Exam 1 Study Guide PDF

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Exam 1 Study Guide. I made an A studying just this....

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ECON FIRST EXAM REVIEW

Chapter 1 1. OPPORTUNITY COST – the amount of other products that must be forgone or sacrificed to produce a unit of a product 2. ECONOMICS - social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity. 3. Marginal Analysis - comparisons of marginal (extra) benefits and marginal costs, usually for decision making. (choosing a smaller diamond over a bigger diamond) 4. OTHER-THINGS-EQUAL-ASSUMPTION - the assumption that factors other than those being considered do not change. 5. MICROECONOMICS - The part of economics concerned with (1) decision making by individual units such as a household, a firm, or an industry and (2) individual markets, specific goods and services, and product and resource prices.

6. MACROECONOMICS - the part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors 7. POSITIVE ECONOMICS - The analysis of facts or data to establish scientific generalizations about economic behavior. a. Positive Statements – “What is” 8. NORMATIVE ECONOMICS - The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics. a. Normative Statements – “What ought to be” 9. Individual Choice a. Limited Income –finite number that forces people to choose what to buy and what to forgo to fulfill wants. You will select the combination of movies and paperback books that you think is “best.”

b. BUDGET LINE - A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ prices. 10. Society’s economizing choices a. Scarce Resources i. LAND- includes any and all natural resources (“gifts of nature”) used in the production process. These include forests, mineral and oil deposits, water resources, wind power, sunlight, and arable land. ii. LABOR - Any mental or physical exertion on the part of a human being that is used in the production of a good or service. One of the four economic resources. iii. CAPITAL - Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods. One of the four economic resources. iv. ENTREPRENEURIAL ABILITY - The human resource that combines the other economic resources of land, labor, and capital to produce new products or make innovations in the production of existing products; provided by entrepreneurs. 11. Production Possibilities Model - lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment a. Table & Opportunity Cost calculation b. LAW OF INCREASING OPPORTUNITY COSTS - The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises. c. Production Possibilities Curve - displays the different combinations of goods and services that society can produce in a fully employed economy i. Points on (maximum combination of two products), inside (attainable, but full employment is not being realized) and outside the curve (unattainable)

12. Optimal Allocation of Resources Diagram (MB=MC)

13. ECONOMIC GROWTH - (1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita. a. Shifts of production possibilities curve Shift right = economic growth. Prioritizing future products over present products will result in greater economic growth due to technological advance b. Sources of economic growth (1) increases in supplies of resources (2) improvements in resource quality (3) technological advances

CHAPTER 3

1. MARKET – brings together suppliers and demanders, or buyers and sellers 2. DEMAND - is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. a. Demand Schedule - A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time. b. Demand Curve - A curve that illustrates the demand for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity demanded (on the horizontal axis). GOES DOWN FROM TOP TO BOTTOM.

c. LAW OF DEMAND - The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.

i. DIMINISHING MARGINAL UTILITY - successive units of a particular product (2nd time eating a hamburger isn’t as satisfying or beneficial as the 1st) yield less and less marginal utility, consumers will buy additional units only if the price of those units is progressively reduced. ii. INCOME EFFECT - A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.

iii. SUBSTITUTION EFFECT - suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.

3. Individual to Market Demand (sum horizontally)

4. Changes in Demand a. # of buyers (rising number of older people has increased demand for motor homes) b. Tastes (introduction of digital cameras decreased demand for film cameras) c. Income (consumers buy more if they make more) i. NORMAL GOOD - A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant (ex. Steak) ii. INFERIOR GOOD – A good or service whose consumption declines as income increases, prices held constant. (ex. Used clothes. Increase in income would cause consumers to buy new clothes.) d. Prices of related goods i. SUBSTITUTES - Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises. (ex. Colgate and Crest) ii. COMPLEMENTS - Products and services that are used together. When the price of one falls, the demand for the other increases. (Computers and software) e. Consumer expectations about future prices of the product (Ex. Predicted future gas prices are high, so people stock up on gas now)

f.

