ECO 105 1nd EditionExam # 1 Study Guide Lectures: 1 - 6Lecture 1What is economics?The social science of production, distribution, and consumption of goods and servicesAlfred Marshall: Ordinary business of lifeThe study of how individuals/human beings (try to) satisfy their infinite desires in a world that isfiniteRhetorical tool for politicians and businessmenWhat is the difference between market and command economies?Market economy = individuals are free to choose about production and consumptionCommand economy = central authority chooses the production and consumption decisions of individualsWhat is the difference between microeconomics and macroeconomics?Microeconomics = individual and firm (businesses) behavior – productivity, cost, revenue, profit,utilityMacroeconomics = whole economy (usually on the national scale) – growth, recessions, inflation, interest rates, monetary and fiscal policyWhat are the 8 principles of economics?1.Scarcity = resources are scarce2.Individuals make choices about the allocation of scarce resources3.Opportunity cost = value of the next best option4.Decisions are made on the margin = trade-offs and marginal analysis5.Decisions are based on incentives6.There are gains for trade when individuals specialize = learn how to do something well7.Markets equilibrate = equilibrium8.Markets are efficient = no one is made worse off by a decisionLecture 2What is an economic model?Foundation of economic theory --> in economics: require a degree of abstraction to represent the real worldSimplified version of the real world intended to communicate some salient feature (concept/idea) of the worldWhat is abstraction?The process of limiting the set of information around a concept/idea/phenomenon in order to develop a general (more universally applicable) understanding of the conceptWhat is ceteris paribus?An assumption of all economic modelsHow is the movie “Cast Away” used to describe a production possibilities frontier (PPF)?Imagine a human stranded on an island. In order to survive, this individual must allocate his/her time to two productive activities (gathering coconuts and catching fish)Lecture 3What is comparative advantage?Comparative advantage in the production of goods resides with the individual/economy with the lower opportunity costLecture 4What is the circular flow diagram (CFD)?Factors of production = labor (L) and capital (K)Production function Q = F(L,K)- Q = quantity produced is a function of labor and capital (amount)Lecture 5What does a demand schedule represent?The quantity of a good consumers are willing to buy at a finite number of pricesWhat does a demand curve/function represent?The quantity consumers are willing to buy at any/every priceWhat does a supply schedule represent?The quantity sellers/producers are willing/able to sell at a finite number of prices- Willing/able = individual sale of the good increases profitWhat does a supply curve represent?The quantity of a good producers are willing/able to profitably produce/sell at any/every priceLecture 6Possible exam questions (format)If y increases and Q is an inferior good, then demand _____.a)increasesb)decreasesc)does not changed)?If Po decreases and Q and Qo are complements, then demand for Q _____.∆Q/∆Po < 0If Q and Qo are complements and Po increases, what happens to demand for Q? ∆Q/∆Po < 0If Q and Qo are substitutes and Po increases, then _____.∆Q > 0 (Q increases)Lecture 7Unable to attend