Econ 212 Midterm

Trade makes everyone better off because consumptions is much higher when trade is involved. Causes- Absolute Advantage: producing a good using fewer inputs than another producer. If Each country has absolute advantage in 1 good + specializes in that good then both countries gain from trade, Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. When each country specializes in that good in which it has comparative advantage total productions is higher in all countries, the worlds economic pie is bigger and all the countries gain from trade.

Normative Statements- attempt to describe how the world should be. Positive Statement- attempt to describe the world as it is. Normative Ex: The government should print less money. Positive Ex: Prices rise when the gov't increases quantity of money.

3. The participants in the circular flow diagram are _FIRMS_ and _HOUSEHOLDS__. The markets in the circular flow diagram are GOODS AND SERVICES___ and FACTORS OF PRODUCTION.

Microeconomics is the study of economics from a more individual point of view (ex: consumers and their spending habits and firms in how they make profits) and how economy affects people in their daily lives. Macroeconomics is economics from a 'big picture' perspective, such as how our country's economy affects the world as a whole, etc.

a. Economic Growth; Ex: Improvement in technology. b. Possible but not efficient. i. Some resources under utilized, Ex: Workers unemployed c. Not Possible i. Extra hours of labor, Ex: 65,000 hrs isn't possible b/c the economy only has 50,00 hrs. d. All resources are utilized. e. A slope or bow shaped if the opportunity cost is constant PPF is straight. If opportunity cost of a good rises as the economy produces more of the good, PPF is bow shaped. f. A PPF is also a CPF when the PPF is at its full efficiency, because a CPF is the maximum quantity of goods that an economy can consume in a specified situation.

Opportunity cost is what must be given up to obtain something else, the opportunity cost of attending college is paying tuition.

Absolute advantage is producing a good using fewer inputs than another producer. Determined by measuring the cost of a good in terms of the input of the input required to produce it.

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. To determine you must find the opp. cost of the good in each country. It relates to trade because when you each country specializes in the good in which it has comparative advantage, total production in all countries is higher, the worlds "Economic Pie" is bigger and all countries gain from trade. The same applies to individual producers specializing in different goods and trading with each other.

Normal Good: Any goods for which demand increases when income increases and falls when income decreases but price remains constant. Ex.- New clothing/ New car. Inferior Good: Something comparable to a normal good and you are more willing to purchase as your income decreases or the price increases. Ex.- inexpensive foods/inexpensive car. Luxury Good: Is a good for which demand increases as people become wealthier, Ex.- instead of a luxury car you buy a luxury airplane, as income decreases, consumptions of these goods increase or decrease. For a normal good, when income decreases, consumption decreases but price remains constant. For an inferior good when income decreases your more willing to purchase this good and the demand increases. For luxury goods when income decreases demand for the good decreases.

Law of Demand: claim that the quantity of a demanded good falls when the price of a good rises, other things equal. Law of Supply: claim that the quantity of supplied of a good rises when the prices of a good rises other things equal. Equilibrium: (price) - That equates quantity supplied with quantity demanded. (quantity) - Quantity supplied and quantity demanded at equilibrium price.

The Buyers as a group determine the demand, and the Sellers determine the supply.

Is one with many buyers and sellers each has negligible effect on price. -All goods exactly the same. -Buyers and sellers so numerous that no one can affect market price-each is a "price taker".

When there is a surplus in the market, sellers respond by cutting prices, which in turn increase the quantity demanded & decrease the quantity supplied. When a shortage exists in a market, sellers respond by raising prices without losing sales, as prices raise quantity demanded decreases and quantity supplied increases and the market moves toward equilibrium.

Quantity demanded will increase in response to a decrease in price. When supply is more elastic and theres a decrease in price, quantity supplied decreases. Buyers & Sellers are more price sensitive when elasticity is high. If the supply curve is flat its said to be elastic, also if the demand curve is said to be flat demand is elastic as well.

-Availability of close substitutes. -Necessities VS Luxuries. -Definition of the market. -Time Horizon.

The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. Time is also a determinant.

Calculate by taking Percentage change in Quantity demanded, divided by Percentage change in Price. *[Use Midpoint Method: End value + Start value / 2, gives md point.] * % change in price: 45-35/ 40 (midpoint) X 100 = 25% * % change in Quantity Demanded: 50-100/ 75 (midpoint) X 100 = 66.67% *Price elasticity of Demand: 66.67 (Q^d) / 25 (P) = 2.67 is the price elasticity of demand for tickets.

Calculate by taking the Percentage change in Quantity supplied divided by Percentage change in price. If the elasticity of supply is .8, and a price increase led to a 4% (.04) in the Quantity supplied, whats the % change in price? * Take .8 over 1 and 1 over .04 then cross multiply- * .8 X .04 = .032 change to % so .032 X 100 = 3.2% (ANSWER)

21. A price floor is binding if the price floor is _ABOVE_ the equilibrium. A price ceiling is binding if the price ceiling is _BELOW_ the equilibrium. If a price ceiling is binding there will be a _SHORTAGE_. If a price floor is binding there will be a _SURPLUS_. If the price floor or ceiling is binding how are goods rationed? It is also important to know how to calculate shortages and surpluses. (ANSWER) Sellers ration goods using long lines, and discrimination according to sellers biases. Shortage = P1 and the distance or difference between Q1 and Q2. Surplus = P2 and the distance or difference between Q1 and Q2.

A.) A tax on sellers and a tax on buyers is the different yet shared, Taxes on a Buyer are commonly excised through a sales tax as a percentage of the price of the good.Taxes on the Seller are not directly levied on the buyer but on the seller. B.) Shared among participants in a market. C.) The effects of Price & Quantity, and the tax incidence are the same whether the tax is imposed on buyers & sellers. If the supply curve has shifted then the seller sends payment to the government.

A.) CS = WTP - P B.) CS = 1/2 * BASE * HEIGHT C.) TCS = $7.00 according to chart Julie CS is $5 (15-10=5) and Andy's is $2 ( 12-10=2) TCS = $5 + $2= $7.00* D.) TCS becomes $10.00 because Jeff has a CS of $1.00, Julie has a CS of $6.00, and Andy's CS is $3.00. (1+3+6=10 TCS)*

A.) The amount a seller is paid for a good minus the sellers cost. a.) PS = P - Cost b.) PS = 1/2 * b * h

An allocation of resources is efficient if it maximizes total surplus. Means the goods are consumed by the buyers who value them most highly. The goods are produced by the producers with the lowest cost, Raising or Lowering the quantity of good would not increase total surplus. * TS = (value of buyers) - ( cost to sellers).