econ 2306 test one preview sheet

what is the Cobb-Douglas Production Formula?

Q= f (k, l) Q= output F( )= function of input k= capital l= labor

write out the demand function

Quantity of demand (Qd)=Function of (Price) if price increases, Quantity demanded decreases

what is meant by a circular flow diagram?

A diagram that traces the flow of resources, products, income, and revenue among economic decision makers a. Households supply inputs b. Business demand inputs c. Businesses then supply outputs d. Households demand outputs e. Money makes things flow; but is not a factor of production

total revenue contined

Elastic demand: A negative relationship exists between changes in price and changes in total revenues inelastic demand:A positive relationship exists between changes in price and total revenues. We therefore conclude that if demand is inelastic, price and total revenues move in the same direction. (elastic)sensitive to price--drop price for more TR (inelastic)not sensitive to price--raise price for more TR

how it total revenue affected by elasticity?

Total Revenue = price x quantity; elastic: price goes down 10%; quantity d goes up 25%= elastic; Total revenue increases price goes down 10%, quantity d goes down 25%; total revenue decreases unit elastic: price goes down 10%, quantity goes up 10%, TR stays the same; inelastic: price goes down 10%, quantity d up 1%; total revenue decreases price goes up 1%, quantity d goes up 1%, total revenue increases; if something is elastic and you want more of it, throw a sale; don't throw a sale for inelastic goods; sensitive to price--drop price for more TR not sensitive to price--raise price for more TR

what are the sectors of macro?

Y=C+I+G+(X-M) Consumption= private sector Investment=business sector Government expenditures=public sector Exports-imports=international sector

what is meant by a price ceiling?

a case in which the government says "you can charge no more that $______" it is a maximum; the government has sided with the buyer; effective price ceilings must be set below equilibrium and must result in a shortage; example: rent control; leads to a shortage of apartments

what is mean by a price floor?

a case in which the government says, "you must charge at least $_______" price floors are a minimum; it means the government has sided with the seller; effective price floors must be set above equilibrium and must result in a surplus; example: minimum wage leads to a surplus of labor; increases in unemployment

how does correlation differ from causation?

a correlation between two variables does not necessarily imply that one causes the other; ii. Examples: two people walking together does not mean they will end up getting married; however, a mother dragging her toddler along is causing the child to go forward or something like that

how does a movement along a curve differ from a shift?

a movement along a curve is moving from one point to another along the curve and is a result of changes in price; a shift is moving the entire curve right or left and is a result of a change in a non price parameter

in terms of an income elasticity, what is meant by a normal good? ... inferior good? a luxury (or superior) good?

a normal good is a good that has a positive relationship to income; as income increases, the demand of that good will increase; an inferior good has a negative relationship to income; as income increases, the demand of that good will decrease

what is meant by shortage? surplus?

a shortage means that quantity demanded is greater than quantity supplied; it is graphically represented by a line below the point of equilibrium a surplus means that quantity supplied is greater than quantity demanded; it is graphically represented by a line above the equilibrium

how does allocative efficiency and productive efficiency relate to a PPF?

all the points on the PPF curve are productively efficient; however, there is only one allocatively efficient point, and it is determined by consumer sovereignty; (movements along curve changes according to consumer sovereignty; shifts of the curve are a result of the change of resources) productive efficiency: when resources are used to give the max possible output at the lowest possible cost; (price = minATC) allocative efficiency: resources are allocated to the best interest of society, max social wellfare and max utility; (price = mc)

what is meant by "shaving with Ockham's razor"?

applies to the inclusion of an irrelevant variable, "less is more"; simple explanations over complex; parismony of parameters(stingy with variables)

what causes a shift?

changes of non price parameters

over time, what happens if a nation devotes more of its production to capital goods? consumer goods?

devotion to capital goods will result in an increase in resources, shifting the PPF out to the right, growing the economy; devotion to consumer goods will only shift the PPF a little and will underprepare the nation

what is meant by allocation?

distribution

10. In the end, economic laws tend to prevail

example: Mexico trying to keep the exchange rate of the peso constant; in the end supply and demand wins

9. public policies have primary and secondary effects; some good, some bad

example: creating bike helmet laws lead to the secondary effect of more accidents because people feel safer and act more reckless always have to consider the secondary effects another example: raising minimum wage; primary: increases wages; secondary: higher unemployment

