ECON 1113 1st Edition Exam 1 Study Guide Lectures 1 7 Lecture 1 January 12 Discussion of the Basic Economic Problem Economic Resources and Types of Costs What are the two economic facts Economic resources are scarce or limited Desires for particular types of goods and services are effectively unlimited What are the four economic resources and their characteristics Labor human abilities to use and produce material goods and services Capital human made aids to production such as tools machinery factories and transportation networks Land all natural resources useable in production a function of technology Entrepreneurship human resources which bring together economic resources bear risk gain motivation from self interest as expressed by a desire to maximize profits and display an idea about how to maximize profit What is the difference between capital goods and consumer goods Capital goods are used to produce other goods whereas consumer goods are consumed by themselves How do unlimited material wants function against the scarcity of economic resources The limited resources satisfy the unlimited wants as best as possible However people must make choices because resources are limited thus they must unavoidably encourage cost of products and services based upon their choices What are the two types of costs Explicit Costs out of pocket money spent when an individual makes a choice once spent the money cannot be spent on anything else Implicit Costs alternative forgone or sacrificed abstract and material items that result after an individual makes a choice but this choice does not require out of pocket payments Lecture 2 January 14 Discussion of Production Possibilities Analysis What is a production possibilities analysis and the assumptions associated with it A production possibilities analysis delineates how a society chooses to allocate its funds toward either consumer goods or capital goods It functions under some basic assumptions which are simplifying and general characteristics of economic principles These ideas include that resources are fixed in quantity technology does not advance no unemployment or underemployment of resources exists and there are two types of goods consumer and capital How is a production possibilities curve drawn and labeled Production alternatives exist that can be plotted on a graph and ought to form a line that begins on the y axis and slopes negatively toward the x axis The society represented economically by the graph can choose to function at any point on the visible curve or within its dimensions Consumer goods are listed along one axis and capital goods are listed on the other axis What are ways of determining where on a production possibilities curve a society decides to establish production In the United States society practices dollar voting in a market economy This means that how people spend their dollars simultaneously acts as a voting system for which products are in the greatest demand at the best prices This makes some goods more profitable than others In the former Soviet Union a command economy determined through five year plans by the national Politburo set the consumer and capital production of goods The capital goods within the society at this time were not so much capital goods as they were military goods due to the regime s agenda Based on these principles they always produced more military goods rather than consumer goods Both systems demonstrate that people must choose and sacrifice for their decisions What does a production possibilities curve illustrate The production possibilities curve summarizes the basic economic problem based on one line that displays the potential possibilities offered by the four basic resources It portrays the necessity of choices because society can only choose one point on the graph It also conveys economic costs through the negative slope of the production possibilities curve additional units of one good require that an increasing number of the other goods be foregone This is because the line is straight and not curved Scarcity creates a limit on the production possibilities curve Points within the production possibilities curve show less than total utilization of resources Points outside the production possibilities curve are unattainable due to scarcity of resources but the current circumstances can change with growth and expand the line to points that now lie beyond it How would relaxing the assumptions adjust the position of a production possibilities curve Relaxing the assumptions generates a more realistic portrayal of economic situations Positive unemployment and or underemployment of resources can cause for points occurring within the production possibilities curve Growth in economic resources and or technological advance can shift the entire line outward from the origin Lecture 3 January 21 Further Discussion of Production Possibilities Analysis with Examples Discussion of Flow of Income in the Economy and Introduction of Price Determination How do the production possibility curves of the United States and China compare The initial curve of the two lines is essentially the same however China s point of production lies among higher capital good productions unlike the United States whose point occurs higher on the consumer goods production Each of the countries had to choose one point on the curve and observers are assuming that each nation is near full employment Generally the more capital goods produced the higher the rate of future economic growth Thus the Chinese economy will grow faster because of their relatively higher production of capital goods overtaking the United States The current depiction of the production possibilities curves would shift outward from their present location in a parallel manner except China s would shift further than the United State s would on the graph What are the components and flow of income in the economy Households or basic consuming units produce economic resources for firms or basic producing units which then produce consumer goods and services or outputs Alternately households participate in consumer spending through money payment for outputs given to firms which then encourage money flow through payments back to households The resource market includes households supplying resources firms demanded resources and together yielding resource prices The output or goods market consists of households demanding goods firms supplying goods and together yielding