Foundational Economics Concepts

Exam 1 Review (Chapter 1,2,3) Chapter 1 1. Define opportunity costs – the best or most highly valued forfeited alternative. 2.Define Economics- How humans make decisions in the face of scarcity 3. Macroeconomics deals with the entire economy. 4. Division of labor - when producing a good or service, work is divided into a number of tasks that are performed by different workers 5. Specialization - when workers or firms focus on a particular task for which they are well-tuited within the overall production process. 6. Define scarcity – the condition in which wants are unlimited and resources are limited. 7. Entrepreneurship is - the talent for organizing the other three broad categories of resources. 5. Four broad categories of resources – land, labor, capital and entrepreneurship. A. LAnd is all natural resources B. Labor is the physical and mental talenets people contribute to the production process C. Capital is produced goods used for fithewr production such as factories machinery tools computers and buildings D. Entrepreneurship is the talenet for organizing the use of resources land labor and capital among other things. 6. The higher the opportunity cost of attending college, are you more or less likely to go? The less likely you will go 7. What does Ceteris Paribus mean? All other variables held constant or nothing else changes. 8. Command economy - the government makes most economic decisions, or at least strongly influences how decisions are made. 9. Market-oriented economy – most decisions about what to produce, how to produce and for whom to produce are made by buyers and sellers. 10. Traditional economy - things are done the same as they have always been done. 11. Division of labor - when producing a good or service, work is divided into a number of tasks that are performed by different workers. 12. Three goals of a healthy macroeconomy: 1) Price stability 2) Full employment 3) Economic growth 13. Basic differences between macroeconomics and microeconomics Microeconomics focuses on the behavior of individual consumers and firms. Macroeconomics focuses on the performance of the entire economy. 14. Economies of scale - for many goods, as the level of production increases, the average cost of producing each individual unit declines. Chapter 2 1. Synonym for additional – marginal 2. Decision at the margin - The person compares additional benefits and additional costs when deciding what to do. 3. Is it possible for a country to produce beyond it’s PPF? No 4. Is it possible for a country to consume beyond it’s PPF? Yes , through specialization and trade. 5. Points that lie inside the PPF are attainable but productive inefficient. 6. If increasingly more units of good Y must be given up as each successive unit of good X is produced, then the PPF for these two good is a downward-sloping curve that is bowed outward representing increasing opportunity costs. 7. PPF point of efficiency and inefficiency A productive efficient society oproduces at a point on its PPF. ocan produce more of one good only by giving up some of another good. ocannot produce unlimited amounts of a good. ostill has to make choices. A society is productive inefficient when oit produces at a point inside (below) its PPF. oit does not produce the maximum output with its given resources and technology. oit can produce more of one good without giving up some of another good. 8. PPF attainable and unattainable regions Points that lie inside or on the PPF are attainable, and Points that lie outside the PPF are unattainable. 9. Productive efficient society – see #7 10. Comparative advantage relationship to opportunity costs A person has a comparative advantage in the production of a good when they can produce the product at a lower opportunity cost compared to another person. 11. Positive statement describe the world as it is. 12. Normative Statement – describe the world as it should be. 13. Sunk Costs - The lesson of sunk costs is to forget about the money that’s irretrievably gone and instead to focus on the marginal costs and benefits of future options. 14. Law of diminishing marginal utility - as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines. 15. Law of diminishing marginal returns as additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline. A PPF with increasing opportunity costs has a curvd shape because of the law of diminishing returns. Chapter 3 1. Define Demand - the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. 2. Define Law of Demand there is an inverse relationship between price and the quantity demanded. 3. Define Supply The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period of time. 4. Define Law of Supply - there is a direct relationship between price and the quantity supplied. 5. Know how the shift factors for Supply and Demand affect the supply and demand curves (matrix) 6. Surplus - at a price above equilibrium price there is a surplus or excess supply 7. Shortage – at a price below equilibrium price there is a shortage or excess demand. 