ECON Term 1

Question 1

Economics

Answer 1

The social science that studies the choices made by economic players to cope with scarcity.

Question 2

Difference between Microeconomics & Macroeconomics

Answer 2

Microeconomics: the study of choices that producers and consumers make, how they interact in markets and the influence of governments

Macroeconomics: the study of the performance and interaction of the national and global economies

Question 3

Scarcity

Answer 3

The shortage and inability to satisfy all our wants, continuously created by the fact that we want more than we can get.

Question 4

Economic Players

Answer 4

Consumers, producers, government and society.

Question 5

Two Big Questions

Answer 5

1. How do choices determine what, how, for whom goods & services get produced?
2. When do choices made in the pursuit of self-interest also promote social interest?

Question 6

First Big Question + Examples

Answer 6

1. How do choices determine what, how, for whom goods & services get produced?

-What: depending on time, technology, resources of region
- How: land; gifts of nature to produce goods & services, labor; work time & effort that people devote to produce goods & services (Quality=Human Capital), capital: tools, instruments, machines buildings & other constructions businesses use to produce goods & services (Financial Capital=money used to buy capital), entrepreneurship: human resource that organizes land, labor & capital
- Who: depending on incomes that people earn: land earns rent, labor earns wages, capital earns interest through investment, entrepreneurship earns profit

Question 7

Second Big Question + Examples

Answer 7

When do choices made in the pursuit of self-interest also promote social interest?

• Necessity: Do we produce the right things in the right quantity?
• Efficiency? Do we use our factors of production in the best way?
• Equity? Do the goods and services go to those who benefit more from them?
• Self-Interest: choices that you think are best for you = you are most economically benefited
• Social-Interest: choices that are best for society as a whole = resources are used efficiently and goods & services are distributed fairly

Question 8

Tradeoff

Answer 8

Every choice has a tradeoff; get something=lose something

Question 9

Opportunity Cost & Marginal Cost

Answer 9

Opportunity Cost: the value of the option not taken to get something; the highest-valued alternative given up to get something. (note: the opportunity cost of one good is the inverse in terms of the other)

Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes

Question 10

What influences choice?

Answer 10

Choices, what/how/for whom goods and services get produced, change over time, place and quality of our economic lives.

Question 11

Draw + Explain PPF

Answer 11

• Production Possibilities Frontier (PPF) is the boundary between attainable (inside) and unattainable production (outside) of a combination of goods and services
• Production Efficiency (on PPF): if we cannot produce more of one good without producing less of some other good
• Scarcity illustrated by downward slope
• Production Inefficiency (inside PPF): if we can produce more of one good without producing less of the other good due to misallocated or unemployed resources
• TradeOff: in order to produce more of one good, the production of the other will decrease due to limited factors of production.
  Illustrated by the downward trend of PPF, for every pizza made cola production decreases
• Opportunity Cost (slope): the forgone goods used to produce more of the other good (note: the opportunity cost of one good is the inverse in terms of the other)
• Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes (rise time run)
• As production increases, opportunity cost increases because skill level decreases and the transfer of factors of production increase
  (PPF bows outward– is concave, largening boxes, second derivative is a linear positive trend). Resources are not equally productive in all activities, more workers are removed from the production of their original good and are required in order to achieve the same initial high level of skill.

Question 12

Draw + Explain Marginal Cost & Benefit Graph

Answer 12

GOAL: how to use resources efficiently, Allocative Efficiency (point of intersection): cannot produce more of any one good without giving up some other good that provides greater benefit.
- Shows most efficient quantity of goods produced to satisfy both producer and consumer + increase/decrease production of good

• Marginal Benefit: benefit/satisfaction received from consuming one more unit of a good/ willingness to pay.
• Principle of Decreasing Marginal Benefit (downward slope): as the units of goods increases the consumer satisfaction/their willingness to pay decreases
• Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes (rise time run)
• Principle of Increasing Marginal Cost: as production increases, opportunity cost increases because skill level decreases & more workers are transferred to reach same initial high level of skill
• Describing Points: Before/After that point, benefit falls short of benefit you could get from pizza/cola, as well as marginal benefit exceeds/falls short of marginal cost, so we get more value from our resources by increasing/decreasing production of pizza