6. there is often more than one way to produce things

example: handmade or factory made clothes; two countries may be able to produce the same good, but one might have a comparative advantage (due to specialization)

7. voluntary exchange is mutually advantageous

example: hiring a moving truck; you get the service, they get the money; example: ordering something off ebay; that thing has value to you more than money; in turn, to the seller money has more value than the thing they're selling

2. risk is unavoidable

example: the oil spill

5. people generally act on their own self interest

example: the producer sells out of self interest in order to get money to feed his family; in turn the goods he sells benefits others; remember positive and negative externalities; example: loud music from neighbors example: standing in line at Walmart; not involved in the specific trade process at checkout, but still affected by it

1. scarcity is inescapable

example: you can't be at two places at the same time; Stephanie has to choose between playing basketball or swimming after school; there is a a scarcity of time since she can't do both

List which direction each of the non-price parameters of demand shifts the demand curve.

if income increases, curve will shift right if it is a normal good. If it is an inferior good, curve will shift left. if the price of a complement goes up, the demand curve will shift left. if the price of a substitute goes up, the demand curve will shift right. if the number of buyers increases, the demand curve will shift right. if taste/preference for a good increases, the demand curve will shift right; if buyers expect prices to increase in the future, the demand curve will shift to the right

how does micro differ from macro?

micro deals with the small picture, such as individuals and firms, while macro deals with the big picture, the nation's economy as a whole

write out the supply function

quantity of supply = function of (price) as price increases, quantity supplied increases

what is meant by normative economics?

reflects an opinion, and can't be proved or disproved by reference of facts key words: what should be; example: "Inflation is too high" (it should be lower) equity; "fairness" is a normative issue because everyone's idea of fairness is different

what is the largest part of national income? what is the smallest?

rent is the smallest, wages are the largest

what are the payments to the four factors of production?

rent, wages, interest, profit

what is meant by positive economics

statements based on empirical evidence that can be tested; key words: what is example: Inflation is 5% efficiency is a positive issue; allocative efficiency is the right mix of goods; productive efficiency is the right methods of production

non price parameters for demand quick notes

normal good has a positive relationship with income inferior goods have a negative relationship with income substitutes have a positive relationship between price of one good and the demand of the other complements have a negative relationship between the price of one good and the demand of the other unrelated goods have no relationship

what are the non price parameters of supply?

number of sellers, expectations of sellers, prices of inputs, taxes/subsidies, technology, weather

Using the demand function, demonstrate what happens when price changes & what happens when a non-price parameter changes.

when the price changes, quantity demand changes; graphically shown as a movement along the curve; when a non price parameter changes, demand changes; the entire curve shifts left or right

Using supply function, demonstrate what happens when price changes and what happens when a non price parameter changes

when the price changes, quantity supply changes; graphically shown as a movement along the curve; when a non price parameter changes, supply changes; the entire curve shifts left or right

what is the general formula for elasticity?

%change in quantity /%change in price

what is meant by unintended consequences?

(Adam Smith)- outcomes that are not the ones intended by a purposeful action, "secondary effects" (ex: seat belt laws- primary= save lives, secondary= more accidents)

what is the mid point formula for elasticity?

(Q2-Q1/Q2 + Q1) / (P2-P1/P2 + P1)

what is the formula for economics?

(wants > resources) ***wants that approach infinity/limited amount of resources economics is the study of how people allocate limited resources to satisfy unlimited wants. economics is derived from two Greek words: oikos meaning household, and nemein, meaning management; literally: household management

what are the levels of micro?

1) individual 2) entrepeneur 3) firm 4) industry 5) politicans/voters

when was the wealth of nations published?

1776

what are the non-price parameters of demand?

Income (Normal, Inferior), Price of other goods (complementary, substitutes, or unrelated), taste/preferences, Expectations of buyers, Advertising, Number of buyers

what is meant by production?

