ECON 1051 1st EditionExam # 1 Study Guide Lectures: 1 - 19Chapter 1 Terms To KnowScarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wantsEconomics: The study of the choices people makes to attain their goals, given their scarce resourcesMarginal Analysis: Analysis that involves comparing marginal benefits and marginal costs Trade-Off: The idea that because of scarcity, producing more of one good or service means producing less of another good or service Opportunity Cost: The highest valued alternative that must be given up to engage in an activityNormative Analysis: Concerned with what ought to bePositive Analysis: Concerned with what is Centrally Planned Economies: An economy in which the government decides how economic resources will be allocated Market Economies: An economy in which the decisions of households and firms interacting in markets allocate economic resources Microeconomics: The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choicesMacroeconomics: The study of the economy as a whole, including topics such as inflation, unemployment and economic growth Concepts To Know 1.Trade-offs force society to make choices when answering the three main questions: a. What goods and services will be produced?b. How will they be produced? c. Who will receive the goods and services?2.Some economists argue that the Great Depression has expanded government intervention, therefore US, Canada and Western Europe aren’t pure market economics 3. Three key economic ideas: a. People are rational b. People respond to incentivesc. Optimal decisions are made at the marginChapter 2 Terms To KnowTrade: The act of buying and sellingProduction Possibilities Frontier (PPF): A curve showing the maximum attainable combinations of two products that can be produced with available resources Absolute Advantage: The ability of an individual, a firm or a country to produce more of a good or service than competition, using the same amount of resourcesComparative Advantage: The ability of an individual, firm or a country to produce a good or a service at a lower opportunity cost than competitors Market: A group of buyers and sellers of a good or service and the institution or arrangement bywhich they come together to tradeProductive Efficiency: Situation in which a good or service is produced at a lower cost Concepts To Know 1.Points outside the PPF curve are unattainable2.Points inside the PPF curve are attainable but inefficient Chapter 3 Terms To KnowDemand Schedule: Table that shows the relationship between price of a product and quantity of the product demanded Quantity Demanded: The amount of a good or service that a consumer is willing and able to purchase at a given priceDemand Curve: A curve that shows the relationship between the price of a product and the quantity of the product demanded Market Demand: The demand by all the consumers of a given good or service Law of Demand: The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises,the quantity demanded of the product will decrease Substitution Effect: The change in the quantity demanded of a good that results from the change in price, making the good more or less expensive relative to other goods that are substitutes Income Effect: The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing powerNormal Good: A good for which the demand increases as income rises and vice versa (ex- Budweiser)Inferior Good: A good for which the demand increases as income falls and vice versa (ex- Natty)Ceteris Paribus Condition: Means “all else equal” in Latin and requires that when analyzing the relationship between two variables –such as price and quantity demanded- other variables must be held constant Compliments: Goods and services that are used together Supply Schedule: A table that shows the relationship between the price of a product and the quantity of the product supplied Supply Curve: A curve that shows the relationship between the price of a product and the quantity of the product supplied Law of Supply: The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied Market Equilibrium: A situation in which quantity demanded equals quantity supplied Competitive Market Equilibrium: A market equilibrium with many buyers and many sellersSurplus: When supply is greater than demandShortage: When demand is greater than supplyConcepts To Know1.As price changes, demand changes – as price goes down, demand goes up2.Substitution and Income effect explains the Law of Demand 3.Variable that change market demand are: a. Incomeb. Price of related goodsc. Tastesi. Subjective elements such as ad campaigns that can enter into a consumer’s decision to purchase a product d. Population and Demographicse. Expected future pricesi. If the price of stock is expected to increase next week, then demand increases now4.An increase in demand will cause the demand curve to shift right and a decrease in demand will cause the demand curve to shift left 5. If Samsung Galaxy becomes more expensive and Sprint offers better plans, then the demand for iPhones will increase and the demand will shift to the right6.Variables that shift market supply: a. Price of inputsb. Technological changes c. Prices of substitutes in production i. A farmer can grow corn or wheat but if the price of corn is expected to behigh next year then the farmer would plant more corn since he’ll get more money and supply less wheat d. Number of firms in the market i. More firms, more supplye. Expected future prices i. If the price is expected to be higher in the future there is an incentive to decrease supply now and increase it in the future 7.In the situation of a surplus, price is lowered until demand is met 8.In the situation of a shortage, price is increased until demand is met 9.Shifts in supply and demand curve:a. If more firms enter the market and start producing then the supply curve will increase and shift to the rightb. If Jimmy John’s cuts prices on its sandwiches then demand will decrease and shifts to the left Chapter 4 Price Ceiling: A legally
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