Econ1a Notes For Midterm#1 Miyanishi

Chapter 2 Notes for Econ 1A Absolute advantage – Person A has an absolute advantage over Person B if A takes fewer hours to perform a task than Person B Comparative advantage – Person A has a comparative advantage over Person B, if A’s opportunity cost is lower than Person B’s Opportunity cost – the value you have to give up in order to undertake the activity Production possibilities curve – a graph that describes the max amount of one good that can be produced for every possible level of production of the other goods Attainable point – any combination of goods that can be produced using currently available resources Inefficient point – any combination of goods for which currently available resources enable an increase in the production of one good without reduction in producing the other good Gains from specialization and exchange -

increases total output

Facts that shift the economy’s PPC -In the short run, to increase one good, the other good decreases -in the long run, production of all goods can be increased factors that enhance long-run economy growth will shift the PPC outward -population growth -invest in new capital goods (like machines or factories) -improvement in knowledge and technology benefit of free trade – specialization increases total output among natives -as a result – the amount of goods and services available to consumers will increase some oppose free trade because – specialization causes less productive domestic industries may decline -workers in declining industries may lose their jobs Chapter 3 Notes on Econ 1A - the prices and quantities of goods and services are determined by interactions in the market -demand curve graphs the quantity of a good that buyers wish to buy at each price -why demand curve is downward sloping? -buyer’s reaction to a price change

-substitution effect -the change in quantity demanded because buyers switch to or from substitutable goods when the prices changes -income effect -the change in quantity demanded (Qd) because change in price changes the buyer’s purchasing power) -difference in buyer’s reservation prices -consumers are different in terms of how much they are willing to pay for the goods -buyer’s reservation prices – the largest dollar amount the buyer is willing to pay for the goods -seller’s reservation price – the smallest dollar amount the seller would be willing to charge for an additional unit of the good -interpretations of demand curves -horizontal interpretation -start from the vertical axis (P) to the horizontal axis (Q) -how much of the good is demanded at a given price? -vertical interpretation -start from the horizontal axis to the vertical axis -how much the buyer wants to pay at a given quantity? -the reservation price of the marginal buyer at a given quantity -interpretation of supply curves -horizontal interpretation -at a certain level of price, how many products sellers wish to sell -vertical interpretation -the seller’s reservation price at a given level of Qs -when the market is in equilibrium, no incentive to move away from the equilibrium -Changes in demand -when there is an increase in demand, the demand curve shifts to the right -when there is a decrease in demand, the demand curve shifts to the left

-6 factors that shift demand curve -change in price of a complementary good -2 goods are “complements” if a price of one good decreases, demand for the other good increases (or price of one good increases, demand for the other good decreases) -change in price of a substitutable good

-two goods are “substitutes” if increase in price of one good, demand for the good decreases (demand decrease, price decreases, and quantity decreases) -change in buyer’s income -normal good – increase in buyer’s income causes demand for normal good to increase -(Equilibrium Price increases and Equilibrium Quantity increases) -inferior good – increase in buyer’s income causes demand for inferior good to decrease -change in buyer’s preference or taste -demand increases which causes price and quantity to increase -change in population of potential buyers -demand increases the price and quantity increases -an expectation of price change in future -decrease in demand causes decrease in prices and quantity -changes in supply - when there is an increase in supply, the supply curve shifts to the right - when there is a decrease in supply, the supply curve shifts to the left

-5 factors that shift the supply curve -change in the cost of inputs used for production (capital or labor) -wage of workers increase causes costs to increase which causes decrease in supply -causes price of goods to increase and quantity of goods to decrease -improvement in technology (less costly to produce) -causes supply to increase which causes price to decrease, and quantity to increase -change in weather (agriculture) -if there is sunny weather for oranges then the supply increases which causes the price to decrease and the quantity to increase -change in the number of suppliers -if the number of suppliers increases it causes the supply curve to shift to the right -causes the equilibrium price to decrease and the equilibrium quantity to increase

-an expectation of price change in future -due to a bad weather, bad crops of wheat are expected -suppliers may withhold sale of wheat because they expect an increase in price due to shortage of wheat -supply decreases which causes equilibrium price to increase and equilibrium quantity to decrease -what if both supply and demand curves shift simultaneously? -if increase in supply is relatively bigger than decrease in demand -equilibrium price decreases, and equilibrium quantity increases -if decrease in demand is relatively bigger than increase in supply -equilibrium price decreases and equilibrium quantity decreases Chapter 4 Notes on Econ 1A -Price changes as Qd changes along the demand curve -price elasticity tells you how strongly buyers (Qd) react to a price change -slope of the demand curve (∆P/∆Qd) -Price elasticity= E = (∆Q/Q) / (∆P/P) -E is measured in absolute terms -demand for a good is called: -elastic if E is greater than 1 -unit elastic if E is equal to 1 -inelastic if E is between 0 and 1 -determinants of price elasticity of demand -substitution possibilities -if easy to find substitute then it is elastic -if difficult to find substitute then it is inelastic -budget share -cheap then it is inelastic -if expensive then it is elastic -time horizon -goods tend to have more elastic demand in the long run -price of gas rises -in the short run, Qd decreases only slightly -in the long run the Qd for gas decreases substantially -Price Elasticity changes along the demand curve (straight line) - in general assume the demand curve is a straight line -near the top of the demand curve E >1 -near bottom of the demand curve E<1 -Two special cases -if it is a horizontal curve then E=infinity -if it is a vertical curve then E=0

The total expenditure is the P*Q -Price Elasticity of supply -in general, E changes along the supply curve -‘a special case’- if supply curve goes through the origin (vertical intercept is zero), E is always zero -special cases -if supply curve is vertical then it is perfectly inelastic -if supply curve is horizontal then it is perfectly elastic -determinants of supply elasticity -flexibility of sellers to change the amount of production -if price increases it affects the Quantity supplied -time -supply is more elastic in the long run than in the short run -in the long run, firms can build or close factories to adjust Quantity supplied -in the short run, firms cannot change the size of factories