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

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