8. Equilibrium On a supply and demand curve, it is the point where supply and demand intersect one another. 9. Change in demand vs change in quantity demanded A change in demand means a shift of the entire demand curve. A change in quantity demanded indicates movement from one point to another on the same demand curve. 10. Change in supply vs change in quantity supplied A change in supply means a shift of the entire supply curve. A change in quantity supplied indicates movement from one point to another point on the same supply curve. 11. What can change equilibrium price and quantity? Whenever demand changes, whenever supply changes or whenever both supply and demand change. 14. List the shift factors for Demand PREFERENCES RELATED GOOD • COMPLEMENTS • SUBSTITUTES INCOME • NORMAL GOOD • INFERIOR GOOD • NEUTRAL GOOD MARKET SIZE EXPECTATION OF FUTURE PRICE 16. List the shift factors for Supply RELEVANT RESOURCE PRICES ALTERNATE GOODS PRICES TECHNOLOGY NUMBER OF SELLERS EXPECTATION OF FUTURE PRICE SUBSIDIES TAXES AND GOVERNMENT REGULATIONS Review 2 1. Define opportunity costs – alternative forfeit or next best choice 2. Define economics – the study of how humans make decisions in the face of scarcity 3. Scarcity –means that human wants for goods, services and resources exceed what is available. Basically, wants are greater than resources. 4. Division of Labor - when producing a good or service, work is divided into a number of tasks that are performed by different workers. 5. Specialization - when workers or firms focus on a particular task for which they are well-suited within the overall production process. 6. Four broad categories of resources – land, labor, capital and entrepreneurship. a. Land is all natural resources b. Labor is the physical and mental talents people contribute to the production process c. Capital is produced goods used for further productions, such as factories, machinery, tools, computers, and buildings d. Entrepreneurship is the talent for organizing the use of resources (land, labor and capital, among other things) 7. The higher the opportunity cost of attending college, are you more or less likely to go? False 8. Economies of scale – for many goods, as the level of production increases, the average cost of producing each individual unit declines. 9. What does Ceteris Paribus mean? All other variables held constant or nothing else changes. 10. We can measure an economy’s macroeconomic health by examining three main goals: a. Economic Growth b. Price Stability c. Full Employment 11. Command Economy - Economic system where the government makes most economic decisions, or at least strongly influences how decisions are made. 12. Market Economy – Economic system where most decisions about what to produce, how to produce and for whom to produce a product or service are made by buyers and sellers. 13. Traditional Economy-- Economics system where things are done the same as they have always been done. . 14. Heavily regulated economies often have what is called: _Underground Economy Be able to give an example: The drug trade in the United States. 15. Basic differences between macroeconomics and microeconomics Microeconomics focuses on the behavior of individual consumers and firms. Macroeconomics focuses on the performance of the entire economy. 16. Define Economies of Scales and give an example: for many goods, as the level of production increases, the average cost of producing each individual unit declines. 17. Basically, division of labor and specialization can lead to an increase in overall production. WHY? a. Specialization allows workers to focus on parts of production where they have an advantage b. It allows workers to produce more quickly with higher quality c. It allows for economies of scale Chapter 2 1. Synonym for additional – marginal 2. Decision at the margin- person compares the addititional benefits & additional cost when dividing what to do 3. PPF – a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available. 4. Is it possible for a country to produce beyond it’s PPF? NO 5. Is it possible for a country to consume beyond it’s PPF? Yes , through specialization and trade. 6. A production possibilities graph for Constant Opp Cost is a straight downward sloping line . Constant opportunity cost occurs when the opportunity cost stays the same as you increase your production of one good in relation to another. 7. If increasingly more units of good Y must be given up as each successive unit of good X is produced, then the PPF for these two goods is a downward-sloping curve that is bowed outward representing INCREASING OPPORTUNITY COST . 