HACE 3150 MASTER STUDY GUIDE Rules: Please Write answers BOLD. AND IN RED Thanks!

Team work is awesome yall! :) 1. Understand/explain the concepts of scarcity, opportunity costs and tradeoffs , how scarcity differs from shortage or inadequacy a. Scarcity- Cant accomplish when we dont have the resources i. Scarce resources are constantly changing ii. Resources are too little to accomplish all goals at once b. Trade Offs- Less of one/More of another c. Opp Cost- the value of the next best thing. In order to get A, you must give up B. Thus opportunity cost is the value of B. d. Shortage is Demand> Supply where scarcity is not having enough resources. And example of shortage is a hot Christmas toy item being out of stock. You are willing and able but there isnt enough of the resource. e. Inadequacy- not enough of the good at prices people can afford. Example: textbooks 2. Show how a production possibility frontier graphically depicts the basic assumptions economists make about market actors as well as the concept of opportunity costs (explain how opportunity cost, rational choice, and scarcity are depicted in production possibility frontier) a. Opp Cost: The OC on a graph is essentially the slope. As you move from one point to another you get more of one good X, but you must give up some of good Y and that relationship is depicted through looking at the slope. b. Rational choice: you would operate on the PPF rather than inside of it because it maximizes efficiency c. Scarcity: you cannot produce outside the PPF but can consume at a point outside with help through trade--and if the PPF shifts outward 3. Explain why typical production possibility frontiers are concave a. Typical PPFs are concave because of diminishing marginal returns. b. labor and capital affect the concavity and varying slopes along the PPF c. Specialization d. Constraints e. Increasing marginal returns to production

4. Define or explain: a. market All Potential Buyers And Sellers for a good/service, and the products having a degree of substitutability b. supply quantity of a good or service, per time period, that a producer is willing to offer for sale at various market prices c. supply curve Shows the quantity supplied at various market prices, typically positively sloped.

d. demand The quantity of Goods or services a consumer is Able and Willing to buy i. Able= Budget Constraint ii. Willing=Preferences e. demand curve Amount of a good that a consumer wishes to purchase depends on many factors: income, age, occupation, education, etc. Also depends on PRICE. f. law of demand When Price decreases, Q demanded increases g. Law of supply When price increases, sellers are willing to produce more h. normal goods As income increases demand increases i. Inferior goods As income increases demand decreases j. complementsGoods that tend to be purchased together. $ increase good 1, D for good 2 decreases (moves in opposite directions) k. substitutes Goods that tend to replace one another. $ increase good 1, D for good 2 increases (moves in the same direction) l. taste or preferences: feelings of consumers about the desirability of different goods m. equilibrium Intersection of Supply and Demand curve. Quantity Demanded=Quantity supplied n. excess supply surplus: Quantity supplied exceeds quantity demanded o. excess demand shortage: Quantity demanded exceeds quantity supplied p. elasticities: measures of the magnitude of the responsiveness of any variable (quantity demanded or quantity supplied) to a change in particular determinants. how much? q. Price elasticity of demand measurement of how sensitive QD is to change in price. r. elastic greater than 1....QD greater than change in price s. inelastic less than 1... QD less than change in price t. unit elastic n=1 %change in quantity is equal to % change in price u. income elasticity of demand: measure of how responsive consumption of some item is to a change in income, assuming the price itself does not change. -percent change in QD divided by percent change in price -if E < 0, it is inferior -if E = 0-1, it is a normal good -if E >1, it is a normal/luxury good v. crossprice elasticity of demand: how responsive consumption of one good is to a change in the price of another related good w. production possibility frontier: depiction of all different combinations of goods that a rational consumer with certain personal goals can attain with a fixed amount of scarce resources. (graph of economic assumptions about market actors and concept oppprtunity cost) 5. Explain the three dimensions in which markets exists substitutes, geography, and time a. Substitutes: two goods for which an increase in price of one good leads to an increase in demand for the other. b. Geography: perishability, distance, transportation cost c. time: some close proximity between supply and demand.

6. Identify the factors that shift the demand curve; demonstrate their effects on demand curves [Make sure you know if its a positive or negative relationship] A change in the factors besides price income the price of related goods preferences population (increase in pop., increase in D) All these shifters can cause the demand curve to shift inward or outward 7. Identify the factors that shift the supply curve; demonstrate their effects on supply curves [Make sure you know if its a positive or negative relationship] Technology in production Factor prices (input prices) Number of suppliers Weather Expectations Distinguish between a change in demand and a change in quantity demanded: a shift in quantity demanded means youre moving along the same curve. A shift in demand means youre drawing a new curve. Quantity demand c`hanges occur when the price changes 8. Distinguish between a change in supply and a change in quantity supplied: A change in supply= DVD players produced cheaper Change in QS= change in goods selling price? 9. Explain how equilibrium price and quantity are determined in a market for a good or service. Where the supply curve and demand curve intersect is the equilibrium price At the equillibrium price the QD by consumers exactly equals the quantity supplied by the producers 10. Analyze how market equilibrium prices and quantities are affected by changes in demand or supply (understand how demand curves and supply curves shift under various circumstances) When the supply curve or demand curve shifts it shifts equillibrium price. EX Consumers want 600,000 DVD players at $100 Firm only produces 200,000 CAUSES--- 400,000 Shortage. Firms raise price... QD will fall.... 11. Be able to identify factors that affect priceelasticity of demand

