPC Insights

• Points R and S:

  • R is unattainable due to limited resources.

  • S represents inefficiency due to resource unemployment.

• All PPC points are productively efficient, indicating full employment of resources.

Page 11: Trade-offs Using PPC

• Downward Slope: The PPC slopes downward due to scarcity, indicating necessary trade-offs in choices.

• Unemployment Representation: Points within the PPC indicate unemployment of resources.

Page 12: Economic Growth

• Definition: Economic growth increases an economy's productive capacity or standards of living.

• Visual Representation: Indicates growth by an outward shift of the PPC.

• Sources of Growth: Includes technological improvements, resource increases, and productivity advancements.

Page 13: Growth and Goods Types

• Consumption vs. Capital Goods: Economic growth often requires sacrificing consumption goods for capital goods, which enhance future production.

Page 14: Demand Overview

• Definition of Demand: Represents quantities of a good/service consumers are willing to buy at varying prices, holding other factors constant (ceteris paribus).

• Law of Demand: Inversely relates quantity demanded to price (P); As price (P) increases, quantity demanded (Qd) decreases.

Page 15: Law of Demand Detail

• Definition Clarification: Demand reflects an inverse relationship between price and quantity demanded (ceteris paribus).

• Emphasizes the changes in buying behavior based on price fluctuations.

Page 16: Demand Curve Movements

• Quantitative Changes: A change in the price of a good causes movements along the demand curve, while other factors remain constant.

Page 17: Ceteris Paribus Factors

• Factors Held Constant:

  • Income

  • Tastes and preferences

  • Prices of other goods

  • Other numerous factors

Page 18: Individual Demand Curve

• Visualization: Shows the relationship between price and quantity of wireless earbuds demanded, drawn from combinations of demanded quantities at various prices.

Page 19: Substitutes in Demand

• Definition of Substitutes: Goods where a change in the price of one causes a shift in demand for the other in the same direction.

• Example: Price decrease in butter increases demand for butter, while decreasing demand for margarine.

Page 20: Complements in Demand

• Definition of Complements: Goods where a change in price for one leads to an opposite demand shift for the other.

• Example: An increase in peanut butter prices results in decreased demand for jam.

Page 21: Supply Overview

• Definition of Supply: A schedule showing the relationship between price and the quantity supplied at various prices, holding other factors constant.

Page 22: Definition of Supply

• Quantities Supplied: Refers to the amount available at different prices. Law of Supply stipulates a direct relation between price and quantity supplied (Qs).

Page 23: Law of Supply Explanation

• Price Relations: Higher prices incentivize greater supply, with businesses supplying more as prices increase due to profit motives.

Page 24: Movement Along Supply Curve

• Changes in a good's price lead to movement along the supply curve (quantity supplied changes), while other factors are held constant.

Page 25: Shifts versus Movements in Supply

• Distinction: A change in a determinant other than the good's price shifts the entire supply curve.

• Movement versus Shift: Price changes cause movements along the same curve.

Page 26: Supply Shift Example

• New Production Method: If manufacturing costs decrease, it leads to a rightward shift of the supply curve, indicating an increase in supply at all prices.

Page 27: Determinants of Supply (Supply Shifters)

1. Cost of Inputs

2. Technology

3. Taxes and Subsidies

4. Price Expectations

5. Number of Firms

• Each determinant can shift supply curves right or left based on changes.

Page 28: Market Equilibrium Fundamentals

• Equilibrium Price: The price that balances quantity demanded and quantity supplied; graphically defined where the supply and demand curves intersect.

Page 29: Market Equilibrium Example

• Illustrates variations in supplied and demanded quantities, addressing excess supply (surplus) and demand (shortage) situations based on price changes.

Page 30: Excess Supply and Demand

• Graph Example: Shows changes in quantity of DVDs supplied versus demanded, highlighting market clearing prices and influences on equilibrium.

Page 31: Changes in Equilibrium Dynamics

• Increasing Demand: Illustrates how equilibrium price and quantity change when demand increases, shifting the demand curve outward.

