Econ Exam 1 Study Sheet PDF

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Econ Exam Number 1 Study Sheet...

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Exam 1 Exam 1 consists of 36 multiple choice questions. Bring an 882-E scantron and a pencil to cclass lass on exam th day day,, Thursday Thursday,, Februa February ry 8 . Exam 1 will test your mastery of the follo following wing learning objective objectivess from lessons 1-7:

1. Define economics limited ted resources for unl unlimited imited wants. Economics: The study of how people make choices, and use the limi

2. Classify topics as either microeconomic topics or macroeconomic topics Microeconomics is the study of how househo households lds and firms make decision decisionss and how they inter interact act in specific markets. Macroeconomic Macroeconomicss is the study of economy economy-wide -wide phe phenomena. nomena. Therefore, tthe he influence of the government budg budget et deficit on economic growth is a mac macroeconomic roeconomic topic, while the others are all microeconomic topics. 1. A family's d decision ecision about how much income to save save.. Microeconomics 2. The effe effect ct of government reg regulations ulations on auto emissions. Microeconomics 3. The impact of higher nationa nationall saving on economic growth. Macroeconomics 4. A firm's decision a about bout how many worke workers rs to hire. Microeconomics 5. The relationship between the in inflation flation rrate ate and changes in the quantity of money money.. Macroeconomics

3. Identify the three basic economic questions and two opposing sets of answers 1. 2. 3. -

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Which goods and services to produce How to produce those goods and services Who gets what is produced Centralize Centralized d command and control system: The economic system in which a gov government ernment establishes ownership of resources and issues rules for how to ma manage nage the production of products is best described as Price system: The economic system in which individuals a and nd families own all o off the scarce resources used in production, decide how and what to produce, and how many product productss to produce,

4. Classify economic statements as positive or normative Posit Positive ive statements are descript descriptive; ive; they make a claim about how the world is. However However,, normative statements are prescriptiv prescriptive; e; they make a cla claim im about how the world ought to be. Theref Therefore, ore, in this case, the only positive statement is la law w X will reduce national income beca because use it states what will happen if something is done rrather ather than what should be done 1) Society ffaces aces a short-run tr tradeoff adeoff betwee between n inflation and unemplo unemployment. yment. Posit Positive ive 2) A reduction in the rrate ate of money growt growth h will reduce the rrate ate of inflation.

Posit Positive ive 3) The F Federal ederal R Reserve eserve sshould hould reduce the rrate ate of money growth. Normative 4) Society ought to requi require re welfare re recipients cipients to look for jobs. Normative 5) Lower tax rrates ates encourage more work and more saving. Posit Positive ive

5. Identify and describe direct and inverse (positive or negative) relationships In a direct relationship relationship,, the vvalues alues of both vvariables ariables increase together o orr decrease together together.. That is, if one increases in vvalue, alue, so does the other; if one d decreases ecreases in va value, lue, so does the other other.. In an inverse or negative relations relationship, hip, the values o off the varia variables bles change in opposite directions in ei either ther direction.

6. Recognize why people and countries trade Countries trade with each other when, o on n their own, they do not have the resources, or capacit capacity y to satisfy their own needs and wants. By deve developing loping and exploiting their domestic sca scarce rce resources, countries can produce a surplus, and tr trade ade this for the resourc resources es they need. W We e can rais raise e our standard of comparativ mparativ mparative e adv advantage antage at, then trading our surplus with someone living by specializing in what we have a co who specializes in producing what they have a com comparativ parativ parative e adv advantage antage at. To find a person’ person’ss or a country’ country’ss comparative a advantage dvantage dvantagess compare their opportunity co costs. sts. Whoever has the lowest opportunit opportunity y cost has the compar comparative ative adv advantage. antage.

7. Recall why prices are important 1. Aggregate informa information tion 2. T Transmit ransmit inf information ormation 3. Generate inf information. ormation. - Doesn’t cost a lot to do this.

8. Recall the important signals that profits and losses provide and apply this knowledge to current events Profits and Losses are 1. Signals to the firms actually earning tthe he profits or taking the losses 2. Signals to firms standing o on n the sidelines.

9. State the law of demand As the price of a good increases, consum consumer er demand for the good or service w will ill decrease.

10. Create, read, and interpret demand curves and schedules Increases in demand a are re shown by a shift to the right in th the e demand curve. Decreases in demand are shown b by y a shift to the left in the demand curv curve. e.

11. Identify the demand shifters and tell how they move a demand curve 1. Number of buyers: If the n number umber of buyers increa increases ses then the demand increases and shift shiftss to the right (vise versa) 2. Change in consumer taste/pref taste/preference: erence: either increase demand (shift right) or decrease demand (shift left) for a good or service. 3. Changes in income: increa increase se in income will make it shift right, decrease in income will make it shift left. 4. Expectations of the fu future: ture: Increa Increase se demand will shift right, decrease dema demand nd will shift the curve to the left. 5. Price of related goods Substitute a and nd complimentary goods: As the price of one good increa increases ses there is an increase in demand ffor or another good, a substitute good and vice vversa. ersa. Complimentary good: If the price of one good increases then the demand for another good (complimentary) will d decrease ecrease and vise versa.