8. PPF point of efficiency and inefficiency A productive efficient society o produces at a point on its PPF. o can produce more of one good only by giving up some of another good. o cannot produce unlimited amounts of a good. o still has to make choices. A society is productive inefficient when • it produces at a point inside (below) its PPF. • it does not produce the maximum output with its given resources and technology. • it can produce more of one good without giving up some of another good. 9. PPF attainable and unattainable regions Points that lie inside or on the ppf are attainable, and points that are on the outside are unattainable ` 10. Points that lie inside the PPF are attainable but productive inefficient. 11. Comparative advantage relationship to opportunity costs A person has a comparative advantage in the production of a good when they can produce the product at a lower opportunity cost compared to another person. ` 12. POSITIVE statements - describe the world as it is (fact based) Be able to recognize an example. 13. NORMATIVE statements – describe the world as it should be (judgement based). Be able to recognize an example. 14. The lesson of _SUNK COSTS to forget about the money that’s irretrievably gone and instead to focus on the marginal costs and benefits of future options. Be able to recognize an example. 15. __LAW OF DIMINISHING MARGINAL UTILITY - as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines. Be able to recognize an example. 16. _LAW OF DIMINISHING MARGINAL RETURNS as additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline. A PPF with increasing opportunity costs has a curved shape because of the law of diminishing returns. Be able to recognize an example. 17.ALLOCATIVE EFFICIENCY – when the mix of goods produced represents the mix that society most desires. Be able to recognize an example. 18. Adam Smith’s concept that individuals self-interested behavior can lead to positive social outcomes is known as the INVISIBLE HAND 19. Recognize a properly labeled Productions Possibilities Frontier (PPF) Graph for Constant Opportunity Cost. Constant - straight line Efficient on the line Inefficient inside Unattainable outside The maximum combination of two goods that can be produced given current resources 20. Recognize a properly labeled Productions Possibilities Frontier (PPF) Graph for Increasing OpportunityCost. Chapter 3 1. Define Demand -the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. 2. Define Law of Demand - there is an inverse relationship between price and the quantity demanded. P - UP, Qd - DOWN | P - DOWN, Qd - UP . 3. Change in demand vs change in quantity demanded A change in demand means a shift of the entire demand curve. A change in quantity demanded indicates movement from one point to another on the same demand curve. A change in demand means a shift of the entire demand curve. (PRIME) A change in quantity demanded indicates movement from one point to another on the same demand curve caused by a change in the good’s own price. 4. Define Supply -The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period of time. 5. Define Law of Supply - there is a direct relationship between price and the quantity supplied. P - UP Qs -UP P - down Qs - down 6. Change in supply vs change in quantity supplied change in supply means a shift of the entire supply curve. A change in quantity supplied indicates movement from one point to another point on the same supply curve. A change in supply means a shift of the entire supply curve. (RATNEST) A change in quantity supplied indicates movement from one point to another point on the same supply curve caused by a change in the good’s own price. 7. Fixed Supply – No time to produce additional units of a good so the Supply Curve is Vertical 8. Know how the shift factors for Supply and Demand and how they affect the supply and demand curves (see matrix) 9. SURPLUS OR EXTRA SUPPLY - at a price above equilibrium price there is a surplus or excess supply 10. SHORTAGE – at a price below equilibrium price there is a shortage or excess demand. 11. EQUILIBRIUM/EQUILIBRIUM POINT On a supply and demand curve, it is the point where supply and demand intersect one another. 12. What can change equilibrium price and quantity? Whenever demand changes Whenever supply changes Whenever both supply and demand change 12. Recognize a properly labeled Demand Graph 13. Recognize a properly labeled Supply Graph 14. Know how the following shift factors affect Demand and how they affect the demand curve (shift to the left or right) PRIME • Preferences • Related Goods a. Complements b. Substitutes • Income a. Normal b. Inferior Good c. Neutral Good • Market Size • Expectation of Future Price 15. Know how the following shift factors affect the Supply curve and how they affect the supply curve (shift to the left or right) RATNEST • Relevant Resource Prices • Alternate Goods Price • Technology • Number of Sellers • Expectation of future prices • Subsidies • Taxes and Regulations 16. Recognize a properly labeled graph of Equilibrium. Know how equilibrium price and equilibrium quantity will be affected after shifts of the demand and/or supply curve.