Question 13

Draw + Explain Economic Coordination Circle

Answer 13

The first economic system was subsistence, producing for oneself, until people realised they excelled at different skills and started to specialise transitioning to commercial based production with these 4 core components

• Firm: economic unit that hires and organises factors of production to produce and sell goods & services
• Market: social arrangement that enables buyers and sellers to get information and do business with each other
• Property Rights: social arrangements that govern ownership, use, and disposal of resources, goods or services, incentive to specialise and produce goods
• Money: any commodity or token that is generally acceptable as means of efficient payment, durable, portable, interchangeable, easily divisible and gives a universally accepted unit value to goods
• Factors of production and goods & services flow in one direction
• Money flows in opposite direction
• Markets incentivize/inform individual decisions through price adjustments

Question 14

Why Trade + Advantages ?

Answer 14

• All parties benefit and encourages specialisation for faster rate of production so society can consume more
• Absolute Advantage: a person that is more productive than others
• Comparative Advantage: person that can perform activity at a lower opportunity cost than anyone else

Question 15

Joe can produce 6 smoothies (sm) or 30 salads (sal) in 60 min. Liz can produce 30 smoothies or 30 salads.

Joe spends 50 min sm and 10 min sal.
Liz spends 30 min sm and 30 min sal

Who should specialize in what + Trading Price + Gains in Trade

Answer 15

Liz specializes in smoothies.
Joe specializes in salads.

Trading Price: Price of 1 smoothie = 1-5 salads

Gains From Trade:
Total Gain = 10 Salads, 10 Smoothies
Individual Gains:
- Liz: 5 sm, 5 sal
- Joe: 5 sm, 5 sal

Question 16

Trading Price

Answer 16

Seller’s OC of sm ≤ Psm (acceptable price) ≤ Buyer’s OC of sm

• Allows for both sides to gain more than the OC it took to produce their goods
• Usually buyers are looking for lowest price, and sellers highest price + lowest OC

Question 17

How to Calculate Gains In Trade

Answer 17

1. Who specializes in what by comparing comparative averages= calculating–>comparing opportunity cost
2. How much each can make by specializing
3. Trading price + how much willing to trade to increase quantity in both goods they are selling
4. Gains in Trade
   Total Gain: new - original
   Individual Gain (C-A): # goods after trade - before trade

Question 18

Competitive Market

Answer 18

Market where many buyers and sellers have all necessary info so no one player can control or influence the price

Question 19

Money Price vs Relative Price

Answer 19

• Money Price: the amount of money needed to buy a good
• Relative Price: opportunity cost of a good in terms of money instead of quantity (Good’s Price/Alternative Commodity Price)

Question 20

Demand, Quantity Demand

Answer 20

• Demand: the relationship between the price of the good and the quantity demanded. Want it, can afford it and have a plan to buy it, not influenced by price change.
• Quantity Demanded: amount of good that consumer plans to buy in a particular time period and at a particular price

Question 21

Law of Demand + Draw/Explain Demand Curve

Answer 21

• Law of Demand (inward decreasing shape): other things remaining the same, the higher the price of a good, the smaller is the quantity demanded, the lower the price of a good the larger is the quantity demanded
  Result of
  >Substitution Effect: when the relative price rises (value of alternative rises) people seek substitutes/alternatives, so quantity demanded decreases
  >Income Effect: limited income as price of good rises, it become unaffordable and so quantity demanded of the good decreases
• Demand Curve=Willingness and Ability to Pay Curve: relationship between the quantity demanded/willingness to pay (marginal benefit) and price of a good when all other influences on consumers’ planned purchases remain the same

Demand increases, Demand Curve shifts right
Demand decreases, Demand Curve shifts left

