ECON 205 2nd Edition Exam 1 Study Guide Lectures 1 5 Lecture 1 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 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 3 Profit 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 create inefficiency 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 4 The 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 5 The 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 GDP yields 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 by Ben 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 policy determines how the currency is regulated Extra questions on the test answers given by professor in class The subject of economics includes 1 The study of wealth 2 The study of business life 3 The study of allocation of scarce resources 4 The study of activities involving money 5 All of the above The answer is all of the above Inflation is less of a problem over the long term than unemployment A Positive B Normative It is a normative statement Which of the following must be held constant when drawing up a PPF A Total resources B quantity of money C Money income prices D The allocation of resources The answer is total resources A change in which of the following will not alter the demand curve for rental housing A The price of houses B Rental prices C Income of consumers D Energy prices E Growth of the community The answer is rental prices Therefore a change in prices doesn t mean that the demand curve will change The schedule remains the same as long as only price or quantity changes The demand curve for a normal good will shift to the right if A Income increases true B Population increases true C The price of a substitute good increases true D All of the above The answer is all of the above Which of the following items is not part of fiscal policy A Production of goods and services B Transfer payments C Money supply the answer D Taxes E Government spending The answer is money supply That is part of monetary policy