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ECON 202 MIDTERM 1 STUDY GUIDE.docx. Exercise 05 2013-04-16 w solutions to exercise 5 University of Oregon Economics 202 ECON 202 - Spring 2013.
Exam 1 Study Guide
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Exam 1 Study Guide
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ECON 202 1st Edition Exam 1 Study Guide Chapter 1 4 Chapter 1 Individual Choice The 12 Principles 1 Choices are necessary because resources are scarce Resource anything that can be used to produce something else Scarce in short supply a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it 2 The true cost of something is its opportunity cost Opportunity cost What you must give up in order to get something 3 How much is a decision at the margin 1 Trade off Comparison of the costs and the benefits of doing something a Example eating a candy bar cost and benefit Marginal decision decision made at the margin of an activity about whether to do a bit more or a bit less of that activity Marginal analysis the study of marginal decisions Ex taxing or banning soda because of its negative health 4 People usually respond to incentives exploiting opportunities to make themselves better off Interaction and Individual Choice Specialization 5 There are gains from trade Trade allows us all to consume more than we otherwise could Specialization the situation in which each person specializes in the task that he or she is good at performing 6 Markets move toward equilibrium Equilibrium An economic situation in which no individual would be better off doing something different 7 Resources should be used efficiently to achieve society s goals Efficient taking all opportunities to make some people better off without making other people worse off Equity a condition in which everyone gets his or her fair share There are many definitions of equity Equity and efficiency are often at odds 8 Markets usually lead to efficiency People normally take opportunities for mutual gain 9 When markets don t achieve efficiency government intervention can improve society s welfare Sometimes markets fail and need correction Economy Wide Interactions 10 One person s spending is another person s income During recessions a drop in business spending leads to Less income less spending and further drops in business spending layoffs and rising unemployment 11 Overall spending sometimes gets out of line with the economy s productive capacity 12 Government policies can change spending Chapter 2 Supply and Demand and PPF A competitive market has many buyers and sellers of the same good or service none of whom can influence the price The supply and demand model is a model of how a competitive market behaves Demand represents the behavior of buyers o A demand curve shows the quantity o Demanded at various prices o The quantity demanded the quantity that buyers are willing and able to purchase at a particular price a change in demand does NOT equal a change in quantity demanded The Law of demand a higher price for a good or service leads people to demand a smaller quantity Understanding Shifts of the Demand Curve Important demand shifters 1 Changes in the prices of related goods or services 2 Changes in income 3 Changes in tastes 4 Changes in expectations 5 Changes in the number of consumers Changes in Price of Related Goods Substitutes Two goods are substitutes if a decrease in the price of one leads to a decrease in demand for the other or vice versa What happens to the demand for travel in Hawaii if the perceived safety cost of traveling to Mexico increases Changes in Price of Related Goods Complements Two goods are complements if a decrease in the price of one good leads to an increase in the demand for the other or vice versa Consumers often have to buy goods together An increase in price of gasoline will decrease the demand for SUVs Changes in Income The effect of changes in income on demand depends on the nature of the good in question o A normal good Demand increases when income increases and vice versa o An inferior good Demand decreases when income increases and vice versa Change in taste Taste in preferences are subjective and vary among consumers Seasonal changes or fads have a predictable effects on demand What happens to demand for boots in October Change in expectation If consumers have a choice about the timing of a purchase they buy according to expectations Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price o If prices for Xbox 360 consoles are expected to drop right before Christmas what will happen to sales during November Change in number of customers As the population of an economy changes the number of buyers of a particular good also changes thereby changing its demand o What happens to the demand for diapers in Russia as birth rates drop Supply Supply represents the behavior of sellers A supply curve shows the quantity supplied at various prices The quantity supplied is the quantity that producers are willing and able to sell at a particular price Understanding Shifts of the Supply Curve Important supply shifters include changes in 1 input prices 2 the prices of related goods or services 3 technology 4 expectations 5 the number of producers Chapter 3 Interference in markets has consequences I Price controls a Price controls legal restrictions on how high or low a market price may go There are two main types b Price ceiling a maximum price sellers are allowed to charge for a good or service usually set BELOW equilibrium c Price floor a minimum price buyers are required to pay for a good or service usually set ABOVE equilibrium II How Price Ceilings Cause Inefficiency a Price ceilings cause predictable side effects i Inefficiently low quantity ii Inefficient allocation to customers iii Wasted resources iv Inefficiently low quality v Black markets III IV V VI Inefficiently Low Quantity a When prices are held below the market price shortages are created b The lower the controlled price relative to the market equilibrium price the larger the shortage Inefficient Allocation to Customers a Price controls distort signals that would help the goods get allocated their highest valued uses b Consumers who value a good most don t necessarily get it So producers have no incentive to supply the good to the right people first i As a result goods are misallocated Wasted Resources a Price controls that create shortages lead to bribery and wasteful lines b Shortages not all buyers will be able to purchase the good c Normally buyers would compete with each other by offering a higher price d If price is not allowed to rise buyers must compete in other ways waiting in line illegal