The producing of the output; or rather, the transforming of inputs into outputs

what is a definition of economics?

a social science which attempts to explain how individuals, firms, and nations allocate (distribute) scarce (fixed, limited) resources (inputs) among competing interests (opportunity cost)

what causes a moment along a curve?

changes in price

4. incentives matter

increases willingness to buy; example: coupons; half off days at Salvation Army

what are the four factors of production?

land, labor, capital, entrepreneurship

what is meant by an economic "bad"?

less preferred to more? Weeds are a good example of bads—goods for which the desired quantity is much less than what nature provides at a zero price.

what does the slope of a PPF represent?

opportunity cost (of the good on the horizontal axis?)

what is meant by capital intensive production? labor-intensive production?

production that requires a larger amount of capital/machinery/investment to produce good or service; labor intensive production, however, requires a larger amount of human labor to produce a good or service.

what is meant by scarcity?

scarcity is the fundamental economic problem; there is a fixed/limited supply for unlimited wants; scarcity is inescapable; everyone experiences scarcity, no matter how rich because you will never be able to satisfy all your wants and therefore must make choices

what is meant by time-series data? Cross sectional data?

time series data looks at information in the order of time; cross sectional data looks at information in one set time

what are three questions that all economic systems must answer?

what are we producing? (allocation of inputs) how will we produce it? (production) for whom are we producing? (allocation of outputs)

what are the four types of economics systems?

1. Capitalism ex. Hong Kong 2. Command and Control ex. North Korea 3. Compromise ex. U.S., most places 4. Customary/traditional ex. isolated island; Gilligan's Island

what are the three steps of comparative statics?

1. Identify the initial equilibrium price and quantity (P1, Q1) 2. identify the non price parameter; is it a shift in demand or supply? is the shift right or left? 3. identify new equilibrium of price and quantity example: oat bran before and after its increase in demand

what are the six economic warnings?

1. Post Hoc ergo propter hoc fallacy 2. fallacy of composition 3. correlation does not necessarily mean causation 4. violation of ceteris paribus 5. exclusion of a relevant variable 6. inclusion of an irrelevant variable

what were the two most noble professions discussed in class? why were these considered to be the most noble?

1. plumber or AC man because without them life would be horrible 2. manager of McDonalds "no two nations with McDonald's have gone to war with each other" --T Friedman, meaning that trading with other nations prevents war because there's too much business involved. There's a McDonald's in China; there's not one in North Korea

what makes a good more or less elastic?

1. substitutes; few subs=inelastic; many = elastic 2. time; short run=inelastic; long run= elastic 3. product definition; broadly defined=inelastic; narrowly defined=elastic 4. % of your budget or income; small part=inelastic; large part=elastic 5. luxury=elastic; necessity=inelastic examples: gas, electricity, healthcare, cigarettes, sugar--inelastic fresh peas, root beer, private education--elastic shoes--unit elastic

what is the 8 part definition of demand?

1. the various quantities 2. of a good or service 3. which a consumer 4. is both willing and able 5. to purchase 6. at various prices 7. per unit of time 8. ceteris paribus

8 part definition of supply

1. the various quantities 2. of a good or service 3. which a producer 4. is both willing and able 5. to produce/sell 6. at various prices 7. per unit of time 8. ceteris paribus

what lessons can be learned from a circular flow diagram?

?? the circular flow diagram shows us how households and businesses are dependent on each other within an economy

who is the author of the wealth of nations?

Adam Smith

what is meant by the "guns and butter" metaphor?

Example of a simple production possibility frontier, it demonstrates the relationship between a nations investment (military) and civilian goods (consumer goods)

what is the fallacy of composition?

The error that if something is true for an individual, then it must also be true for the group. but sometimes if everyone else does it, it no longer works; example: going to the parking lot early to get a better spot

in terms of cross price elasticity, what is meant by a complement? a substitute? an unrelated good?

When two goods are substitutes, the cross price elasticity of demand will be positive. When two related goods are complements, the cross price elasticity of demand will be negative

what is meant by the law of increasing opportunity cost? why does this happen?

because some resources are easily transferred to the other good, but some are not; not all can convert so it becomes increasingly costly as it moves along curve; example: some football players can convert into baseball players and vice versa or singers and soldiers

how do consumer goods and capital goods differ?

capital goods are goods that produce other goods; consumer goods are nondurables, one use goods; example: consumer goods as in corn for food; capital goods as in corn for seed

In each of the economic systems, how are the three economic questions answered?

capitalism: price determines answers command: the government determines answers compromise: price and government answers customary: tradition determines answers

In terms of equilibrium price and quantity, what happens when supply and demand shift in opposite directions? ... The same direction?

