Econ 201 1st EditionExam # 1 Study Guide Lectures: 1 - 11Lecture 1 (January 7)Introduction to EconomicsPeople respond to incentives, particularly monetary ones. The goal for this course is that students will demonstrate a basic understanding of how an economy works and how this knowledge applies to their personal and professional lives.Lecture 2 (January 9) ScarcityEconomics is the study of how a society manages its scarce resources. Economics has everything to do with making decisions when faced with scarcity. Scarcity is the limited nature of a society’s resources. Two types of scarcity are relative and absolute; relative scarcity means that resources are not available in a local area. Absolute scarcity means that resources are not available anywhere on Earth. To manage scarce resources, you must determine four things: what to produce, how to produce, how much of something toproduce, and who receives what is produced.Economic SystemsThere are three types of economic systems: traditional economy, command economy, and market economy. A traditional economy uses traditional practices to produce goods. A command economy is an economy that is controlled by a small group of leaders who determine economic choices for a society (i.e. Soviet Union). A market economy is an economy based on supply and demand (i.e. United States); characteristics of a market economic system are division of labor, specialization, economies of scale, invisible hand, trade, and organization of economic activity through prices.Lecture 3 (January 12)Circular Flow ModelA circular flow model is a visual model of the economy that shows how dollars flow through the markets among households and firms. In the model, households and firms interact with the Market for Goods and Services (G & S) and the Market for Factors of Production. Factors of production are resources the economy uses to produce goods and services. The assumption of the circular flow model is that households own all factors of production (land, labor, and capital) and sell or rent them to firms for income. The circular flow model is shown in the picture below. Macroeconomics and MicroeconomicsMacroeconomics is the study of economy-wide phenomena. Microeconomics focuses on individual decision makers. Role of an EconomistEconomists play two roles in their jobs: that of a scientist and that of a policy advisor. As a scientist they attempt to explain the world using the scientific method. As a policy advisor, they try to improve the current economic situation and plan for what they predict will happen.Lecture 4 (January 14)Positive and Normative StatementsThere are two types of statements an economist can make about an economic situation. They can use positive statements, which describe the world as it is, or they can use normative statements, which attempt to prescribe how the world should be. Positive statements can be proven true or false, while normative statements often use the wording “should be” or “ought to be” and express an economist’s opinion.Opportunity CostScarcity gives rise to tradeoffs and decisions on an individual, firm, government, and society level. These tradeoffs result in opportunity cost. The opportunity cost of any item is whatever must be given up to obtain it. You can also call it the next best alternative. This is not necessarily represented in money, but in the benefits you get from choosing one thing over another.Production Possibilities FrontierA production possibilities frontier, or PPF, is a visual model of scarcity, tradeoffs, and efficiency, showing the combinations of two goods an economy can possibly produce given available resources and available technology. The model is based on technology and resources currently present at the time and assumes that efficiency is possible and obtainable. Any industry has to decide whether to focus their efforts on producingconsumer or capital goods. Consumer goods are goods used by the consumer that do not aid in the production or growth of a company; capital goods are goods that can be used to produce other goods, such as machinery.Example PPF ModelIn this example, we have one country whose labor input can produce two goods: either computers or wheat. They have one resource that is worth 50,000 labor hours. One computer takes 100 hours to produce, while one ton of wheat takes 10 hours to make. Given that we have 50,000 labor hours total, we can determine what our PPF is for this example. A table and graph are shown below. Employment of Labor Hours Production (PPF) Computers Wheat Computers Wheat (in tons)A 50,000 0 500 0B 40,000 10,000 400 1,000C 25,000 25,000 250 2,500D 10,000 40,000 100 4,000E 0 50,000 0 5,000Using the information in the PPF column, we can make a graph using the “Computers” data as the “x” variable and the “Wheat” data as the “y” variable.0 100 200 300 400 500 6000100020003000400050006000Production Possibilites FrontierComputersWheat (in tons)Problem #1: Say this particular company wants to produce 100 computers and 3,000 tons of wheat. Is this possible and efficient? Problem #2: Say this particular company wants to produce 350 computers and 3,000 tons of wheat. Is this possible and efficient?For problem #1, because this production value is inside the PPF trend line, it is possible; however, since it is not on the PPF trend line, it is inefficient. It is not producing all of theresources it could possibly make given the labor hours. In fact, it only uses 40,000 out of the 50,000 hours, as (100 hours)*(100 computers) + (3,000 tons of wheat)*(10 hours) = 40,000 hours.For problem #2, this production value is above the PPF trend line, which means that it is not possible. Regardless of how efficient this may be, this current production is impossible given the technology and resources available. Points that are on the PPF are both possible and efficient. Points that are under the PPF are possible but they are not efficient. Points that are above the PPF are not possible as they go above the resource and technology constraints of the business.Lecture 5 (January 16)PPF and Opportunity CostMoving along a PPF trend line involves shifting resources (e.g. labor) from the production of one good to the other. The slope of the PPF is the cost of one good in terms of another, also known as opportunity cost. So to find opportunity cost given a PPF, find the slope. Example PPF and Opportunity Cost ProblemGiven the two PPF graphs below, what is