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PSU ECON 104 - Exam 1 Study Guide

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ECON 104 1st Edition Exam #1 Study Guide: Lectures 1-8ECON 104.5 Spring 2015 REVIEW QUESTIONS FIRST EXAM the following are some questions for review—they are not all inclusive, your notes are your best guide (lectures 1/13 through 2/5) for what is on the exam. (The answers to these questions are in your class notes. We will fill in the blanks on Tuesday, 2/10,review and answer any questions you may have. No new material will be covered.) Chapter 11. How is microeconomics different from macroeconomics?Macroeconomics is the study of the economy as a whole whereas microeconomics is the study of the decisions made by individuals and small impacting organizations. 2. What is economics? Economics is the study of mankind in the ordinary business of life3. What are the 3 key economic ideas about how people interact and make choices in the marketplace? 1) People are rational2) People respond to economic incentives3) Optimal decisions are made at the margin4. What is the economic problem facing every society? There is unlimited wants with scarce resources, forcing us to make choices5. Standard of Living refers to _economic growth___6. The factors of production are land, labor, capital and ___entrepreneurship__. 7. In economics, “capital”, “capital goods”, “human capital” or the “capital stock” refers to ___a type ofgood that can be consumed now 8. How is a centrally planned economy different from a market economy? What is a mixed economy? An economy asks 3 questions: what to produce? How to produce it? How to share it?In a centrally planned economy the government controls all of these questionsIn a market economy the buyers and sellers control these questions without government interferenceA mixed economy most choices are made by buyers and sellers but the government does control some aspect of the economyTrue or False: The U.S. economy is a Market economy?FALSE the US has a mixed economy .According to the Index of Economic Freedom (http://www.heritage.org/index/ranking), which country has the greatest amount of economic freedom? Which country has the least?#1: Hong Kong#12: US#178: North Korea (Least)9. Countries with the most (least) economic freedom have the highest (lowest) __________GDP per capita__________________ and/or quality of life. 10. What are economic models used for? Economic models are a simplified description of realitythat makepredictions that can be tested with data. 11. What is the difference between positive and normative economics? Positive: statements that can be certified and tested scientifically using real world data and economic models. However there are often discrepancies on what model to use. For Normative Economics statements are based upon opinion and are scientifically untestableChapter 212. What do we mean by Opportunity cost? Ceteris paribus?Opportunity Cost is the highest valued alternative that must be given up to engage in an activity.Ceteris Paribus means other things being held equal or constant. Only one thing can change at atime13. What is the intuition (meaning) behind the production possibilities frontier (PPF)? What points are unattainable? Efficient? Attainable? Which points reflect full employment of resources?PPF shows the max attainable combinations of two products that may be produced. Points on the PPF graphOn the PPF line = efficient= full employment of resourcesInside the PPF line= inefficient Outside the PPF line = unattainable 14. Why are points on the curve said to be efficient? What does this imply?You cannot produce more of one good, without giving up some production of the other good. When you are on the line you have full employment of resources.15. Why does the production possibilities curve display a bowed-out shape (i.e., concave to the origin)? This occurs because of increasing opportunity costs. 16. What is the law of increasing opportunity cost? How is it related to the production possibilities curve? As an economy moves down along PPF, it can experience increasing marginal opportunity costs. This happens because the more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity 17. What are the assumptions behind the production possibilities curve? How would technological advance, an increase in the capital stock (i.e., investment) or an increase in the labor force affect the production possibilities curve? Resources are fixedFull employment of resourcesTechnology and productions techniques do not changeIf there was a would technological advance, an increase in the capital stock (i.e., investment) or an increase in the labor force the PPF would shift outwards representing economic growth. 18. Why does an outward shift in the PPF represent economic growth?You can now produce more goods and the PPF line represents the max combination of two possible goods 19. What are the two most important sources of economic growth?Increase of capital stock and technology advance. 20. Productivity is defined as _____an economic measure of output per unit of input. _________. 21. What is society’s tradeoff between producing more investment goods versus consumer goods in the present? To produce more in the future, the economy must accept less satisfaction in the present.Chapter 3 22. What is the law of demand?There is an inverse relation between the price of a good and quantity demanded23. How could a change in the number of buyers, income, expectations of future prices, or a change in tastes and preferences (i.e., nonprice determinants of demand) affect the demand curve? Affect equilibrium price and quantity?These changes will either shift the entire curve in or out (decrease or increase)If the curve is decreased then equilibrium price will decrease and equilibrium quantity will decreaseIf the curve is increased then equilibrium price will increase and equilibrium quantity will increase 24. How is a change in quantity demanded different from a change in demand? For example, an increase in quantity demanded vs. an increase in demand?A change in demand is when the whole line shifts A change in quantity demanded when a point moves along the same line due to price 25. What is the law of supply?There is a direct relation between the price of a good and the quantity sellers (firms) are willing to offer for sale 26. How could a change in the number of firms in the market, technology, prices of inputs, or expectations of future prices (i.e., nonprice


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