case 1: demand shifts right, supply shifts right; equilibrium price: unknown (depends on the magnitude of the shifts) equilibrium quantity: increases case 2: demand shifts left, supply shifts left; equilibrium price: unknown equilibrium quantity: decreases case 3: demand shifts right, supply shift left equilibrium price: increases equilibrium quantity: unknown case 4: demand shifts left, supply shifts right equilibrium price: decreases equilibrium quantity: unknown if supply and demand move in the same direction, we will know equilibrium quantity; to the left, quantity decreases; to the right, quantity increases if supply and demand move in the opposite direction, we will know equilibrium price; demand to the right, price increases; demand to the left, price decreases

what is meant by cross-price elasticity? do we care about the sign or magnitude? how do we interpret the sign?

cross price elasticity is comparing the price and quantity changes between two different goods; formula: (%change in quantity of good B/ % change in price of good A) we care about the sign; if the sign is positive, the goods are substitutes; if the sign is negative, the goods are complements; if the sign is zero, the goods are unrelated

what is meant by elastic, inelastic, unit elastic, perfectly elastic, and perfectly inelastic?

e > 1 = elastic e < 1 = inelastic e = 1 = unit elastic e = infinity = perfectly elastic e = 0 = perfectly inelastic

3. therefore, all persons must make choices

each individual must make choices because resources are limited and therefore cannot satisfy​ one's many competing wants. example:

what is the opposite of an economic good?

economic bad (good--more preferred to less)

how does elasticity vary along a demand curve?

elastic at the top, inelastic at the bottom, unit elastic in the middle

what is meant by income elasticity? do we care about the sign or magnitude? how do we interpret the sign?

elasticity of income; (% change in quantity/%change in income) we care about the sign; if the sign is positive, it is a normal good; if it is negative, it is an inferior good

what is meant by the "invisible hand"?

even though each individual pursues his or her self-interest, the invisible hand of market competition promotes the general welfare; describes the self-regulating behavior of the free market

what happens in a market graph if a price is below, above, and at equilibrium?

if the market price is below equilibrium, there will be a shortage because quantity demanded will be greater than quantity supplied; (find the shortage by subtracting quantity demanded by quantity supplied)(to fix a shortage, raise the price) if the market price is above equilibrium, there will be a surplus because quantity supplied will be greater than quantity demanded; (find the surplus by subtracting quantity demanded by quantity supplied)(to fix a surplus, lower the price) if the market price is at equilibrium, this means that quantity supplied is equal to quantity demanded; it is the natural state of the market

list which direction each of the non price parameters of supply shifts the supply curve

if the number of sellers increases, the supply curve shifts to the right; if sellers expect production will cost more in the future, the supply curve will shift to the right; if the price of inputs increases, the supply curve will shift to the left; if there is an increase in taxes, the supply curve will shift to the left; if there is an increase in subsidies, the supply curve will shift to the right; if there is an increase in technology, the supply curve will shift to the right; if there is bad weather, the supply curve will shift to the left

what does it mean to be operating inside, outside, or on the PPF?

inside PPF: inefficient; resources are not being fully utilized outside: unattainable; not enough resources; resources can be increased through an increase in resources, inputs, technology, trade On PPF: efficient

what does the shape of a PPF represent?

it is a bowed out shape; it bows outward from origin because of the Law of Increasing opportunity cost

what is meant by post hoc ergo propter hoc?

literally means: after this therefore because of this; just because one event preceded another does not mean it caused it; example: saying it's bound to rain because you washed your car

what is meant by "aggregate"? which branch of economics uses this term?

macroeconomics deals with aggregates (sums, total)

what is meant by elasticity?

measure of responsiveness/sensitivity (concerning demand relative to price change) examples: $10 worth of gas: elastic/uptight; restricted/sensitive to price 10 gallons worth of gas: inelastic/easy going; doesn't care about price

what is meant by opportunity cost?

the best foregone alternative

in terms of slope what supply curves are more elastic than others?

the flatter the slope, the more elastic; (the steeper the slope, the more inelastic) a perfectly inelastic supply means that no matter what the price, the quantity supplied remains the same. (vertical line) a perfectly elastic supply means the slightest reduction in price will cause quantity supplied to fall to zero. (horizontal line)

in terms of slope, what demand curves are more elastic than others?

the flatter the slope, the more elastic; (the steeper the slope, the more inelastic) so horizontal, i guess?

8. It is wealth, not poverty, which has causes

the natural state of people is poverty; studying how people acquire wealth and build society and maintain economy; moral hazard