12. State the law of supply An increase in price resul results ts in an increase in quantity supplied.

13. Create, read, and interpret supply curves and schedules If supply increases Price will go down a and nd quantity will go up If supply decreases price will go up a and nd quantity will go down.

14. Identify the supply shifters and tell how they move a supply curve 1. Number of firms in the indust industry: ry: if increase there will a shift rig rightward. htward. 2. T Technology echnology and pro productivity: ductivity: if increased there will be a shift rightwa rightward. rd. 3. Subsidies: if increased there will be shift rightward. 4. Prices of inputs: if iincreased ncreased there will be a shift leftwa leftward. rd. 5. Prices of other goods that use the same inp inputs: uts: f increased there will be a shift le leftward. ftward. 6T Tax ax axes: es: f increased there will b be e a shift leftward. 7. Expectations of fut future ure price and av ava ailability change changes: s: shift depends on the situation.

15. Apply the process by which equilibrium is achieved (including applying the signals that shortages and surpluses provide) Equilibrium is achieve achieved d when the supply and demand curve iintersect. ntersect. The quantity d demanded emanded by buyers equals the quantity supp supplied lied by sellers. Shortages are the exc excess ess demand. A shortage occurs when th the e price is below the equilibrium price, and quantity demanded exc exceeds eeds the quantity supp supplied. lied. The shortage is a signal telling market pa participants rticipants that the current price iiss too low low.. Surplus = exce excess ss supply supply.. A surplus occurs when the price is above the equilibrium price, a and nd quantity supplied exc exceeds eeds the quantity demanded. The surplus is a signal telling ma market rket participants that the curre current nt price is too high.

16. Predict what will happen to price and quantity when a shifter changes If If If If

demand increases the price will increa increase se and the quantity will incre increase. ase. demand decreases the price will decrea decrease se and the quantity will increa increase se supply increases Price will decrease a quantity will increas and nd increase e supply decreases Price will increa increase se quantity will decrease

17. Define market failure When freely fu functioning nctioning markets ffa a il to provide the opt optimal imal amount of goods and services

18. Identify five major reasons why market failure occurs 1. Not enough competition: if there is only a few firms in a mark market et then a firm can rraise aise its price without having to worry about losing ma market rket share. 2. Information ffailu ailu ailures: res: good inf information ormation if required in order for marke markets ts to produce the eff efficient icient quantity of a good, If there is incomp incomplete lete or inaccurate inf information ormation then a mark market et won’t produce the right amount of the good. Adverse selection: bef before ore the marke markett transact transaction. ion. the problem that arises when the peop people le or firms who are most eager to mak make e a tr transaction ansaction are the least desir desira able to parties on the other side of the tr transaction. ansaction. And moral ha hazard, zard, that occurs after the mark market et tr transaction, ansaction, occurs when one party changes their behavior that ha harms rms another party party.. 3. The existence of external benefits or costs: Exter External nal benefits (also called positive externalities) a are re defined as benefits that are conf conferred erred on third part parties ies when a trade occ occurs. urs. The buyers and sellers in th the e market are happy and some third parties are also benefit from the tr trade ade and wish more ttrades rades took place. External costs (also called negative externalities) are defined as costs that a are re imposed on third parties when a tr trade ade occurs. The buyers and sellers in the market are hap happy py but some third parties are hurt by the tr trade ade and wish fewer tr trades ades ttook ook place. 4. The existence of the fre free e rider dilemma: Each of us pref prefers ers that someone else pay ffor or the good, because once it is provided, we each know that we cannot be excl excluded uded from using it. Consequently Consequently,, no one will voluntarily pay for it. 5. The existence of common property re resources: sources: Common prop property erty resources (ocean fish, the atmosphere, common gr gra azing lands) are owned by the co community mmunity at large and tend to be overus overused. ed. “The tragedy of the commons” is the fact that markets that use common prop property erty resources as ttheir heir inputs produce too much output.

19. For each type of market failure, tell whether too much or too little output is produced 1. Not enough competition: too little out output put 2. Information F Failures: ailures: Either too littl little e or too much output 3. The Existence of External Benefits or Costs: Market Marketss with external benefits will produce too litt little le output. Markets with external ccosts osts will produce too much output. 4. The Existence of the Free R Rider ider Dilemma: T To o litt little le output 5. The Existence of Common Property Resour Resources: ces: Where resources are used as inpirts will produce too much output.

20. Explain how government intervention can potentially improve market outcomes when markets fail They can provide a llegal egal system (This helps protect property right rightss and enforce cont contract ract obligat obligations. ions. ions.)) Property rights are tthe he clear delineation of ownership of pro property perty backed by go government vernment enfo enforcement. rcement....