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USC ECON 205 - Exam 1 Study Guide

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Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals.Scarcity creates economic goods.Efficiency is the most effective use of societal resources.Positive economics vs. normative economics:Normative economics defines what ‘ought to be’—ethics and fairness. Positive defines what will be the effect of something.The Three Problems of Economic Organization:What commodities are produced and in what quantities?How are goods produced?For whom are goods produced?Macroeconomics is concerned with the overall performance of the economy.It began with John Maynard Keynes and his 1936 book General Theory of Employment, Interest, and Money.It analyses business cycles, total investment and consumption, bank money management, financial crises, and national economic growth (i.e. why some nations grow and others don’t).Microeconomics is concerned with the behavior of individual entities like markets, firms, and households.Free goods are things like sunshine and sand—free and (relatively) infinite.Economics is the study of how governments allocate economic goods.Opportunity cost is useful when discussing the allocation of resources, the ‘next-best alternative’, can determine the cost of something without monetary prices: the answer is all of the above.ECON 205 2nd EditionExam 1 Study Guide: Lectures 1-5Lecture 1Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals.- Scarcity creates economic goods.- Efficiency is the most effective use of societal resources.- Positive economics vs. normative economics:Normative economics defines what ‘ought to be’—ethics and fairness. Positive defines what will be the effect of something.The Three Problems of Economic Organization:- What commodities are produced and in what quantities?- How are goods produced?- For whom are goods produced?Macroeconomics is concerned with the overall performance of the economy. - It began with John Maynard Keynes and his 1936 book General Theory of Employment, Interest, and Money. - It analyses business cycles, total investment and consumption, bank money management, financial crises, and national economic growth (i.e. why some nations grow and others don’t).Microeconomics is concerned with the behavior of individual entities like markets, firms, and households. Free goods are things like sunshine and sand—free and (relatively) infinite.Economics is the study of how governments allocate economic goods.Lecture 2  Opportunity cost is useful when discussing the allocation of resources, the ‘next-best alternative’, can determine the cost of something without monetary prices: the answer is all of the above.In The Wealth of Nations (1776), Adam Smith talks about the invisible hand—that private interest can lead to public gain when it takes place in a well-functioning market mechanism. Smith viewed government economic intervention as injurious. He wanted a laissez-faire market—one without government involvement.In a perfect system of competition and no market failures, markets will be efficient. Monopolies or pollution or other market failures will destroy the invisible hand.Lecture 3Profit provides incentives for firms to behave efficiently, while losses (when costs exceed revenue) provide disincentives. In a perfectly competitive market, no agent (seller or buyer) has enough market power (high enough percentage of the total market) to affect prices. Still, in practice most markets are at least slightly imperfect. Monopolies over an industry createinefficiency, as they can dictate the price without competition to lower it.Gains from trade arise when people specialize in production of different goods and then interact in the free market. Externalities (for the purpose of the test, all shall be considered negative) are costs or benefits imposed on outside players during production. They are things like pollution and resource depletion. Lecture 4The production-possibility frontier is a curve that relates two production opportunities that use the same factors of production—land, labor, and capital—by prices and profit. A society can never exceed the PPF curve, and various factors leading to inefficiencies—like war—can make it fall inside the curve.Prices dictate producers and consumers in the market. When prices are high, in general consumers will buy less while suppliers will be willing to supply more. The reverse is also true: when prices fall, consumers will buy more in general while suppliers will supply less. This is the law of supply and demand. The relationship between the price of a good and the amount wanted by consumers is the demand curve, while the price of the good and the amount supplied is the supply curve.The demand and supply curves will only shift when the underlying determinants of them change, not the price (price will change the point on the curve, however).When supply and demand curves intersect, that is the market equilibrium price, also called the market-clearing price.Lecture 5The value of all goods and services in a country is called the gross domestic product (GDP). However, the total value of goods and services produced by a country’s citizens (regardless of geographical location) is the gross nation product. GDP is composed of the country’s total consumption (C), investments (I), government expenditures (transfer payments—Medicare, Social Security, welfare, noted G), and net exports (total exports minus total imports, noted X) added together (GDP = C + I + G + X). Actual GDP is the GDP measured with current market prices, while Real GDP is the GDP measured against the prices of a base year for the items (subtracting depreciation from GDPyields the real GDP). Potential GDP is the maximum amount an economy can produce and maintain price stability.To regulate the economy, the government uses monetary, international, fiscal, and market policies.- Monetary policy is the ability of government to control the money supply available by regulating interest rates. In the US, the Federal Reserve regulates this weekly (chaired byBen Bernanke).- Fiscal policy is taxation, government expenditures, and subsidies created by the administration (the White House and passed by Congress).- Market policy determines the market structure and promotes competition.- International


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