Review sheet for 304K - Review sheet for 304K: Introduction...

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FIRST THIRD: basic tools and consumer behavior The production possibility frontier shows the combinations of goods that can be produced if resources are used efficiently. If they are, society must trade off some of one good to get more of the other(s). IF there is waste, more of all goods can be attained. Technical change in one industry can increase the amount of all goods attainable by freeing up resources from the industry where the improvement occurs. The opportunity cost , the lost output of one good that occurs when more of the other good is produced, increases the greater is the production of the other good. A demand curve or schedule how much consumers would be willing to buy of a good at various prices. As we draw the demand curve, we hold income, tastes and the prices of other commodities constant. The law of demand states that demand curves are downward sloping: as the price of the good goes up, the quantity demanded goes down. There is a distinction between a change in demand and a change in quantity demanded. There is a shift along the demand curve ( change in quantities demanded ) when the price of the good changes and all other factors are constant, and there is a shift of the demand curve otherwise ( change in demand ). A supply curve shows how much of good sellers would be willing to supply at different prices. The law of supply states that supply is upward sloping. There is a shift along the supply schedule ( change in the quantities supplied ) when the price of the good changes and everything else remains constant (like technology and input prices); there is a shift of the supply curve ( change of supply ) when anything besides the good’s price changes. When buyers and sellers meet in the marketplace their bids and offers determine an equilibrium price of output (where S and D intersect). This is the point where neither surpluses (S>D) or shortages (S<D) occur, and it is a stable point . The equilibrium (price) can only change if S, D or both shift. Price fixity (rent ceiling or minimum wage) may prevent the market clearing (prevent S=D), in which case the outcome is non efficient. Consumer surplus is the amount by which a person’s marginal utility (D curve) exceeds the market price. Producer surplus us the amount by which the market price exceeds the producer’s marginal cost (supply curve) The price elasticity of demand measures the relative responsiveness of the quantities demanded of one good to changes in its price. The income elasticity of demand is the percentage change in demand following a one percent increase in income. The cross elasticity of demand measures the responsiveness of the quantities demanded of one good to changes in the prices of alternative goods ( substitutes or complements ). The elasticity is a feature of part of the demand curve (close to be the slope but not quite), it is positive by convention and unit free, and decreasing along the demand curve. The formulae are the following:
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This note was uploaded on 04/27/2008 for the course ECON 304K taught by Professor Ledyard during the Fall '08 term at University of Texas at Austin.

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Review sheet for 304K - Review sheet for 304K: Introduction...

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