A society is productive inefficient when
oit produces at a point inside (below) its PPF.
oit does not produce the maximum output with its given resources and technology.
oit can produce more of one good without giving up some of another good.
 
8. PPF attainable and unattainable regions
Points that lie inside or on the PPF are attainable, and Points that lie outside the PPF are unattainable.
 
9. Productive efficient society – see #7
 
10. Comparative advantage relationship to opportunity costs
A person has a comparative advantage in the production of a good when they can produce the product at a lower opportunity cost compared to another person.
 
11. Positive statement describe the world as it is.
 
12. Normative Statement – describe the world as it should be.
 
13. Sunk Costs  - The lesson of sunk costs is to forget about the money that’s irretrievably gone and instead to focus on the marginal costs and benefits of future options.
 
 
14. Law of diminishing marginal utility - as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.
 
15. Law of diminishing marginal returns
as additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline.  A PPF with increasing opportunity costs has a curvd shape because of the law of diminishing returns.
 
 
Chapter 3
1. Define Demand - the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period.
 
2. Define Law of Demand there is an inverse relationship between price and the quantity demanded.
 
3. Define Supply  The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period of time.
 
4. Define Law of Supply  - there is a direct relationship between price and the quantity supplied.
 
 
5. Know how the shift factors for Supply and Demand affect the supply and demand curves (matrix)
 
6. Surplus  - at a price above equilibrium price there is a surplus or excess supply
 
 
7. Shortage – at a price below equilibrium price there is a shortage or excess demand.
 
8. Equilibrium  On a supply and demand curve, it is the point where supply and demand intersect one another.
 
 
9. Change in demand vs change in quantity demanded
A change in demand means a shift of the entire demand curve.  A change in quantity demanded indicates movement from one point to another on the same demand curve.
 
10. Change in supply vs change in quantity supplied
A change in supply means a shift of the entire supply curve.  A change in quantity supplied indicates movement from one point to another point on the same supply curve.
 
11. What can change equilibrium price and quantity?
Whenever demand changes, whenever supply changes or whenever both supply and demand change.  
 
14.  List the shift factors for Demand 
PREFERENCES
RELATED GOOD
• COMPLEMENTS
• SUBSTITUTES
INCOME
• NORMAL GOOD
• INFERIOR GOOD
• NEUTRAL GOOD
MARKET SIZE
EXPECTATION OF FUTURE PRICE
 
16. List the shift factors for Supply 
RELEVANT RESOURCE PRICES
ALTERNATE GOODS PRICES
TECHNOLOGY
NUMBER OF SELLERS
EXPECTATION OF FUTURE PRICE
SUBSIDIES
TAXES AND GOVERNMENT REGULATIONS

Review 2

1. Define opportunity costs –  alternative forfeit or next best choice
2. Define economics – the study of how humans make decisions in the face of scarcity

3. Scarcity –means that human wants for goods, services and resources exceed what is available.  Basically, wants are greater than resources.
 
4. Division of Labor  - when producing a good or service, work is divided into a number of tasks that are performed by different workers.
 
5. Specialization -  when workers or firms focus on a particular task for which they are well-suited within the overall production process.
 
6. Four broad categories of resources – land, labor, capital and entrepreneurship.
a. Land is all natural resources
b. Labor is the physical and mental talents people contribute to the production process
c. Capital is produced goods used for further productions, such as factories, machinery, tools, computers, and buildings
d. Entrepreneurship is the talent for organizing the use of resources (land, labor and capital, among other things)
 
7. The higher the opportunity cost of attending college, are you more or less likely to go?   False 
 
8. Economies of scale –  for many goods, as the level of production increases, the average cost of producing each individual unit declines.
9. What does Ceteris Paribus mean? All other variables held constant or nothing else changes.
10. We can measure an economy’s macroeconomic health by examining three main goals:
a. Economic Growth
b. Price Stability
c. Full Employment 
11. Command Economy - Economic system where the government makes most economic decisions, or at least strongly influences how decisions are made.
 
12. Market Economy – Economic system where most decisions about what to produce, how to produce and for whom to produce a product or service are made by buyers and sellers.
 
13. Traditional Economy-- Economics system where things are done the same as they have always been done.
.

14. Heavily regulated economies often have what is called: _Underground Economy  Be able to give an example:  The drug trade in the United States.
 
15. Basic differences between macroeconomics and microeconomics
Microeconomics focuses on the behavior of individual consumers and firms.
Macroeconomics focuses on the performance of the entire economy.
 
16. Define Economies of Scales and  give an example:  for many goods, as the level of production increases, the average cost of producing each individual unit declines.

17. Basically, division of labor and specialization can lead to an increase in overall production.
 
WHY? 
a. Specialization allows workers to focus on parts of production where they have an advantage
b. It allows workers to produce more quickly with higher quality
c. It allows for economies of scale
 
Chapter 2
 1. Synonym for additional – marginal
 
2. Decision at the margin- person compares the addititional benefits & additional cost when dividing what to do
  
3. PPF – a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
 
4. Is it possible for a country to produce beyond it’s PPF?   
 NO
5. Is it possible for a country to consume beyond it’s PPF?  Yes , through specialization and trade.

6. A production possibilities graph for Constant Opp Cost  is a straight downward sloping line . Constant opportunity cost occurs when the opportunity cost stays the same as you increase your production of one good in relation to another.  
 
 
7. If increasingly more units of good Y must be given up as each successive unit of good X is produced, then the PPF for these two goods is a downward-sloping curve that is bowed outward representing   INCREASING OPPORTUNITY  COST .  
 
8. PPF point of efficiency and inefficiency
A productive efficient society
o produces at a point on its PPF.
o can produce more of one good only by giving up some of another good.
o cannot produce unlimited amounts of a good.
o still has to make choices.
 
