Manecon Economics Final Reviewer

Manecon Reviewer for Finals

• Economics is the study of how society manages its resources. It focuses on efficient and effective allocation of resources.
• Efficiency is maximizing output with minimal input.
• Effectiveness is achieving the desired outcome.
• Scarcity is a condition where wants and needs exceed available resources.
• Shortage is a temporary state where demand exceeds supply for a commodity or service.
• Households are the basic consumption units in an economy.
• Markets are arrangements for buyers and sellers to exchange goods and services.
• Opportunity Cost The value of the best alternative given up when making a choice.
• Equilibrium is when market demand equals market supply.
• Utility is the pleasure or satisfaction from consumption.
• Production Possibilities Frontier (PPF) represents the maximum output combinations an economy can produce using its resources.
• Rational Behavior refers to making decisions to attain personal well being.
• Marginal Analysis compares the extra or marginal cost to marginal benefits.
• Microeconomics focuses on individual decision making.
• Macroeconomics analyzes aggregate economic behavior.
• Positive Economics describes how the economy works.
• Normative Economics describes how the economy should work.

Basic Circular Flow

• A model illustrating the continuous flow of money and goods between households and firms in an economy.
• Firms produce goods and services for households.
• Households provide resources to firms.

Market for Goods and Services

• Buyers (Households): determine market demand.
• Sellers (Firms): determine market supply.

Law of Demand

• As price increases, quantity demanded decreases (ceteris paribus)

Other Factors Affecting Demand

• Income - Higher income increases demand for normal goods
• Prices of related goods - Substitute goods (increase in price of one increases demand for the other)
• Complementary goods (increase in price of one decreases demand for the other).
• Tastes and preferences - Increase in preference increases demand
• Expectations - Future price expectations influence current demand.
• Population - Increasing population increases the demand.

Law of Supply

• As price increases, quantity supplied increases (ceteris paribus)

Other Factors Affecting Supply

• Input prices - Higher input prices reduce supply.
• Prices of related goods - Substitute goods (increase in price of one increases supply of the other).
• Expectations - Future price expectations influence current supply.
• Technology - Better technology increases supply
• Government Regulations - More regulations reduce supply
• Number of suppliers - More suppliers increase supply.
• Unexpected calamites or Natural Disasters will reduce supply.

Elasticity

• Price Elasticity of Demand (PED) : measures responsiveness of quantity demanded to price changes.
• Inelastic Demand (PED < 1) : Quantity demanded changes less than proportionally to a price change.
• Elastic Demand (PED > 1) : Quantity demanded changes more than proportionally to a price change.
• Unit Elastic Demand (PED = 1) : Quantity demanded changes proportionally to a price change.
• Perfectly Inelastic Demand (PED = 0) : Quantity demanded does not change with a price change.
• Perfectly Elastic Demand (PED = ∞) : Quantity demanded changes infinitely with a small price change.

Income Elasticity of Demand (IED)

• Measures how quantity demanded changes with changes in consumer income.
• Normal Goods (IED > 0) : Demand increases with income.
• Inferior Goods (IED < 0) : Demand decreases with income.

Cross-Price Elasticity of Demand (CPED)

• Measures responsiveness of quantity demanded for one good to changes in the price of another good.
• Substitute Goods (CPED > 0) Demand for one good increases as the price of another increases.
• Complementary Goods (CPED < 0): Demand for one good decreases as the price of another increases.

Price Elasticity of Supply (PES)

• Measures responsiveness of quantity supplied to price changes.
• Elasticity of Supply is analogous to Elasticity of Demand.

Consumer Theory

• Individuals make consumption choices to maximize satisfaction (utility).
• Indifference Curves represent combinations of goods that yield the same level of satisfaction.
• Marginal Rate of Substitution (MRS) shows the rate at which a consumer can trade one good for another while maintaining the same level of utility.
• Budget Line shows all possible affordable combinations of goods, given a budget constraint.

Law of Diminishing Marginal Utility and Marginal Rate of Substitution

• As consumption of a good increases, the marginal utility derived from each additional unit decreases, leading to less trade-off for additional units.

Market Structures

• Perfect Competition: many sellers, homogenous products, no influence on the price.
• Monopolistic Competition: many sellers, similar but differentiated products, some influence on price.
• Oligopoly: few sellers, significant interdependence between firms, products may be homogenous or differentiated, substantial entry barriers.
• Monopoly: single seller, unique product, significant control over price, high entry barriers.

Measuring National Income (GDP, GNP)

• Gross Domestic Product (GDP): total market value of final goods and services produced within a country.
• Components: Consumption, Investment, Government Purchases, Net Exports.
• Gross National Product (GNP): total market value of final goods and services produced by a country's citizens whether domestically or abroad.

Prepare for your finals with this comprehensive reviewer on key economic concepts. Cover essential topics such as scarcity, utility, and production possibilities. Test your understanding of how markets function and the principles of efficiency and effectiveness in economics.