ECON 106Exam # 1 Study Guide Lectures: 2 - 9Chapter 1Limits, Alternatives, & ChoicesThe Economic Perspective - Opportunity Costs – giving up one thing to obtain more of another- Utility – the pleasure, happiness, or satisfaction gained from buying a good or serviceTheories, Principles, & Models- Scientific method – observing the real world behavior, formulating a possible explanation, testing the explanation, accepting rejection and modifying the hypothesis, continuing to test the hypothesis against facts- Economic principle – a statement about economic behavior about what may cause what,or what may happen under certain circumstances - Other things-equal assumption (ceteris paribus) – the assumption that factors other than those being considered do not changeMicro/Macro Economics- Microeconomics – decision making by individual customers, workers, households, and business firms- Micro measures: the price of a specific product, the number or workers employed by a single firm/household, or the expenditures of a specific firm, government entity, or family - Macroeconomics – Examines the economy as a whole or it’s basic aggregates- Aggregates – a collection of specific economic units treated as if they were one unit- Macro measures: total output, total employment, total income, and aggregate expenditures - Positive Economics – focuses on facts, avoids value judgments, includes theory development/testing (how the world is)- Normative Economics – incorporates value judgments, looks at the desirability of certainaspects of the economy, and underlies expressions of support for specific economic policies (how the world should/ought to be)Individual’s Economizing Problem- Economizing problem – the need to make choices because economic wants exceed economic means - Our income comes to us in the form of wages, interest, rent, and profit- People have unlimited wants - They must pick and choose goods and services that maximize our satisfaction given the limitations we face- Budget line (budget constraint) – a curve that shows various combinations of two products a consumer can purchase with a specific money income - Combinations on or inside the budget line are attainable- Combinations outside the budget line are unattainable- Limited income forces people to choose what to buy that will fulfill their wants- An increase in money income shifts the budget line to the right- A decrease in money income shifts the budget line to the leftSociety’s Economizing Problem- Society also must face choices under scarcity- All natural, human, and manufactured resources that go into the production of goods and services are considered scarce economic resources- Economic resources (factors of production): land, labor, capital, entrepreneurial ability- Land – all natural resources (forests, water, wind, sunlight)- Labor – physical actions and mental activities people interact with (teacher, machinist, football player)- Capital – all manufactures used in producing consumer goods/services (tools, machinery)- Entrepreneurial ability – combines land, labor, & capital, makes strategic business decisions, innovates, bear riskProduction Possibilities Model- To be successful this model needs; full employment, fixes resources, fixed technology, two goods- Consumer goods – products that satisfy our wants directly- Capital goods – products that satisfy our want indirectly - The ability to produce more of both consumer goods and capital goods is the result of:o Economic growtho Increased supplies of the factors of production- Production possibilities table – lists the different combinations of two products that can be produced with a specific set of resources- Production possibilities curve – displays the different combinations of goods and servicesthat society can produce in a fully employed economy- Each point on the curve represents some maximum output of two products- Points on the cure are attainable if the economy uses all of it’s available resources- Points inside the curve are attainable but have less total output- Points outside the curve are unattainable but represent a greater output- Law of increasing opportunity cost – as the production of a particular good increases, the opportunity cost of producing an additional unit rises Unemployment, Growth, & the Future- Almost all nations have experienced widespread unemployment and unused production capacity from business downturns at one time or another- The potential maximum output of the economy changes and shifts the production possibilities curve outward and to the right when the quantity and quality of resources and technology is fixed - The greater abundance of resources will result in greater potential output of one or bothproducts at each alternative- This shift represents economic growth - Economic growth – a larger total output- Goods for the future include capital goods- Goods for the present are consumer goods (food, clothing)Chapter 2The Market System & the Circular FlowEconomic Systems- A particular set of institutional agreements and a coordinating mechanism to respond to the economizing problem- Economic questions: what goods are produced, how are they produced, who gets them, how to accommodate change, and how to promote technological progress- Economic systems have two particular ideas: market system, and the command system- Market System (capitalism) – characterized by private ownership of resources and the use of markets and prices- The market system is based on competition among independently acting buyers and sellers- Laissez-faire (pure capitalism) – government’s role is limited, they cannot interfere with the economy in this system- Command System (socialism/communism) – government owns most property resources and economic decision making occurs through a central economic plan - A central planning board decides how much resources will be used, the distribution of output, and the organization of production Characteristics of the Market System- Private property right – gives owners the freedom to negotiate binding legal contracts, and enables them to obtain, use, and dispose of property resources as they see fit- Roles of property rights:o Only mutually agreeable economic transactions may take placeo Encourage investment, innovation, exchange, maintenance of property, and economic growtho Extend to intellectual property through patents, copyrights, and trademarkso Facilitate exchangeo