Econ 101 Exam 1 Review PDF

Chapter 1 Individual choice is the basis of economics because… 1. Resources are scarce a. Resources: Land, labor (time of workers), capital (machinery, buildings), and human capital (the educational achievements and skills of workers) 2. Consider Opportunity Cost (t...

Chapter 1 Individual choice is the basis of economics because… 1. Resources are scarce a. Resources: Land, labor (time of workers), capital (machinery, buildings), and human capital (the educational achievements and skills of workers) 2. Consider Opportunity Cost (true cost of anything is what you must give up to get it) 3. Marginal Decision: Trade off at the margin – compare costs and benefits at the margin 4. Individuals respond to incentives → ppl take opportunities to make themselves better off Economics interaction 1. Gains from Trade a. Specilization 2. Markets move toward equilibrium a. No individual is better off by taking a different action; by changing your behavior, you would not be made better off 3. Resources should be used efficiently to achieve society’s goals a. Takes all the opportunity to make people better, not worse off b. Efficiency is not the sole way to evaluate an economy: equity or fairness is also desirable → tradeoff between equity and efficiency 4. Markets usually lead to efficiency, but when they don’t, government intervention can imporve society’s welfare 5. One person’s spending is another’s income 6. Spending can get out of line with economy’s productive capacity a. Inflation / deflation 7. Increases in the economy’s potential lead to economic growth over time Practice Questions 1. An economy is inefficient if it is: possible to produce more of one good without producing less of another good a. Productive efficiency means it is impossible to produce more of one good without decreasing the quantity that is produced of another good 2. Municiple courts are not accessible for people with disabilities. The manager responds that the $1 million improvement needed to address the problem will not happen because “that money could be spent building lavatory space for people with disabilities”: The true cost of something is its opportunity cost a. True cost: “The real cost of any purchase isn't the actual dollar cost. Rather, it's the opportunity cost—the value of the investment you didn't make, because you used your funds to buy something else.”  b. Opportunity Cost v. Marginal Decision: Opportunity cost refers to the benefits or values that are lost when one alternative is preferred over another. Marginal cost is the additional cost of producing extra units of a product. 3. Example of marginal analysis: deciding whether to eat one more taco 4. Which statement demonstrates one of the three principles of economy-wide interactions?: in 2008, fearing a recession, Congress approved a White House proposal to rebate some taxes for 2007 a. The three principles of Economy-Wide Interactions i. One person's spending is another person's income 1. One person spends more, the other’s incomes increase ii. Overall spending sometimes gets out of line with the economy’s productive capacity; One person's spending is another person's income iii. One person's spending is another person's income 5. Increases in total output realized when individuals specialize in particular tasks and trade are known as: gains from trade Chapter 2 - Positive Economics: objective and facts / right or wrong - Forecasts - Normative Economics: how the world should work; value judgement - Barter = exchange goods without using money - Model: simplified representation of real situation - Other things equal assumption - Production Possibility frontier - Opportunity costs - Efficiency - Economic growth - Factors of production (resources increase) - Improved Technology - Comparative advantage (everyone has a comparative advantage in something — some good or service in which that person has a lower OC than everyone else) - Absolute advantage: ability to produce a good or service better than anyone else - Circular Flow Diagram - Households are the sellers of the Factors Market and buyers in the Product Market - Factor Markets determine the economy’s income distribution Questions - Circular Flow Chart Problem - Some firms sell to other firms - Output = Over; Input = Under - As long as people have different opportunity costs, everyone has a comparative advantage in something - Factors of production include all of these EXCEPT money - “The PPF is useful because it illustrates how much of one good an economy much give up to get more of another good regardless of whether resources are being used efficiently” → FALSE because it matters if the resources are being used efficiently - Absolute advantage can be accomplished by creating the good / service t a lower absolute cost per unit using a smaller number of inputs - Why are the U.S. and Brazil willing to trade? - Brazil would trade as they give up less for the 10 large jets. Brazil has to give up 3 small jets for 1 large jet, but with the trade with the U.S., they only have to give up 1.5 small jets for 1 large jet. - The U.S. would