Economics Supply and Demand Midterm Review: Scarcity, Markets, and Efficiency, Exams of Economics

Download Economics Supply and Demand Midterm Review: Scarcity, Markets, and Efficiency and more Exams Economics in PDF only on Docsity! ECONOMICS SUPPLY & DEMAND MIDTERM REVIEW NOTES Scarcity: unlimited wants exceed the limited resources available to fulfill those wants Economics: study of the choices people make to attain goals given their scarce resources Market: a group of buyers and sellers who come together to trade Economic assumptions: 1. People are rational 2. People respond to incentives 3. Optimal decisions are made at the margin Marginal analysis: involves comparing marginal benefits and marginal costs Trade-off: producing more of good or service means producing less of another ● What goods will be produced ● How will the goods be produced ● Who will receive the goods Opportunity cost: highest- valued alternative that must be given up to engage in an activity ● Possible price is between opportunity costs Centrally planned economy: the government decides how economic resources will be allocated Market economy: decisions of households and firms interacting in markets allocate economic resources Mixed economy: most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources Efficiency: ● Productive efficiency: good or service produced at the lowest possible cost ● Allocative efficiency: production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides marginal benefit to society equal to marginal cost of producing it ● Voluntary exchange: the buyer and seller of a product are made better off by the transaction ● Economic efficiency: market outcome in which the marginal benefit= marginal cost and CS and PS are at a maximum ● **allocation or resources is efficient if no one can be made better off without someone being made worse off ● Pareto efficiency: there's no way to get more of one thing without giving up something else Positive analysis: “what is” Normative analysis: what ought to be Macroeconomics: study of economy as a whole (inflation, unemployment, economic growth) Microeconomics: how households and firms make choices, how they interact in markets, and how government attempts to influence their choices Households: suppliers of factors of production (labor) and demand goods and services produced by firms and governments Factors of production/ economic resources/ inputs: labor, capital, natural resources, and ability Capital: ● Financial: stocks, bonds ● Capital: manufactured goods used to produce other goods ● Human: training and skills Production possibilities frontier: curve showing the maximum attainable combination of two goods that can be produced with available resources and current technology ● As you move down the production possibilities frontier → increasing marginal opportunity cost ○ Slope of PPF= opportunity cost Economic growth: ability of economy to increase production of goods and services Absolute Advantage: ability to produce more of a good or service than competitors using the same amount of resources Comparative advantage: ability to produce a good or service at a lower opportunity cost than competitors Product market: market for goods or services Factor market: market for factors of production Circular Flow Diagram Economic surplus: CS + PS Black market: buying and selling violate government price regulations Tax incidence: actual division of the burden of a tax between buyers and sellers in a market Perfect competition ● Lots of firms ● Product is standardized (same thing) ● Price taker (zero market power) ● No barriers to entry Monopoly: ● ONE firm ● Strong barriers to entry (patents, legal barriers) ● Price maker (set’s own price)--> has market power Formulas: Bond Price= 𝐶o𝑢𝑝o𝑛 1 + 𝐶o𝑢𝑝o𝑛 2 . . . 𝐶o𝑢𝑝o𝑛 𝑁 + 𝐹𝑎𝑐e 𝑉𝑎𝑙𝑢e (1+) (1+) 2 (1+) (1+)𝑁 ** the higher the default rate the higher the coupon payment Stock Price = 𝐷𝑣𝑑e𝑛𝑑 1 + 𝐷𝑣𝑑e𝑛𝑡 2 +. .. (1+) (1+) 2 Stock Price = 𝐷𝑣𝑑e𝑛𝑑 (−𝑟ow𝑡ℎ 𝑟𝑎𝑡e) Returns on investment= 𝐺𝑎𝑛 o𝑛 𝑛𝑣e𝑠𝑡𝑚e𝑛𝑡 𝑥 100 𝑚o𝑢𝑛𝑡 𝑦o𝑢 𝑝𝑎𝑑 Present Value = 𝐹𝑉 (1+𝑟) 𝑛 Future Value= 𝑃𝑉 𝑥 (1 + 𝑟) 𝑛 ● r= rate of return ● n= number of periods Midpoint formula= Economies of scale ● Doing more at once can sometimes create more output at same cost ● Reduces average cost ● Competition will bring price down Autarky: no trade Invisible hand: each person follows their best interest which overall allocates and maximises well-being of society Asymmetric information: you know you are sick so you buy health care Principal Agent: government actors are self-interested Elastic vs. inelastic ● Perfectly inelastic: 0 ● Inelastic if less than 1 ● Elastic if greater than 1 ● Perfectly elastic - infinity Tax revenue = T x Q Total surplus = value to buyers - cost of sellers Negative externality: supply shift left Positive externality: demand shift right Bonds: IOU +interest at a specific date Stock: partial claim to ownership (equity) Macro Expenditure = income GDP= C + I + G +NX ● Y is total production (aggregate supply) ● C + I + G +NX (aggregate demand) S (saving)= I (investments ) r=i - 𝜋 ● Real interest rate = nominal interest rate - inflation rate Loanable funds: ● Supply- saving ● Demand- investment ● Shift in supply: ○ Expectations about the future ■ Ex: save less today if you know you will earn more in the future ○ Incentives ■ Tax incentives incentify people to save shifting supply (savings) right ○ Tax credit ■ Shift demand of loanable funds Tax incidence: actual division of the burden of a tax between buyers and sellers in a market Not possible for produced surplus to go down when demand increases