Question 22

2 Types of Change on Demand & Supply Curves

Answer 22

1. Along the curve: if price or quantity variable changes
2. Shifting the curve: if external factor increases/decreases

Question 23

6 Factors that Change Demand + What it does to Graph +/-

Answer 23

1. Preference/Likability, when likability increases demand increases
2. Prices of Related Goods
   - Price of substitute, a good used in place of another good
   Same direction as demand: price rises, demand rises
   - Price of complement, a good used in conjunction with another good
   Opposite direction of demand: price rises, demand falls
3. Expected Future Price or Credit, when expected increases or credit is easy to obtain, the demand will increase now
4. Income: when income increases
   - Demand for inferior good decreases
   - Demand for normal/superior good increases
5. Future Income or Credit, when expected to increase demand increases
6. Population, when the population increases, demand increases

Question 24

Supply + Quantity Supplied

Answer 24

Supply: relationship between price and quantity of good supplied. It has the resources and technology to produce it → determines what is possible to produce, Can profit from producing it, and Has made a definite plan to produce and sell it

Quantity Supplied is the amount that producers plan to sell at a given price and time period

Question 25

Law of Supply & Draw/Explain Supply Curve

Answer 25

Law of Supply states other things remaining the same the higher the price the greater quantity supplied as producers are willing to supply a good only if they can cover their marginal cost which increases as quantity produced increases Supply/Curve/Schedule/Willingness-&-Ability-To-Produce: relationship between price and quantity of good supplied When supply increases, the supply curve shifts right When supply decreases, the supply curve shifts left

Question 26

6 Factors that Change Supply + What it does to Graph +/-

Answer 26

1. Prices of Factors of Production, if the PFP rises, the minimum price that a supplier is willing to accept for producing each quantity of that good rises 2. Price of Related Goods Produced > Price of substitute good: another good that can be produced using the same resources, as it rises supply rises > Price of complementary good: produced together, as it rises supply falls 3. Expected Future Price, if it rises, supply decreases 4. Number of Suppliers, if it rises, supply rises 5. Technology, create new products at lower cost, increasing supply 6. State of Nature, natural forces Bad weather supply falls Good weather supply rises

Question 27

Draw/Explain Supply & Demand Curve Graph

Answer 27

GOAL: Market Equilibrium: - Pe Equilibrium Price: price that clears the market, at which the quantity demanded equals quantity supplied - Qe Equilibrium Quantity: quantity bought and sold at the equilibrium price - Price is a Regulator: Regulates buying and selling plans & Adjusts when plans don’t match - Surplus: QdPe Price falls → rise in demand, fall in supply until market is cleared - Shortage: Qd>Qs = P

Question 28

Predicting Changes in Price & Quantity + Draw On Graph

Answer 28

1.1 Increase in demand → movement up along supply both Pe & Qe rise Shortage The price rises, Qs increases, QD decreases 1.2 Decrease in Demand → movement down along supply Pe & Qe fall Surplus Price falls, QD increases, Qs decreases, until market clears 2.1 Increase in supply → movement down along demand curve Pe falls & Qe rises Surplus Price falls, QD increases, Qs decreases, until market clears 2.2 Decrease in supply → movement upwards along demand curve Pe rises Qe falls Shortage Price increase, Qs increases, QD decreases 3.1 Increase in Both: Pe uncertain (increased by inc. demand and lowered by inc. supply) & Qe rises 3.2 Decrease in Both: Pe uncertain (increased by demand and lowered by supply) & Qe decreases 4.1 Decrease in Demand + Increase in Supply: Pe decreased & Qe uncertain (decrease by dec. demand & increased by inc. in supply) 4.2 Increase in Demand + Decrease in Supply: Pe increases & Qe uncertain (increased by inc. demand & decreased by dec. in supply)

