Econ 1001 1st EditionExam # 1 Study Guide Jan. 20 – Feb. 10 Look at the powerpoints on MyGateway for chapter questions and possible short answerprompts.Chapter 1Important vocabulary- ECONOMY – social arrangements that determine WHAT is produced, HOW it is produced, and WHO it is produced foro MARKET ECEONOMY – most economic decisions made by buyers and sellers; decentralized (ex. USA)o COMMAND ECEONOMY – government makes or strongly influences most economic decisions; centralized (ex. Libya)- GLOBALIZATION – trend in which buying and selling in markets have increasingly crossed national borders- MICRO ECONOMICS – focuses on action of particular actors within the economy (ex. Households, workers, business firms)- MACRO ECEONOMICS – focuses on economy as a whole and issues like growth, unemployment, inflation, and balance of trade- BLACK MARKET – an illegal market that breaks government rules on prices or sales- SPECIALIZATION – when workers or firms focus on particular tasks in the overall production process for which they are suited best for- PRINCIPLE – the amount of an original financial investment, before any rate of return is paid- INTEREST RATE – a payment calculated as a percentage of the original amount saved or borrowed, and paid by the borrower to the saverCONCEPTS“no such thing as a free lunch” – someone somewhere is paying for that lunch somehow.There is ALWAYS a tradeoff. If someone offers a free lunch, they’re probably asking for something in return aka you’re paying for it somehow.Economics is called “the dismal science” – its all about weighing benefits and costs. Sometimes, the less moral decision is the most economically smart decision.Chapter 2BUDGET CONTRAINT – a diagram that shows the possible choices in a situationOPPORTUNITY SET – another name for the budget constraint aka the labor/leisure graphUTILITY – the level of satisfaction or pleasure that people receive from their choices (ex. 2 people with the same income who face the same prices will have the same budget constraint, but they may make different choices because of personal preferencesRISK PREMIUM – a payment to make up for the risk of not being repaid in full. Uncertainty of “later”INFLATION –rise in the overall level of pricesTIME VALUE OF MONEY – the cost of having to wait for repaymentINTEREST RATE = RISK PREMIUM + EXPECTED RATE OF INFLATION + TIME VALUE OF MONEYCOMPOUND INTEREST – when interest payments accumulate, so that in later periods, the interest rate is paid on the interest that has been earned and reinvested in previous years. PV(1+r)^t = FV INTERTEMPORAL CHOICE – choice to take a smaller amount of money at an earlier time, or take a larger amount of money at a later timeOPPORTUNITY COST – whatever must be given up to obtain something desired. The ONE best alternative. Aka “cost”MARGINAL ANALYSIS – comparing the benefits and costs of choosing a little more or a little less of a good (ex. Buying a burger when starving provides more utility than buying a burger on the way to work because you have extra time)LAW OF DIMINISHING MARGINAL UTILITY – as a person receives more of a good, the marginal utility from each additional unit of the good is smaller than from the previous unitSUNK COST – costs that were uncured in the past an can not be recovered, and thus should not effect current decisions (ex. Spending $8 on a movie ticket and after watching for 20 minutesyou decide it is a horrible movie, but you cant get your $8 back. You can leave after 20 minutes and spend that remaining hour and a half doing something else rather than watching a crappy movie.)POSITIVE STATEMENTS – objective, verifiable, can be checked.NORMATIVE STATEMENTS – Subjective, opinion based, many times include “should/shouldn’t, short/tall, a lot/a little, good/bad”GraphsBudget constraint (individuals) – shows tradeoff to an individual decisionProduction possibilities frontier (PPF) (societal) Efficiency – when it is impossible to get more of something without experiencing a trade off of less of something else (a point on the line of a graph).Productive efficiency – when it is impossible to produce more of one good without decreasing the quantity produced of another good.Chapter 3ABSOLUTE ADVANTAGE – when one nation can produce a product at a lower cost relative to another nation Line has a CONSTANT slope; tradeoff is constant. The more leisure time, the less money. Budget constraint is always down-sloping because always a tradeoff. Curve: tradeoff is NOT constant Starting point matters for how large or small the tradeoff is going to be Point X is unattainable Point A is inefficient A curve can move out from: technology and innovation, increase in population A curve can move in from: war, natural disasters, or anything that destroys resourcesCOMPARATIVE ADVANTAGE – the ability to produce a good or service at a lower opportunity cost than others.INTRA-INDUSTRY TRADE – international trade of goods within the same industrySPLITTING UP THE VALUE CHAIN – when many of the different stages of producing a good happen in different geographical locationsProductivity tableThe US has the absolute advantage in making shoes and also refrigerators.Opportunity cost: by dividing 4/1, you can tell that the US opportunity cost of making 1,000 pairs of shoes is using up 4,000 workers that could be used for making refrigerators, and making1,000 refrigerators (1/4) is using up a quarter of the workers that could be used to be making 1,000 shoes.(5/4) tells us that Mexico’s opportunity cost is 1 and ¼ the amount of refrigerators they can make. And it is 4/5 the shoes they could be making with those workers.Gains from trade ABSOLUTE PRICE – price in terms of currency (price tag that tells absolute advantage)RELATIVE PRICE – in terms of another good (tradeoffs/opportunity cost and comparative advantage As a relative price of one good rises, the relative price of the other drops and visaversa. Relative prices are typically