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Exam 1 Review

Exam 1 Review. 3 topics supply and demand examples the PPF circular flow slide are posted on the course web site. Supply and Demand. DRAW THE PICTURE! factors that shift demand income tastes prices of substitutes/complements population buyer expectations. factors that shift supply

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Exam 1 Review

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  1. Exam 1 Review • 3 topics • supply and demand examples • the PPF • circular flow • slide are posted on the course web site

  2. Supply and Demand • DRAW THE PICTURE! • factors that shift demand • income • tastes • prices of substitutes/complements • population • buyer expectations

  3. factors that shift supply • costs • prices of substitutes/complements in production • seller expectations • # of sellers • productivity

  4. demand and supply • increase = shift right • decrease = shift left • price change of good does NOT shift the D or S of that good • IF D or S curve shifts, THEN equilibrium price will change

  5. example: market for Nikes • all of the “hot” athletes are wearing Reeboks • which curve? • demand (tastes) • which direction? • decrease (left)

  6. D’ P S P falls Q falls D Q

  7. example: market for Jeeps • increase in the price of steel • which curve? • supply (cost) • which direction? • decrease (left)

  8. S’ P S P rises Q falls D Q

  9. example: market for pizza in Oswego • college enrollment rises • fire destroys several pizza places in Oswego falls • what happens?

  10. more college students • increase demand • increase in P & Q • fewer pizza places • decrease supply • increase P, decrease Q

  11. S’ D’ P S P rises Q ? D Q

  12. The PPF • production possibilities frontier • points inside, on, outside the PPF • opportunity cost • economic growth & PPF

  13. CDs 15 9 6 6 bottled water 3 2 point (3, 9) -- efficient point (2, 6) -- inefficient point (6, 15) -- not possible

  14. CDs 15 6 bottled water economic growth shifts out the PPF

  15. opportunity cost of 1 bottle of water: • A to B = 1 CD • B to C = 2 CDs • C to D = 3 CDs

  16. PPF • negative slope • tradeoff due to scarcity • concave • increase opportunity costs • shifts out • economic growth

  17. Circular flow • two players • HH • firms • two markets • factor/resource market • product market

  18. HH • let firms use factors • & receive income • receive products from firms • & pay for them

  19. Firms • receive factors from HH • & pay for them • give products to HH • & receive price

  20. get rent, wages, etc. pay rent, wages, etc. supply labor, land, etc. Hire labor, land, etc. supply goods goods bought revenue from goods pay for goods Factor Mkts HH Firms Goods Mkts

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