trade as they give up less for the 15 small jets. The U.S. has to give up ¾ large jets for 1 small jet. With trade, they have to give up ⅔ large jets which are smaller than if they produced on their own. Chapter 3 - Competitive Market: many buyers and sellers for the same good - Supply Schedule: quantity supplied at each price is represented by a supply curve. With all things equal, the supply curve is upward sloping  - Movement along the curve is caused by price change - Shifts of the supply curve - Change in input costs - Change in Prices of Related Goods / Services - Substitutes: If heating oil prices increases, the supplier would supply more of the heating oil and less of the gasoline - Complements: Beer and the leftovers of brewing used for Marmite - Changes in Tech - Changes in Expectation - Changes in the Number of Producers - Shift in Demand Curve - Changes in the Price of Related Goods - Substitutes - Rise of the price of uber → people ride more bus / train - Complements - Tennis ball price increase, rackets demand decreases - Change in Income - Normal Good: Income increases, demand for the good increases - Inferior Good: Income increases, demand for the good decreases - Changes in Taste and Preference - Changes in Expectation - Future price drops → demand less - Future income increases → demand more - Changes in the Number of Buyers - The market demand curve for a good or service is the horizontal sum of the individual demand curves of all consumers in the market - Equilibrium Price (Market-clearing price) is the price at which the QD=QS - When the price is above Ep, surplus that pushes the price down - When the price is below its Ep, shortage that pushes the price up - Increase in demand, increases Ep and Eq - Increase in supply, reduces Ep and increases in Eq Questions 1. The market for smoothies is in equilibrium and the price of yogurt increases. In the smoothies market, supply will decrease 2. Excess demand will exist if the price is below the equilibrium price 3. If the price of quinoa rises, we generally expect the: quantity of quinoa to rise 4. Assuming that farmers can easily stock beef or pork, if the price decreases, you can expect the supply of pork to increase 5. Decrease in the quantity of supplied → movement along the supply curve  6. More homeowners put their houses up for sale during a real estate boom that causes house prices to rise: movement along the supply curve 7. Immediately after the school year begins, fast-food chains must raise wages, which represent the price of labor, to attract workers: leftward shift of the supply curve 8. A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases: the quantity of gasoline demanded falls in response to a rise in price. This is a movement along the demand curve 9. Due to wildfires in the area, 2021 was a down year for California wine-grape growers, who saw grape production fall by 5%: The supply curve shifts leftward. At the original equilibrium price of the year before, the quantity of grapes demanded exceeds the quantity supplied. This is a a case of shortage. The price of grapes will rise. 10. Technology is a factor of why supply shifts HW 1 1. Each players’ opportunity cost of free throws in terms of batting average: Batting Average / Free-throw Average 2. 1 additional metric ton of fish is 2,000 hotel rooms so to calculate how many hotel rooms the fishermen can produce: 497*2000 3. More people choose to do their own home repairs when the economy is slow and hourly wages are down: when the economy is slow, the opportunity cost of people’s time is also lower so the opportunity cost of spending time doing their own repairs is lower Chapter 4 - Willingness to pay determines the demand - Willingness to pay - price = individual consumer surplus - Cost of each potential producer (lowest price at which they are willing to supply a unit of good) - Efficiency of a market economy are property rights and economic signals - Market failure occurs making a market inefficient - Market Power - Externalities - Unsuitable for a Market to Allocate Efficiently - Public goods that cannot be bought and sold by the people - Ex: town road, school, and national defense Questions 1. If there is a technological improvement in strawberry cultivation, total surplus in the strawberry jam market: will increase  2. Romulus and Remus each consume two loaves of bread at the current price. If Romulus values each loaf of bread less than Remus values each loaf of bread, then: Remus’s consumer surplus is greater than Romulus’s 3. At Eq = consumer and producer surplus are maximized 4. Say Quantity of peppers supplied / Demanded 5. Cara’s cost of the last pepper supplied is 0.4 and Jamie’s cost of producing one more is 0.7: $0.7-$0.4=$0.3 6. UNOS decides to prioritize giving donated kidneys to patients with children: reduces the total life span of kidney recipients so reduces total surplus 7. Government intervention can be good in cases of market failure. Markets can fail… a. when monopolists prevent mutually beneficial transactions from occurring b. When one individual’s actions have side effects