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Difference between Macro and Micro?
- micro-branch of economics that deals with human behavior and choices as they relate to relatively small units. Individual firm, industry, single market.
- macro-human behavior and choices as they relate to an entire economy.
- micro-single price, particular good, single form
- macro- level price and entire economy
- "all other things constant"
- or "nothing else changes"
- ex: If we raise the price of coke and nothing else changes ,higher price of pepsi cola, people will buy less.
What is the central problem of economics?
- Scarcity-condition in which our wants (for goods) are greater than limited resources (land, labor, capital, enterpreneurship) available to satisfy these wants.
- Scarcity has effects
- 1. need to make a choice
- 2. need for rationing device
- 3. competition
- book written in 1776
- "invisible hand" guided individuals actions towards a positve outcome they did not intend
Difference between positive and normative economics. Example?
- Postive- "what is" cause-effect
- Normative-"what should be" value judements cant be tested
What is fallacy of composition
arises when are infers that something is true of the whole from the fact that it is true of some part of the whole.
What is the difference between a direct and indirect relationship between variables? Example.
- direct- going the same direction
- indirect- when one goes up the other goes down. not same direction.
The four division of economics
What is the PPF(production posibilites frontier)? Why the bowed out shape?
- -a combination of two goods that can be produced in a certain period of time under conditions of a given state of technology and fully employed resources.
- straight line-constant
- bowed-outward- increasing opportunity costs.
What is Opportunity Cost? How is it related to PPF?
- Opportunity Cost-most highly valued opportunity or alternative forfeited when a chance is made.
- The Shape of PPF depends whther on OPP costs
- 1)are constant
- 2)Increase as more of a good is produced.
- Why do Opp Costs increase as more of the good is produced?
- The answer is bc people have varying abilities.
Define Law of Demand
as the price of good rises, the quantity demanded of good falls, and as the price of a good falls, the quantity demanded of good rises. ceteris paribus.
Difference between Change in Quantity Demanded and Change in Demand. What causes each?
- Change in Quantity Demanded- movement one point to antoher point on the same demand curve caused by a change in price of good.
- Change in Demand- Shift in demand curve
- 1. Income
- 2Preferences- the amount they are willing to buy at particular price.
- 3. Prices of related good
- -substitues-satisy similar needs or desire
- -complements- they are consumed jointly
- 4. Number of Buyers- more buyers= higher demand, fewer=lower
- 5. Expectations of Future price
Define the Law of Supply
as the price of good rises , the quantity supplied of good rises, and as price of a good falls, quantity supplied of the good falls, ceteris paribus.
Difference between Change in Quantity Supplied, and Change in Supply. What causes each?
- A Change in Supply- refers to a shift in supply cruve
- 1. Prices of Relevant Resources
- 2. Technology prices of other goods
- 3. Number of sellers
- 4.Expectations of Active Price
- 5. Taxes and Subsidies
- 6. Our Restriction
- Change in Quantity Supplied- movement along supply curve. Change of price of good or own price causes shift.
Define Equilibrium, Surplus, Shortage
Equilibrium- price at which quantity demanded of the good equals quantity supplied.
Surplus-quantity supplied is greater than quanitity demanded. Prices above Equilibrium price.
Shortage- quantity demanded is greater than quantity suppllied. Prices below Equilirium price.
Types of Gov. Intervention. Price Floors and Price Ceilings
- Price Ceiling- gov-mandated max price above which legal trades can not be made
- ex: government manadates max price at which good X sold @ 8.
- Price Floor- government mandated minimum price below which legal trades can not be made
- ex:gov mandates min price at shich good X can be sol at 20 dollars . 20=floor price.
- Price Floor above Equilibrium causes?
- 1. Surpluses
- 2. Fewer Exchanges
What is the idea behind Price Elasticity of Demand ? Supply?
- 4 factors that are relevant to the determination of price elasticity of demand ar:
- 1.number of substitues
- 2.necessities versus luxuries
- 3.percentage of one's budget spent on the good, and
- 4. time
- Price Elasticity of Supply- measures the responsiveness of quantity supplied to changes in price.
Peak= High Inflation
Economy needs cooling
Trough =High Unemployment (recession)
Economy needs stimulus
Balanced and Unbalancced Ecconomic Growth
- Unbalanced- technology changes in one sector of economy at a time
- Balanced- technology changes in ALL sectors of economy at once
Total Revenue Rule
Price times Quantity
- If Ed is >1 Elastic
- If Ed is <1 is Inelastic
- If Ed =1 is Unitary
Price Elasticity of Demand. Idea?
How responsive are consumers to a given percentage change in P ( Will they change their purchases by a larger, equal, or a smaller percentage in response to a certain percentage in price.
Price Elasticity of Supply. Idea?
How responsive are sellers to a given percentage change in market in price? ( assuming the have no control) over market price, will they change their output for sale by a larger, equal or smaller percentage in response to a certain percentage change in market P)
what are four other factors determining the elasticity of demand? Supply?
- 1. number of substitues available for product
- ex:many-elas, few -inelas
- (orange juice) (drugs)
- 2. percentage of Y required to purchase product
- large-elas, small-inelas
- (houses) (food)
- 3. How product is perceived by consumer
- Luxury-elas, necessity-Inelas
- (yachts) (md services)
- 4. time factor
- long period-elas , short period-inelas
- (gas) (gas)
What is income elasticity in terms of normal and inferior goods
- If Ey is positive (even decimal) or 0, the good is a normal good. Purchases increase when increases
- If Ey is negative or <0 they good is inferior good. Purchases decrease as Y increase
- If Ey is =+1 the good unitary normal -1 the good is unitary inferior
Define Total Utility, Marginal Utility, Diminising Marginal Utility
- TU= Amount sales from all wants
- MU=additional satisfaction of each additional unit bought
- DMU=MU or satisfaction gained by consuming equal successive cents of a good will decline as he amount consumed increases.
Formula for the Utility Maximizing Rule
- Consumer gets max satisfaction from all goods bought when marginal utility per dollars spent is the same for each of the goods purchased.
- Max Consumer Sat= MUa=MUb
- Pa Pb
Socialism vs Capitalism
- Socialism-economic system which the means of production are either state owned or commonly owned and controlled cooperatively
- capitalism-a economic system where in which means of production are privately owned
types of capitalism in the US
- 1. high reliance on the ownership of property
- 2.lots of freedom of enterprise
- 3.everyone operates on his/herown self interest
- 4.comp is beneficial to the system
- 5.high reliance on free markets to set and adjust prices
- 6.government plays a minimum role
traditional minimum wage vs new analysis
- traditional-increase in minimum wage increase in UE
- new analysis-increase in minimum wage, decrease in UE