Econ 510 Exam 1 Study Guide

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Intermed Micro Exam 1
Chapter 1 (Powerpoint Slides)
Economics- Unlimited wants and limited resources
Microeconomics- Branch of economics that deals with the behavior of individual economic units. Units such as, consumers, firms, workers, and investors, as well as the markets that these units comprise. Macroeconomics- Branch of economics that deals with aggregate economic variables. Such as the level and growth rate of national output, interest rates, unemployment, and inflation. Micro Economics is a story of trade-offs that consumers, workers & firms face and shows how these trade-offs are best made.

Key Players – Consumers, Workers, Firms
Trade offs for Consumers:
Limited Incomes – To save or to spend.
If save then for HOW LONG and of-course HOW MUCH
If spend then on WHAT and HOW MUCH
This gives birth to the CONSUMER THEORY, which talks about the preferences, choices, utility etc. Trade offs for Workers:
Time: Leisure Vs. Labor
Whether and when to enter the work force…. Pay scale is dependent on education
Choice of employment: Risky but high paying VS safe but less money Trade offs for Firms:
What to produce?
How much to produce?
Example: Any company in the world would love to produce everything and reap profits but can’t do it. Central planned economy- Prices are set by the gov’t
In a market economy- Prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good. In economics, EXPLANATION and PREDICTION are based on theories and models. Theories- are developed to explain observed phenomena in terms of a set of basic rules and assumptions. Model – is a mathematical representation, based on economic theory, of a firm, a market, and some other entity. Positive Analysis - describing relationships of cause and effect. Normative Analysis – Analysis examining questions of what ought to be. Competitive Market – market with MANY buyers and sellers trading identical products so that each buyer and seller is a price taker. Non-Competitive Market – Seller or buyer can influence the prices Market Boundary – GEOGRAPHICAL and RANGE of products

Why is boundary important? To get to know about actual and potential competitors and its helpful in making Public plicies.
Example: Pain Killers
REAL Vs. NOMINAL prices
Nominal price - Absolute price of a good, UNADJUSTED for inflation Real Price - Price of a good relative to an aggregate measure of prices; price ADJUSTED for inflation Consumer Price Index – Measure of the aggregate price level. Producer Price Index – Measure of the aggregate price level for INTERMEDIATE products and WHOLESALE goods. REAL vs. NOMINAL pricing

The real price of eggs in 1970 dollars is calculated as follows: The real price of eggs in 1970 dollars is calculated as follows:

The real price of eggs in 1990 dollars is calculated as follows:

Public Policy -
* Great impact on Economics
* Can change course of the market
Chapter 2 (Powerpoint Slides)
Supply Curve - Relationship between the quantity of a good that producers are willing to sell and the price of the good The Supply curve is upward slopping: The higher the price, the more firms are able and willing to produce and sell. If production costs fall, firms can produce the same quantity at a lower price of a larger quantity at the same price. The supply curve then shifts to the right. Insert Graph by hand:

The Supply Curve – is thus a relationship between the quantity supplied and the price. We can write this relation as an equation: QS = QS(P) Other Variable That Affect Supply are:
Production costs, including wages, interest charges, and the costs of raw materials. When production costs decrease, output increases no matter what the market price happens to be. The entire supply curve thus shifts to the right. Change in supply or Shifts in the supply curve Vs Change in the quantity...
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