Changes in demand vs. changes in quantity demanded

Change in demand is a shift of the demand curve from left to right. Changes in quantity demanded is a movement from one price-quantity combination to another on a fixed demand curve. 5. SUPPLY - schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. 6. LAW OF SUPPLY - The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.

7. Supply schedule - A table of numbers showing the amounts of a good or service producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.

8. Supply curve - A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis). (GOES FROM BOTTOM TO TOP)

9. Individual supply to market supply (sum horizontally) Same way as demand.

10. Changes in Supply a. Resource Prices – (increase in price of crushed rock will increase cost of producing concrete) b. Technology – Improvements in technology allow for production of units with less resources c. Taxes & Subsidies – increase in taxes increase production costs which reduces supply. Subsidies lower production costs and increases supply. d. Prices of other goods (which use same resources) e. Producer expectations f. # of sellers

11. Change in Supply vs. change in Quantity supplied Change in supply  whole curve shifts. 12. Market Equilibrium a. EQUILIBRIUM PRICE - The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall. b. EQUILIBRIUM QUANTITY - The quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal c. SHORTAGE - The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price. d. SURPLUS - The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

13. PRICE CEILINGS - A legally established maximum price for a good, or service. Normally set at a price below the equilibrium price.

14. PRICE FLOORS - A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.

CHAPTER 27 1. GROSS DOMESTIC PRODUCT (GDP) - The total market value of all final goods and final services produced annually within the boundaries of a nation. a. Measured in dollars b. FINAL GOODS – goods that have been purchased for final use, rather than for resale i. Don’t count INTERMEDIATE GOODS – products purchased for resale to produce other products, it leads to MULTIPLE COUNTING. ii. MULTIPLE COUNTING – wrongly including the intermediate goods in GDP iii. VALUE ADDED - The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product. c. Non-productive transactions i. Transfer payment ii. Stock and bond transactions iii. No second-hand sales 2. EXPENDITURES APPROACH - The method that adds all expenditures made for final goods and final services to measure the gross domestic product. GDP is the sum of all the money spent in buying it.

a. PERSONAL CONSUMPTION EXPENDITURES – C  The expenditures of households for both durable and nondurable consumer goods. b. GROSS PRIVATE DOMESTIC INVESTMENT - Ig  Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories. i. Includes changes in inventories c. GOVERNMENT PURCHASES – G  Expenditures by government for goods and services d. NET EXPORTS - Xn Exports minus imports 3. GDP = C + IG + G + XN 4. INCOME APPROACH - The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.

5. NET DOMESTIC PRODUCT (NDP) - GDP less the part of the year’s output that is needed to replace the capital goods worn out in producing the output; the nation’s total output available for consumption or additions to the capital stock.

6. NATIONAL INCOME (NI) - includes all income earned through the use of American-owned resources, whether they are located at home or abroad. NDP + Foreign Income 7. PERSONAL INCOME (PI) - The earned and unearned income available to resource suppliers and others before the payment of personal taxes.

8. DISPOSABLE INCOME (DI) – Personal Income (PI) less personal taxes.

9. PRICE INDEX - An index number that shows how the weighted-average price of a “market basket” of goods changes over time relative to its price in a specific base year. a. Calculation of price index Price of market basket in specific year/price of same market basket in base year *100

10. REAL GDP - the total value of all final goods and services produced in the economy during a given year calculated using the prices of a selected base year. a. Calculation of real GDP Nominal GDP/Price Index*100 11. Shortcomings of GDP measure Nonmarket activities such as growing own tomatoes vs buying Underground economy such as drug dealing Leisure time such as paid vacation GDP and environment – social costs of dirty air and polluted water Noneconomic sources of well-being – reduction of drugs and alcohol abuse and crime Composition and distribution of income

12. GROSS OUTPUT - The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output....