or externalities c. When the good themselves are unsuited for efficient management by markets Chapter 5 - Gov intervention can take the form of price / quantity controls - Price Ceiling: a maximum market price below the Eq price & creates shortages - Problems are the inefficiencies in the form of deadweight loss from inefficiently low quantity, inefficient allocation to consumers, wasted resources, and inefficiently low quality - Encourages shadow markets - Price Floor: a min market price above Eq price & creates surplus  - Inefficiencies in the form of deadweight loss from inefficiently low quantity, inefficient allocation of sales among sellers, wasted resources, and inefficiently high quality - Encourages illegal activity and shadow markets - Ex: Minimum wage - Quantity controls ‘ quotas: limit the quantity of a good (quota limit) - Gov issues licenses to individuals, the right to sell - The owner of the license earns a quota rent (demand price - quota limit = quota rent) - Quota drives a wedge which is equal to the equal rent - Deadwight loss and encourages illegal activity - Questions 1. Deadweight Loss is the triangle 2. Area B: Consumer surplus transferred from producer 3. When discussing quantity controls, the “wedge” is the value of the: quota rent 4. The consumer surplus lost to a price floor at point b is equal to the area: bcge 5. If she sublets her apartment at a rent that is above the price ceiling: the transaction takes place in a black market  6. Your school’s dean of students, who is a proponent of a low-fat diet, decrees that ice cream can no longer be served on campus: this creates deadweight loss 7. Inefficiently high quality caused by price floor 8. Deadweight loss is from the amount of total surplus lost because of missed opportunities. The inefficiency of wasted resources arises as consumers spend time and money driving to other states. HW 2 1. How price gouging can result in an increase in consumer surplus a. Prices act as signals and the rise in price signals to suppliers to increase the quantity they supply. The increase in output leads to an increase in the quantity sold and an increase in consumer surplus b. In anticipation of hurricane, people stock up on necessities, which leads to an increase in demand and an increase in their willingness to pay This implies an increase in consumer surplus 2. Reviw this video: https://www.youtube.com/watch?v=bhucQFXX1Gs 3. Gov pays the full cost for any patient: perfectly inelastic demand curve 4. Apple increases the quantity supply of watches following an unexpected increase in demand Chapter 6 - Price elasticity of demand = % change in QD / % change in P - Greater than 1 = elastic, TR falls when price increases - Less than 1= inelastic, TR rises when price increases - Exactly 1 = unit elastic, TR remains the same by change of price - Factors of Price Elasticity 1. Necessity or Luxury 2. Availability of Close Substitutes  3. Share of Income Spent on the Good a. High share of income: elastic b. Low share of income: inelastic 4. Time Elapsed since price change a. Long run: high elasticity b. Short run: low elasticitiy - Perfectly inelastic demand = QD is unaffected by the price - Perfectly elastic demand = unique price at which consumers will buy as much / little they are offered - Cross-price elasticity of demand = % change in Q of A demanded / % change in P of B - Complements = negative - Substitutes = positive - Price effect: after P increase, each units sold sells at a higher prices, raises revenue - Quantity effect, after P increase, fewer units are sold, which tends to lower revenue - Income elasticity of demand = % change in QD / % change in income - When positive, normal good (QD up, income up) - When negative, inferior good (QD down, income up) - Above 1, income-elastic - Less than 1, income-inelastic - Price elasticity of supply = % change in QS / % change in P 1. Availability of Inputs a. Large when inputs are available (low cost) b. Small when inputs are difficult to obtain (high cost) 2. Time horizon a. Larger when producers have more time → higher in the long run than short run Questions 1. Which good is MOST likely to have a vertical supply curve: scultputres by Michelangelo a. Regardless of price, the supply for a certain good is fixed i. Ex: Helium is finite so the market will dictate the price rather than an increase in supply 2. Price elasticity of demand = 0 is inelastic 3. For which goods is the cross-price elasticity of demand MOST likely a large positive number? a. French fries and onion rings 4. If the demand for milk rose, then, in the long run, milk drinkers would be better off if supply were elastic rather than inelastic The more elastic the supply curve, the easier it is for sellers to reduce the quantity sold instead of taking lower prices 5. Long run price elasticities of supply are generally larger than short run price elasticities of supply 6. HW 3 1. Free syringes a. Has to be elastic to be beneficial b. Weak complementary between syringes and drugs 2. HW 4 1. Tax gasoline because the DWL will be lower than the DWL from a restaurant tax 2.