Page 32: Decrease in Demand Example

• Analysis of what happens when preferences shift away from DVDs to Blu-Ray, leading to a surplus situation at certain price levels.

Page 33: Supply Changes Due to Technology

• Technological advances can lead to an increase in supply, illustrating how shifts in supply curves impact equilibrium prices and quantities.

Page 34: Supply Decrease Example

• Increases in production costs lead to a leftward shift of the supply curve, creating a shortage of goods at existing prices.

Page 35: Normal vs. Inferior Goods

• Normal Goods: Demand rises with income.

• Inferior Goods: Demand falls with increased income.

Page 36: Demand Shifters Summary

• Outlines factors that can shift demand curves to the right or left, including income changes, prices of related goods, preferences, expectations, and population changes.

Page 37: More on Demand Shifters

• Additional detail provided on how shifts occur due to related goods' pricing changes, defining substitutes and complements.

Page 38: Specialization Benefits

• Specialization: Involves focusing on narrower production areas, increasing overall efficiency.

• Absolute Advantage: Ability to produce with the least resources.

Page 39: Comparative Advantage

• Concept: Ability to create goods/services at lower opportunity costs; highlights the importance of specializing in areas where a comparative advantage exists.

Page 40: Economic Systems

• Three Basic Economic Questions:

  1. What and how much will be produced?

  2. How will it be produced?

  3. For whom will it be produced?

Page 41: Command Economy Characteristics

• Definition: Strong public ownership with central planning to answer economic questions.

Page 42: Capitalist Economy Characteristics

• Definition: Emphasizes private ownership of resources with market interactions determining production choices.

Page 43: Functions of Government

• Lists the critical roles of government in the economy, including legal systems, promoting competition, providing public goods, and stabilizing the economy.

Page 44: Antitrust Legislation

• Definition: Laws addressing monopolies and anti-competitive practices ensuring fair competition in markets.

Page 45: Public Goods Characteristics

• Definition: Goods that allow for joint consumption without rival consumption, contrasted with private goods.

Page 46: Political Functions of Government

• Examples of government influences on market behavior, including providing socially desirable goods and inhibiting undesirable goods.

Page 47: Transfer Payments Explained

• Transfer Payments: Payments made without service exchange; examples include social security benefits and healthcare services.

Page 48: Unemployment Categories

• Defines categories of individuals without work, including job losers and new entrants into the job market.

Page 49: Discouraged Workers

• Definition: Individuals not actively seeking jobs due to perceived insufficiency of opportunities; definition of labor force participation rates.

Page 50: Types of Unemployment

• Categories:

  • Frictional

  • Structural

  • Seasonal

  • Cyclical

Page 51: Frictional Unemployment Detail

• Definition: Transitional unemployment as workers search for suitable job placements, inherent in labor market dynamics.

Page 52: Seasonal and Cyclical Unemployment

• Seasonal: Variations based on seasonal changes.

• Cyclical: Linked with economic downturns or recessions.

Page 53: Inflation and Deflation Overview

• Inflation: General price increase.

• Deflation: General price decrease.

Page 54: Price Index Definition

• Describes how a price index compares current costs to those in a base year, crucial for measuring inflation/deflation.

Page 55: Consumer Price Index (CPI)

• Definition: A measure reflecting price changes of a typical consumer market basket over time, indicative of inflation trends.

Page 56: Business Cycle Fluctuations

• Recession: A period of declining business activity contrasted with

  • Depression: A severe form of recession.

Page 57: Price Index Calculation Example

• Illustrates how to calculate a price index using a sample market basket, emphasizing importance in economic assessments.

Page 58: Taxation Overview

• Tax Bracket: Illustrates progressive tax system nuances; with rates increasing as income rises.

Page 59: Taxation Components Explained

• Discusses the marginal tax rate, average tax rate definitions, and examples of progression in taxation as income increases.

Page 60: Marginal Tax Rates Table

• Summarizes the federal marginal income tax brackets as part of a comprehensive taxation overview.