 
A society is productive inefficient when
• it produces at a point inside (below) its PPF.
• it does not produce the maximum output with its given resources and technology.
• it can produce more of one good without giving up some of another good.
 
9. PPF attainable and unattainable regions
 Points that lie inside or on the ppf are attainable, and points that are on the outside are unattainable 
 `     
10. Points that lie inside the PPF are attainable but productive inefficient.
 
11. Comparative advantage relationship to opportunity costs
A person has a comparative advantage in the production of a good when they can produce the product at a lower opportunity cost compared to another person.
         `
12. POSITIVE statements - describe the world as it is   (fact based)  Be able to recognize an example.
 
13. NORMATIVE statements – describe the world as it should be  (judgement based).  Be able to recognize an example.
 
14.  The lesson of _SUNK COSTS to forget about the money that’s irretrievably gone and instead to focus on the marginal costs and benefits of future options.  Be able to recognize an example.
 
15. __LAW OF DIMINISHING MARGINAL UTILITY  - as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.   Be able to recognize an example.
 
16. _LAW OF DIMINISHING MARGINAL RETURNS 
as additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline.  A PPF with increasing opportunity costs has a curved shape because of the law of diminishing returns.  Be able to recognize an example.
 
17.ALLOCATIVE EFFICIENCY – when the mix of goods produced represents the mix that society most desires.  Be able to recognize an example. 
 
18. Adam Smith’s concept that individuals self-interested behavior can lead to positive social outcomes is known as the INVISIBLE HAND

19.  Recognize a properly labeled Productions Possibilities Frontier (PPF) Graph for Constant Opportunity Cost.   Constant - straight line
Efficient on the line
Inefficient inside
Unattainable outside
The maximum combination of two goods that can be produced given current resources
20.    Recognize a properly labeled Productions Possibilities Frontier (PPF) Graph for Increasing  OpportunityCost. 
 
 
Chapter 3
1. Define Demand -the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period.
2. Define Law of Demand - there is an inverse relationship between price and the quantity demanded. 
P - UP, Qd - DOWN | P - DOWN, Qd - UP
. 3. Change in demand vs change in quantity demanded
A change in demand means a shift of the entire demand curve.  A change in quantity demanded indicates movement from one point to another on the same demand curve.
A change in demand means a shift of the entire demand curve.  (PRIME)
A change in quantity demanded indicates movement from one point to another on the same demand curve caused by a change in the good’s own price.
4. Define Supply -The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period of time.
5. Define Law of Supply  - there is a direct relationship between price and the quantity supplied. 
P - UP Qs -UP P - down Qs - down

6. Change in supply vs change in quantity supplied
change in supply means a shift of the entire supply curve.  A change in quantity supplied indicates movement from one point to another point on the same supply curve.
A change in supply means a shift of the entire supply curve.  (RATNEST)
A change in quantity supplied indicates movement from one point to another point on the same supply curve caused by a change in the good’s own price.
 
7. Fixed Supply – No time to produce additional units of a good so the Supply Curve is Vertical
 
8. Know how the shift factors for Supply and Demand and how they affect the supply and demand curves (see matrix)  
 
9. SURPLUS OR EXTRA SUPPLY  - at a price above equilibrium price there is a surplus or excess supply
 
 
10. SHORTAGE – at a price below equilibrium price there is a shortage or excess demand.
 
11. EQUILIBRIUM/EQUILIBRIUM POINT On a supply and demand curve, it is the point where supply and demand intersect one another.
 
 
12. What can change equilibrium price and quantity?
Whenever demand changes
Whenever supply changes 
Whenever both supply and demand change 
12.  Recognize a properly labeled Demand Graph  
13. Recognize a properly labeled Supply Graph
14.  Know how the following shift factors affect Demand and how they affect the demand curve (shift to the left or right) PRIME
• Preferences
• Related Goods
a. Complements
b. Substitutes
• Income
a. Normal
b. Inferior Good
c. Neutral Good
• Market Size
• Expectation of Future Price
 
15.  Know how the following shift factors affect the Supply curve and how they affect the supply curve (shift to the left or right) RATNEST
• Relevant Resource Prices
• Alternate Goods Price
• Technology
• Number of Sellers
• Expectation of future prices
• Subsidies
• Taxes and Regulations
 
16.  Recognize a properly labeled graph of Equilibrium.  Know how equilibrium price and 
equilibrium quantity will be affected after shifts of the demand and/or supply curve.

Transcript for:Foundational Economics Concepts

Transcript for:
Foundational Economics Concepts