ECON 104 1st Edition Exam 1 Study Guide Lectures 1 8 ECON 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 1 1 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 life 3 What are the 3 key economic ideas about how people interact and make choices in the marketplace 1 People are rational 2 People respond to economic incentives 3 Optimal decisions are made at the margin 4 What is the economic problem facing every society There is unlimited wants with scarce resources forcing us to make choices 5 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 of good 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 questions In a market economy the buyers and sellers control these questions without government interference A mixed economy most choices are made by buyers and sellers but the government does control some aspect of the economy True 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 untestable Chapter 2 12 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 a time 13 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 graph On the PPF line efficient full employment of resources Inside 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 fixed Full employment of resources Technology and productions techniques do not change If 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 demanded 23 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 decrease If 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 determinants of supply affect the supply 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 increase and