Econ Test 2 Study Guide

Chapter 3: Demand and Supply Model

• Demand Curve: Represents the quantity demanded at each price.

  • Law of Demand:

    • Increases in price reduce the quantity demanded.

    • Decreases in price increase the quantity demanded.

• Supply Curve: Shows quantity sellers are willing to offer at various prices.

  • Typically upward sloping:

    • Higher prices increase the quantity supplied.

• Equilibrium Price:

  • Where demand and supply curves intersect.

  • Quantity demanded equals quantity supplied.

  • At prices above equilibrium:

    • Quantity supplied > Quantity demanded (Surplus).

  • At prices below equilibrium:

    • Quantity demanded > Quantity supplied (Shortage).

• Market Surpluses and Shortages:

  • Usually short-lived.

  • Changes in determinants shift equilibrium price/output.

• Circular Flow Model: Displays relationship between different markets.

Chapter 4: Market Outcomes from Demand and Supply

• Technological Change: Shifts the supply curve to the right for personal computers.

  • Results in reduced equilibrium price and increased quantity.

• Crude Oil and Gasoline Prices 2008:

  • Prices soared due to increased demand from China, impacting general goods/services.

  • Prices decreased dramatically later due to global economic decline.

• Stock Prices Determination:

  • Prices reflect market estimates of profitability.

  • Any changes in expectations can alter stock prices.

• Government Price Controls:

  • Price floors lead to surpluses; price ceilings lead to shortages.

  • Unintended consequences often arise from market interventions (e.g., agricultural price floors, rent controls).

• Health Care Market:

  • Third-party payers increase consumption and spending.

Chapter 5: Elasticity

• Elasticity Definition: Measure of responsiveness of a dependent variable to a change in an independent variable.

• Price Elasticity of Demand:

  • Reflects quantity demanded's responsiveness to price changes.

  • Classifications:

    • Price Elastic: > 1

    • Unit Price Elastic: = 1

    • Price Inelastic: < 1

• Total Revenue: Depends on elasticity type; moves with quantity if elastic, price if inelastic, unchanged if unit elastic.

• Determinants of Price Elasticity:

  • Availability of substitutes, importance in budgets, time.

• Other Elasticity Measures:

  • Income Elasticity: Positive indicates normal goods; negative indicates inferior goods.

  • Cross Price Elasticity: Positive indicates substitute goods; negative indicates complements.

• Price Elasticity of Supply:

  • Responsiveness to price; classification similar to demand elasticity.

Chapter 6: Purposeful Choices in Economics

• Choice Making: Individuals make choices aimed at maximizing objectives (utility/profit).

• Marginal Decision Rule: Leads to allocations that maximize utility or profit.

• Efficient Resource Allocation: Achieved in price systems accounting for all costs and benefits.

  • Deadweight Loss: Represents inefficiencies when allocation is not optimal.

• Public Goods and Market Failures: Indicates scenarios requiring public intervention to improve resource allocation efficiency.

Chapter 9: Perfect Competition

• Price Takers: Under this model, firms accept market price determined by supply and demand.

• Profit Maximization: Occurs when marginal revenue equals marginal cost; firm’s marginal cost curve is short-run supply curve.

• Market Entry/Exit:

  • Economic profits lead to new firm entry, driving down prices.

  • Economic losses result in existing firms exiting, pushing prices up again.

Chapter 10: Monopoly Behavior

• Monopoly Definition: An industry with a single firm, restricted entry.

• Sources of Monopoly Power: Economies of scale, locational advantages, high sunk costs, restricted ownership.

• Profit Maximization:

  • Quantity produced when marginal cost equals marginal revenue; price is determined from the demand curve.

• Impact of Monopoly: Internal price above marginal cost reduces efficiency.

• Public Policy: Includes antitrust laws and regulations for monopolies.

Chapter 15: The Role of the Public Sector

• Government Expansion: Increased size and scope since 1929, addressing market failures.

• Areas for Government Intervention:

  • Correction of market failures, expansion/reduction of merit and demerit goods, income transfer activities.

• Principles of Taxation:

  • Ability-to-pay and benefits-received principles.

• Tax Types: Income, sales, excise, and property taxes.

Chapter 16: Government Intervention and Antitrust

• Antitrust Actions: Monitor and regulate market power.

• Regulatory Views:

  • Traditional view: Big business is harmful.

  • Current approach: Examines firm behavior and market structure impacts on welfare.

Chapter 17: International Trade

• Trade Benefits: Countries can consume beyond domestic limits with comparative advantage.

• Trade Barriers: Tariffs and quotas increase prices and reduce quantity.

Chapter 18: Pollution Economics

• Pollution Costs: Derived from the balance of benefits and costs of emissions.

  • Efficient pollution amount maximizes societal net benefits.

• Policies for Pollution Reduction:

  • Command-and-control, incentive-based approaches (taxes, permits) encourage emission reductions.