Studyguide exam 1 - Professor Paul Kagundu - virtual course - exam 1 summary PDF

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Professor Paul Kagundu - virtual course - exam 1 summary...

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Chapter 1: The Nature of Economics Defining economics: - Scarcity: refers to the inability to satisfy all human wants with the available resources (supply is limited) - Scarcity = nature made, can not be eliminated - Shortage = man made, can be eliminated - Choice + resources - Societal choices include decisions on what goods/services to produce and how to produce them given the society’s scarce resources. - resources + economics - Economics studies how people (individually and collectively) allocate the limited resources to meet unlimited wants. Types of resources (aka factors of production): - Land: earth and the minerals, fish, water, and forest found on it - Labor: the people that provide the mental or physical effort - Physical capital: the machines and equipment used to produce goods and services - Human capital: the knowledge and skills acquired through education and training and used to produce goods and services Fundamental economic problems (questions) - What to produce? - How to produce? (method of production) - Labor intensive (employing more people) vs capital intensive (non human labor like machines) - For whom to produce? Economic system: a set of rules that define the ownership and use of society’s (or a nation's) resources. It determines how those 3 questions are answered. 1) Centralized Command and Control - Centralized authority that decides what items to produce and how many of each - No one owns anything privately (government decides everything- communism) - Everything is share - All resources are communally owned - No competition 2) Price System - Businesses compete, individual decision making (decentralized), resources owned privately - Price determined by market - Income inequality Marginal Analysis: decision-making technique based on the benefits and the costs of a possible action.

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Marginal cost: incremental costs (additional/the next one) Marginal benefit: incremental benefits Sunk cost: the cost incurred and cannot be recovered regardless of the decision - Not apart of decision - If the chapter Iphone is $400 and the other is $1000, $400 is the sunk cost because it’s the minimum amount you’re spending Incentives: rewards/penalties that influence behavior - Rewards: increase the marginal benefit of doing/not doing an action - Penalties: increase the marginal cost of doing/not doing an action - Better results

Macroeconomics: study of entire economy - National unemployment rates, inflation rate Microeconomics: studies the decisions of individuals, households, firms, industries - Effects on gas prices Positive economics: description of facts - “What is” - “The best way” Normative economics: analyzes outcomes and evaluates as good or bad - “Should be”

Chapter 2: Scarcity and the World of Trade-offs - Trade-offs: choosing to do something implies choosing NOT to do something else - Opportunity cost: the value of what we have not chosen (value of what we have lost) - It is the value of the trade off - “Next best alternative that must be sacrifice for the choice that was made” - What you lose when you take an opportunity Understand the simple production possibilities model - Be able to draw a simple production possibilities curve for a given set of production possibilities. - Understand how to calculate opportunity cost from a given set of production possibilities. - Understand the difference between constant opportunity cost and increasing opportunity cost. - Constant = 1:1 ratio (you lose one, you gain one) - Increasing = as more of a good is producing, opportunity cost increases (nonlinear on graph) - Understand the reason why increasing opportunity cost occurs - Productive Efficiency on the PPC - Achieved when given a level of inputs is used to produce the maximum output possible - Point on the curve

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Points below are inefficient Points above are unobtainable

Shifts in the PPC - Shifts outward for positive growth - Shifts inward for negative growth causes of economic growth (shifts in the PPC) - Better or worse resources/technology - Change in the amount or quality ^ - Unemployment rate does not cause PPC to shift Specialization and trade - Specialization: working on a relatively well-defined, limited activity - Facilitates trade between individuals,regions, and countries - Gains from trade: mutual gains obtained when individuals specialize in doing different things and trading with one another - Measured by the amount of goods each individual or country is able to consume over and above what they could possibly produce on their own. - Absolute advantage: the ability to produce more of a good or service using a given quantity of labor/resources (you’re better) - Comparative advantage: the ability to produce a good or service at lower opportunity cost compared to others - Be able to determine the country (or individual) with a comparative advantage in the production of a goods from a set of production possibilities (see comparative advantage/absolute advantage questions on Homework 1) Chapter 3: Demand and Supply Demand: how much of a good a buyer is able and willing to purchase - Quantity demanded: the amount of a good that buyers are able and willing to purchase at a given price - The law of demand: describes the relationship between the price of a good and the quantity demanded of the good. - Inverse relationship - When the price of a good goes up, people buy less - When the price of a good goes down, people buy more - demand curve has negative slope Understand how you go from individual demand to market demand (horizontal summation of individual demand curves). - shift factors in demand (i.e. factors that cause a change in demand) - “change in demand” and “change in quantity demanded”.

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Change in demand is shift in line (affected by anything else-resource,labor cost,technology) Change in quantity demanded is movement along line (only affected by price of the product)

Supply: the amount of a good that producers are able and willing to offer to the market for sale - Quantity supplied: the amount of a good that sellers are able and willing to sell at a given price - Law of supply: positive relationship (slope) between the price producers receive and the quantities that they are willing to supply to the market - At higher prices, a larger quantity will be supplied - At lower prices, a lower quantity will be supplied - Be able to construct a supply curve from a set of prices and quantities supplied - Understand how you go from individual supply to market supply (horizontal summation of individual supply curves). - Understand the shift factors in supply (i.e. factors that cause a change in supply) - Be clear about the difference between a “change in supply” and a “change in quantity supplied”. Putting demand and supply together - Understand the concept of market equilibrium – equilibrium price and equilibrium quantity - Be able to identify and calculate the amount of surplus (or shortage) when the price is higher (or lower) than the market equilibrium price. - Know how to solve for the market equilibrium price and quantity from simple linear demand and supply equations. - You should also be able to draw the demand/supply curves represented by a set of linear equations and indicate the equilibrium price and quantity on the graph. Chapter 4: Extensions of Demand and Supply Shifts in demand and supply (aka demand and supply shocks) - Understand the effects on equilibrium price and quantity of changes in demand (aka demand shocks) while supply is unchanged. - Understand the effects on equilibrium price and quantity of changes in supply (aka supply shocks) while demand is unchanged. - Understand the effects on equilibrium price and quantity of simultaneous changes (shifts) in demand and supply...