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Economics Cheat Sheet

Economics Cheat Sheet

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Published by: caitobyrne3412 on Sep 21, 2009
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03/11/2014

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ECONOMICS CHEAT SHEET
METHOOGY1.Definition of Economics
The science of balancing our needs/wants with limit
The study of how society manages its scarce resources2.Principle of scarcity
The limited nature of society’s resources
A society cannot give every individual the highest standard of living towhich he or she might aspire.
AKA TRADE OFFS!!!3.Opportunity cost
The slope of rise over run
Whatever must be given up to obtain some item
Input4.Circular flow diagram
Assume there are only 2 groups in the economy (household and firms)
Assume there are only 2 markets (factors of production,goods/services)
Inner loop: flow of inputs and goods & services
Outer loop: flow of $5.PPF diagram
Captures trade off 
Captures opportunity costs
 Not constant, keeps changing
o
If it is a straight line then slope is constant
Ppf changes over time
o
Lose/gain resourcesLose/gain technology6.Pos/normative
Positive – how it is- scientists
 Normative – how it should/ought to be – policy advisorsGAINS FROM TRADE1.Ranger and Farmer example2.Comparative advantage
Ability to produce at a lower OPPORTUNITY COST than another 
A country cannot have comparative advantage over everything3.Absolute advantage
Ability to produce using fewer inputs over another 
A country may have an absolute advantage in the production of 
 
everything
o
Example: rancher is better at everythingHOW MARKET WORKS1.What determines Qa.Quantity Demand – quantity buyers are willing to buy at any given price
If buyers buy more, increase in demand. Shift to right
If buyers buy less, decrease in demand. Shift to left.
Income
Price of related good
Preference or taste
Expectation
 Number of buyers b.Quantity Supply – amount sellers are willing or able to sell at anygiven price
Positive relationship - Qty Supplied and price
Input prices
Technology
Expectation of tomorrow
 Number of sellers2.Law oa.Demand
Other things equal, there is a
negative
relationship between thequantity demand of a good and the price of that good
INVERSE RELATIONSHIP
If $ of good changes, the Qty Demand will change b.Supply
Positive relationship between Qty supplied and price
Move in same direction
Increase of price = increase of Qty supplied, vice versa3.differences between moving along the curve and the shift of curves (s&d)a.Demand
If price of the good changes, the Qty D will move along the DemandCurve
If any of the other factors change, then the Demand curve will shift. b.Supply
If there is a change in price, the Qty S will move along the Supplycurve
If any of the factors are changed, then Supply curve will shift.
 
4.normal & inferior goodsa.normal good
a good for which, other things equal, an increase in income leads to anincrease in demand b.inferior good
a good for which, other things equal, an increase in income leads to adecrease in demand5.compliments & substitutesa.substitutes
two goods for which an increase in the price of one leads to anincrease in the demand for the other  b.complements
two goods for which an increase in the price of one leads to a decreasein the demand for the other 6.Difference between Qd Qs at equilibrium
Qty D MUST = Qty S at equilibrium… MUST!!!7.What happens when there is no equilibrium8.What happens when there is a shortage/surplusa.Surplus
IF GOING PRICE IS ABOVE EQUILIBRIUM – Qs > Qd
Excess demand
Sellers will decrease price and Qty D go up until you reach theequilibrium b.Shortage
IF GOING PRICE IS BELOW EQUILIBRIUM
Qd > Qs
Excess demand
Price will go up until you reach equilibrium9.Difference between going price and equilibriuma.Equilibrium
Where Qd is equal to Qs,
Where they intersect on the map b.Going price
What everyone else is selling it as

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