Econ Midterm 1

Trade

• Trade does not necessarily mean one country wins and another loses; often, every country can benefit by leveraging comparative advantages.
• Trade enables individuals to purchase a broader range of goods and services at reduced costs.

Productivity

• Productivity is gauged by the quantity of goods and services produced per unit of labor input.
• It measures output per worker.

Basic Principles of Economics

• Governments should intervene in markets when those markets fail to produce efficient or fair outcomes.
• Naturally occurring market inefficiencies can be corrected by government intervention.

Economists and Experimentation

• Economists often rely on natural experiments offered by history due to the difficulty of conducting controlled experiments.
• Economists still use the scientific method, but employ natural experiments.

Circular-Flow Diagram

• Labor flows from households to firms in the circular-flow diagram.
• Households laborers to firms, while services and profits flow from firms.

Circular-Flow Diagram example

• A worker delivering flowers participates in the markets for factors of production and exchanges labor for income.
• Suzy is selling her labor to the firm for income.

Table 1: Production Opportunities

• In Table 1, if England and France both divide their 40 labor hours equally between cheese and wine production, the total production would be 24 units of cheese and 15 units of wine.
• In Table 1, France spending 30 hours on Cheese and 10 on Wine could produce 6 units of cheese and 5 units of wine in 40 hours.
• In Table 1, the slope of England's production possibilities frontier would be -0.25, and the slope of France's production possibilities frontier would be -2.5, measuring cheese along the horizontal axis.
• PPF all slope downward so the signs need to be negative. Slope is measured as rise over run.

Specialization and Trade

• A person benefits from specialization and trade by obtaining a good at a price lower than their opportunity cost of that good.
• A person's opportunity cost is what they give up to produce a good.

Xenophobia and Trade

• Xenophobia isolating itself from the rest of the world does not make economic sense as long as Xenophobia had a comparative advantage in some good.
• Any comparative advantage makes trade mutually beneficial.

Dave, Caroline, Sweaters, and Socks

• If Dave's opportunity cost of 1 sweater is 3 socks, and Caroline's opportunity cost of 1 sweater is 5 socks, Dave has a comparative advantage in producing sweaters.
• Dave gives up fewer socks to make 1 sweater, so he has a comparative advantage in sweaters.

Competitive Market

• A competitive market is one in which no individual buyer or seller has a significant impact on the market price.
• In competitive markets, consumers and suppliers are price takers.

Rubber and Tire Production

• If an increase in the price of rubber coincides with an advance in the technology of tire production, the demand for tires is not necessarily correct.
• The rubber price increase shifts supply left, but the technology improvement shifts supply right.

Music Compact Discs

• If musicians accept lower royalties, compact disc players become cheaper, more firms start producing compact discs, and music lovers experience an increase in income, the quantity will rise, and the effect on price is ambiguous.
• Lower royalties shift supply right, cheaper cd players shifts demand right, new firms shift supply right, and higher income shifts demand right.

Input Costs and Firms

• A decrease in input costs to firms in a market will result in a decrease in equilibrium price and an increase in equilibrium quantity.
• When input costs decrease, it reduces the cost of production for firms, shifting the supply curve rightward.

Surplus of Units

• According to the graph with supply/demand curves, at a price of $20, there is a surplus of 4 units.
• At a price of $20, the quantity supplied exceeds the quantity demanded by 4 units.

Lattes Equilibrium

• If coffee shops begin using a machine that reduces the amount of labor necessary to produce steamed milk and scientists discover that coffee prevents heart attacks, the equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.
• The labor-saving machine lowers production costs and health discovery increases demand.

Elasticity

• Elasticity measures how much buyers and sellers respond to changes in market conditions.
• Elasticity measures the responsiveness of quantity demanded or supplied to changes in price, income, or other economic factors.

Demand Change

• If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then the demand for the good is said to be inelastic.
• Inelastic demand means that even when prices change, quantity demanded changes only slightly.

Carlos and Toothpaste

• Juan Carlos filling out a survey illustrates the importance of the definition of a market in determining the price elasticity of demand.
• When considering elasticity, broad markets have inelastic demand, while narrow markets have elastic demand.

Mobile and Landline Telephone Service

• With income increase, the income elasticity of demand for mobile service is 1.88, using the midpoint method.

Demand Function for Good X

• Given Qdx = 15-0.5Px - 0.8Py, with the price of good X at $10 and the price of good Y increasing from $8 to $10, the cross-price elasticity of demand rounded -2.57, using the midpoint method.

Interdiction of Illegal Drugs

• When the price elasticity of demand for illegal drugs is 1.3, the interdiction of illegal drugs would result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users.
• When demand is elastic a rise in price causes total revenue to fall.

Minimum Wage Laws

• Minimum-wage laws dictate a minimum wage that firms may pay workers.
• Minimum wage laws set a legal floor on wages, meaning firms cannot pay workers less than the specified amount.

Taxes Levied on Tea Sellers

• When a tax is levied on sellers of tea, both sellers and buyers are made worse off.
• A tax on sellers increases costs, shifting supply leftward and raising the price buyers pay while lowering the price sellers receive.

Competitive Market Regulation

• In a competitive market free of government regulation, the price adjusts until quantity demanded equals quantity supplied.
• Market equilibrium occurs when quantity demanded = quantity supplied, meaning there is neither excess supply nor excess demand.

Binding Price Ceiling

• With the imposition of a binding price ceiling on a market a smaller quantity of the good is bought and sold after the price ceiling becomes effective.
• A binding price ceiling creates a shortage where demand exceeds supply.

Good Tax

• A tax imposed on the sellers of a good will raise the price buyers pay and lower the effective price sellers receive.
• A tax on sellers shifts the supply curve upward, increasing the price consumers pay and decreasing what sellers keep after taxes.

Selling Liquor

• If sellers of liquor are required to send a tax to the government for every bottle they sell then this tax causes the supply curve for liquor to shift upward by the amount of the tax at each quantity of liquor.
• A per-unit tax on sellers shifts the supply curve up by the amount of the tax.