Midterm 1 Review:Chapter 1-Scarcity= the limited resources of the society-Economics= the study of how the society manage it’s limited sources-Incentives (诱 诱)matter: something that induces a person to act, i.e. theprospect of a reward or punishment . Rational people respond to incentives . People respond to incentives in predictable ways. . Self-interest is an important incentive in economics.-Market= A group of buyers and sellers (need not be in a single location)-Organize economic activity= determining -what goods to produce -how to produce -how much of each to produce -who gets them?-A market economy= allocates resources through the decentralized decisions of manyhouseholds and firms as they interact in markets-Each of the household and firm acts as if ‘led by an invisible hand’ to promotegeneral economic well being.-The invisible hand works through the price systemAll decision involve tradeoffs诱efficiency vs. equality诱-Efficiency= when society gets the Most from its scarce resources-Equality= when prosperity is distributed UNIFORMLY AMONG society’s members.-Opportunity Cost of any item is whatever must be given up to obtain it.-Rational people=systematically and purposefully do the best they can to achievetheir objectives.-Making decisions by evaluating costs and benefits of MARGINAL CHANGES, incremental adjustments to an existing plan.-The most important determinant of living standard is PRODUCTIVITY (depends onthe equipment, skills, and technology available to workers).-Market failure= when the market fails to allocate society’s resources efficiently.-Cause of market failure: externalities, when the production or consumption of a goodaffects bystanders (e.g. pollution)-Market power, a single buyer or seller has substantial influence on market price (e.g.monopoly) -Public policy may promote EFFICIENCY -Government may alter market outcome to promote EQUITY. -If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic ‘pie’ is divided. -Policymakers use FISCAL POLICY (taxation ad expenditure) and MONETARY POLICY to attempt to smooth out this economic volatility. -Inflation= increase in the general level of prices. (Money growth is the ultimate source of inflation) -In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to FALL -The faster the government creates money, the greater the inflation rate.-Society facts a Short - run TRADEOFF between INFLATION and UNEMPLOYMENT-The Federal Reserve (is in charge of money supply) is the U.S’s central bank. -Balancing INFLATION and UNEMPLOYMENT -Helping the economy be stable.Chapter 2 Thinking like an economist-Economist play tow roles -Scientists: try to explain the world -Policy advisors: try to improve it -In the first, economists employ the SCIENTIFIC METHOD, the dispassionate development and testing of theories about how the world works. -Assumptions SIMPLIFY the COMPLEX world, make it easier to understand. -MODEL: is a highly SIMPLIFIED representation of a more COMPLICATEDreality. -Economists use MODELS to study economic issues.-The Circular- Flow Diagram= a visual model of the economy, shows how dollars flow through markets among households and firms.-Two types of ‘actors’ - Households: own the factors of production, sell/rent them to firms for income; buy and consume goods & services -Firms : buy/hire factors of production, use them to produce goods and services; sell goods & services-Two markets: .the market for goods and services .the market for ‘factors of production’= the resources the economy uses to produce goods & services, including: labor; land; capital Firms market for goods & services = sold Goods & Services Market for good and services Revenue Firms  markets for factors of production = wages, rent, profit Markets for factors of productionfirms = factor of production Markets for factors of production  Households =income Households  markets for factors of production= labor, land, capital Household markets for G & S= spending Market for G& S  Household =G &S bought -The production possibilities frontier (PPF)= A graph that shows the COMBIMATION of TWO goods the economy can POSSIBLY produce given the available resources and available technology-The PPF could be a straight line or bow-shaped-It depends on what happens to the opportunity cost as the economy shifts resources from one industry to the other.-If the OC remains CONSTANT, the PPF is a STRAIGHT LINE-If the OC of a good RISES AS MORE OF THE GOOD is produced, PPF isBOW-SHAPED.-Why the PPT might be Bow- Shaped (more realistic)?-PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.-Also will happened when there is some other resources, or mix of resources with varying OC (different types of land suite for different uses)-A bow-shaped PPF illustrates the concept of increasing opportunity cost. -Absolute Advantage= the ability to produce a good using fewer inputs than another procurers (look at the amount from given)-Absolute advantage measures the cost of a good in terms of inputs required to produce it. (another measure of cost is opportunity cost)-Comparative Advantage= The ability to produce a good at a lower opportunity cost than another producer-When a producer has a better comparative advantage, it tend to be specialized in producing particular goods.The Economist as Policy Advisor-As scientists, economists make POSITVE statements, which ATTEMPT TO DESCRIBE HOW THE WORLD IT IS.-As policy advisor, economists make NORMATIVE statement, white ATTEMPT TO PRECRIBE HOW THE WORLD SHOULD BE.-economist as scientists, make positive statement (can be confirmed or refuted, normative statement cnt ) explain how the world it is. (describing a relationship)-economist as policy makers, make normative statement, prescribe how the world should be. (involve value judgement). As policy advisors, economists offer advice on how to IMPROVE the world.-Microeconomics studies the behavior of consumers and firms, and theirInteractions in market; Macroeconomics studies the economy as a whole.Chapter 3 Independence and Gains from Trade-If the price of trade is lower than opportunity cost, the country that exports the