jan 27 (week three) - EC 201 Review from Last Week Cost...

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EC 201 Jan 27, 2009 Review from Last Week Cost- Benefit Analysis o People maximize economic surplus by setting MaxBenefit = MaxCost o Net Benefits = (total benefit) – (total cost) Production Possibilities Frontier o Simplified model of the trade off between two goods o Shows what combinations are feasible, unattainable, efficient o Efficiency = no way to get more of one thing without giving up another o Opportunity Cost = slope of PPF Comparative Advantage o Absolute and comparative advantage o Absolute = lower production cost o Comparative = lower opportunity cost o Total value of output increases with specialization and trade o Each individual has a lower opportunity cost in one good Demand Curve o Graphical representation of demand schedule o Movement along curve vs. shift in curve o Law of Demand = P ↑, Q ↓ and P ↓ Q ↑ o Reasons for shift in Demand Curve Price changes of complements and substitutes Change in income Change in preferences Change in number of buyers o Price changes never shift demand curve Goal: decrease traffic congestion “: decrease Qd of driving Increase the price of a complement (gas) (parking) Decrease the price of a substitute (public transit) Increase the price of driving New Material Income vs. Substitution Effects What happens when price increases? Substitution Effect: if the price of one good increases but not the other, then buyers switch to the cheaper good Income effect: if the price of all goods increases…………………. . Supply Curve Models the quantity of a good that sellers offer at each price Supply schedule o Coffee Beans: Price Quantities $2 8 $3 12 $4 16 Q: why does the quantity supplied increase with price?
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A: “low-hanging fruit principle” Increasing marginal cost of production o Most start with resources with higher opportunity cost
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This note was uploaded on 02/19/2009 for the course ECON 201 taught by Professor C.liedholm during the Spring '07 term at Michigan State University.

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jan 27 (week three) - EC 201 Review from Last Week Cost...

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