Econ Final Study Guide

Econ Final Study Guide - Econ Final Study Guide 4 Basic...

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Econ Final Study Guide 4 Basic principles of individual choice 1. Resources are scarce Income/Time 2. Opportunity cost- the real cost of something is what you must give up to get it 3. Marginal Analysis- “How much?” is a margin decision Your decision involves a trade-off – a comparison of costs and benefits 4. People will take advantage of opportunities to make themselves better off Ex. A financial incentive to reduce pollution PPF Shows efficiency, opportunity cost, and economic gowth Economic growth is an outward movement of the PPF line with two basic sources of growth o Factors of production, resources such as land, labor, capital, and human capital o Technology Absolute advantage vs. Comparative advantage Absolute- occurs when one party is more productive than the other, and can produce an amount with fewer inputs Comparative- when one party has a lower opportunity cost than the other in producing some good Income distribution- how an economy’s total income is allocated to the owners of the factors of production Circular-Flow Diagram Represents transactions of flows of goods, services, factors and money between households and firms Four Market Structure Types Perfect Competition o Many Buyers and sellers o Many substitutes, free entry and exit, standardized product o Supply and Demand Model o Only market that can achieve efficiency Monopoly o Monopoly profit: MR=MC; price discrimination o Only one producer o Restricted entrance, often because of exclusive rights to a resource o Natural monopoly exists whenever a single firm experiences economies of scale over the entire range of production that is relevant to the market Oligopoly o Few firms o Firms often produce nearly identical products
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o Game theory o Kinked Demand Curve Monopolistic Competition o Monopoly analysis o Free Entry & Exit Movements along DC/SC o Changes in demand or supply due to changes in price Shift of the DC/SC o Demand curve shifts 5 factors Changes in the price of related goods or service Changes in income Changes in taste or preferences Changes in expectations Changes in the number of customers o Increase in demand rightward shift shortage occurs o A decrease leads to a fall in equilibrium price and quantity o An increase in supply leads to a fall in equilibrium price and a rise in quantity o A decrease leads to rise in equilibrium price and fall in equilibrium quantity o Supply curve shifts 5 factors Changes in input price Changes in the price of related goods or services Changes in technology Changes in expectations Changes in the number of producers o Differences: demand involves # of customers not producers and income not technology Substitutes o A rise in the price of one good makes a consumer more willing to buy another Compliments o A fall in the price of one good makes a consumer more willing to buy another product o Usually goods that are consumed together
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Econ Final Study Guide - Econ Final Study Guide 4 Basic...

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