Question 29

P=16-0.2Q P=4+0.1Q Q=0.2P-16/0.2 Q=0.4P-40 1. Find Market Equilibrium (Pe & Qe) from equations 2. If Marginal Benefit (QD=P)/Marginal Cost (QS=P) rises/decreases what happens to market (Mc rises by 8) 3. If Demand/Supply rises/decreases what happens to market (D rises 16) 4. If P/Q=#, what happens to market & by what amount (P=10)

Answer 29

1. Pe=8, Qe=40 2. Pe=4+40/30 3. Qe=1360/15-40 4. Surplus of 30

Question 30

4 Types of Equilibrium Questions

Answer 30

1. Find Market Equilibrium (Pe & Qe) from equations >Make all 4 equations from 2 equations >Isolate for P and Q 2. If Marginal Benefit (QD=P)/Marginal Cost (QS=P) rises/decreases what happens to market >What is line & equation is changing (Pe or Qe) >Find Pe 3. If Demand/Supply rises/decreases what happens to market > What line & equation is changing (Pe or Qe) >Find Qe 4. If P/Q=#, what happens to market & by what amount >Shortage/surplus >Which is bigger: supply/demand --> Q-Q=amount

Question 31

Price Elasticity of Demand (ed) + Draw Graphs

Answer 31

Percentage ratio, no direction, yields a negative value, only magnitude measurement of the responsiveness of the QD to a change in its P when all other influences on buying plans remain the same > Formula: %△QD/%△P = (△Q/Qave)/(△P/Pave) 1. Perfectly Inelastic Demand: QD does not change no matter the P infinite, no substitutes 2. Inelastic Demand: ed<1, %△QD is smaller than %△P Unit Elastic Demand: %△QD equals %△P 3. Perfectly Elastic Demand: %△QD is infinitely large when price barely changes, lots of supply 4. Elastic Demand: ed>1, %△QD is greater than the %△P

Question 32

3 Factors that Influences ed

Answer 32

1. Closeness of Substitutes: the more competitive(s) a substitute the more ed, less competitive inelastic >Necessities = inelastic demand >Luxuries = elastic demand 2. Proportion of Income Spent on the Good: greater the proportion of income consumers spend on good the more ed, smaller proportion inelastic 3. Time Elapsed Since Price Change: more reaction time to adjust to change the more elastic, less time inelastic

Question 33

Cross Elasticity of Demand & Income Elasticity of Demand

Answer 33

Measure of the responsiveness of demand for a good to change in the price of a substitute or a complement eC= %△QD/%△Psub/comp = (△Q/Qave)/(△P/Pave) >Substitute is positive >Complement is negative Income Elasticity of Demand: measures how QD responds to change in income, Ceteris Paribus ei= %△QD/%△Pincome = (△Q/Qave)/(△P/Pincome) >Income elastic+Normal Good: ei>1 >Income inelastic+Normal Good: 0Income elastic+Inferior Good: e<=0

Question 34

Elasticity's Influence on Total Revenue

Answer 34

Total Revenue Test: estimate ed by observing the change in total revenue from price change Elastic: price cut increases TR Inelastic: price cut decreases TR Unit Elastic: unchanged at maximum - Elastic: quantity sold greater than price cut - Inelastic: quantity sold smaller than price cut - Unit elastic: equal, max

Question 35

Elasticity of Supply + Draw Graphs

Answer 35

No direction, yields a positive value, only magnitude measurement of the responsiveness of the QS to a change in its P when all other influences on buying plans remain the same FORMULA: %△S/%△P 1. Perfectly Inelastic Supply: eS=0, no matter price, supply stays the same 2. Unit Elastic Supply: eS=1, linear passing through origin 3. Perfectly Elastic Supply: eS=infinity, price remains fixed as supply changes 4. Elastic: eS>1 vertical axis intersection 5. Inelastic: eS<1 horizontal axis intersection

Question 36

2 Factors that Influence es

Answer 36

1. Resource Substitution Possibilities: more supplies the greater the elasticity of the supply, how easily is it to switch resource allocation to better good 2. Time Frame for Supply Decision: more reaction time more elasticity, less means inelastic, momentary supply is perfectly inelastic