Most important is closeness of substitutes, budget share and time 12. Explain the relationship between elasticity and the effect of a price change on total expenditures: If demand is elastic (>1), a lower price increases total expenditure. -If demand is inelastic (<1), a lower price decreases total expenditure. -If demand is unit elastic (=1), a lower price does not effect total expenditure. 13. Based on presented own priceelasticities, incomeelasticities, or crossprice elasticities be able to identify whether a good is elastic, inelastic, unit elastic, a normal or inferior good, or a complement or substitute: *** own price-elasticity e > 1 elastic e = 0 unit elastic e < 1 inelastic Income price elasticity e < 0 inferior good 0 < e < 1 normal good e > 1 normal (luxury) good cross-price elasticity e < 0 complements e > 0 substitutes e = 0 unrelated 14. Define/explain the following terms: a. theory an explanation of how facts fit together. helps predict outcomes by condensing and organizing knowledge about a phenomenon. Can be maintained, refined, discarded. b. assumptions statements we presume to be true c. axiom accurate or self-evident, fundamental truth d. hypothesis educated guesses about relationships of variables e. consumption process of goods and services being put into final use by people f. utility: consumers satisfaction g. resource constraints, such as budget constraints-h. technical constraints, such as knowledge constraint or technological constraint i. legal constraints, we are constraint to abide by the law j. sociocultural constraints, such as social norms k. indifference curves: depicts goal oriented behavior, scarce resources, rationality and opportunity costs and is a combination of all possible points on curve l. economic good, more is preferred to less, negative slope for indifference curve m. economic bad, less is preferred to more, positive slope for indifference curve n. economic neuter, indifference to preference, constant slope for indifference curve o. marginal rate of substitution- rate at which consumers are willing to exchange two goods holding utility constant. represented as the formula = the absolute value of the slope at any point on the indifference curve. p. diminishing marginal rate of substitution: exchange less and less of X for still more of Y

15. Explain what is meant by rationality (rational consumer): Provides that you would choose a point ON the PPF line rather than below it (inside the boundary line) -under the line= attainable and inefficient -above the line= unattainable and efficient -ON THE LINE= attainable and efficient/RATIONAL 16. What economic concepts explain why consumers are forced to choose? Scarcity and Opportunity cost/trade offs 17. Explain the assumptions of the neoclassical approach: rationality of consumers refers to the success of goal achievement; highly personal frozen potatoes vs. homemade certainty of preferences perfect information assume consumers know all there is to about price, quality, and market conditions 18. Identify and describe the assumptions made about preferences complete (consumers have perfect information) ability to identify and rank preferences transitive A > B, B > C, therefore A > C nonsatiation assumed more is better strict convexity diminishing marginal rate of substitution 19. Identify the characteristics of indifference curves and what assumptions about preferences explain these characteristics negatively sloped if the curve is not negatively sloped, we dont define it as an economic good more is preferred to less higher indifference curve always preferred --> nonsatiation assumed curves never intersect transitivity and nonsatiation assumptions would be violated if utility curves intersect curves convex to the origin MRS 20. Explain why indifference curves do not intersect: would violate transitivity and nonsatiation 21. Looking at graphs be able to identify whether good X or good Y is preferred:

Find MRS. MRS= absolute value of (y2-y1)/(x2-x1) If its >1 prefer X, if its <1 prefer Y. Whichever you give up more of, you prefer more of the other one.

22. Why are typical indifference curves convex to the origin diminishing MRS a consumers willingness to give up less and less of some other good to obtain still more of the first good 23. Be able to identify economic goods, economic bads and economic neuters graphically economic goods: more is preferred to less economic bads: less is preferred to more over all ranges economic neuters: indifferent to quantity of good. MRS = 0 24. Be able to identify graphically indifference curves for perfect complements, perfect substitutes, substitutes Points on the same indifference curves correspond to equally preferred bundles of goods. No two distinct indifference curves can cross. Over some region, that having more goods is preferred to having less goods. So this also means that indifference curves are downward sloping. Mixtures of goods are better than extremes of goods, so the indifference curves are bent much like hyperbola centered on the origin. 25. Explain how the slope of the indifference curve represents the willingness to trade INDIFFERENCE CURVES http://www.youtube.com/watch?v=P_N2hr9aMow