ECON 1200 1st Edition Exam #1 Study GuideCHAPTER 1: FOUNDATIONS AND MODELS- All individuals and societies face scarcity- Scarcity- A situation in which unlimited wants to exceed the limited resources available to fulfill those wantso Ex) Time: everyone faces this scarcity- Due to scarcity, when we choose something, we must give up something else. This is called the opportunity cost- Opportunity Cost- The highest-valued alternative that must be given up to engage in an activityo Ex) Abby chooses to study instead of playing soccer. Her opportunity cost is the enjoyment she would have gained from playing soccer.- Economics- The study of the choices people and firms make to attain their goals given the scarcity of resources in the economy.o Macro- Deals with the performance, structure, decision making, and behavior of an economy as a wholeo Micro- Deals with the performance, structure, decision-making, and behavior of individual markets- Incentives-Factors that motivate people to make a particular choiceo Ex) Getting a good grade on a test is an incentive to studyo Public policy may rely on incentives to change people’s behavior and it may lead to unattended consequences if it inadvertently changes incentiveso Incentives also play a role in various Economic Models- Economic Models- simplified versions of reality used to analyze real world economic situations- Economists and other scientists make unrealistic assumptions when they build models inorder to simplify our complicated world enough that they can understand and analyze problems and accurately answer questionso Ex) A production possibility frontier may assume that two firms only make two goods. While it is unrealistic to assume these firms ACTUALLY only produce two goods, it simplifies the model so it is easier to economists to understand what is going on.- Positive Statement- Descriptive statements that can be evaluated as true or false using only datao Ex) The company’s sales improved by 6% after they fired Harold- Normative Statement-Prescriptive statements that involve personal values (or opinions). They cannot be evaluated as true or false using only datao Ex) The government SHOULD lower taxesCHAPTER 1: FOUNDATIONS AND MODELS (CONT.)- Household- Refers to all individuals occupying a home- Firm- A company that produces goods and services- Goods- Tangible merchandise- Services- Goods “done” for othersCHAPTER 2: TRADEOFFS, COMPARATIVE ADVANTAGE, & MARKETS- Tradeoff- The idea that producing more of 1 good means producing less of another good due to scarcityo Ex) Country A produces 2 goods, tables and chairs. If Country A wants to produce more tables, then they have to give up the production of some chairs.- Production Possibilities Frontier (PPF)- A curve showing the maximum attainable combinations of 2 products that may be produced with available resources and current technologyo Used to analyze the tradeoffs and opportunity costs that individuals, firms, and countries face when deciding how to use their scarce resourceso Any point on the curve is attainable and means that the firm is using their resources efficiently  Points outside the PPF curve are unattainable due to scarcity Points inside the PPF curve are attainable, but mean the firm is under-producing because some goods are not being usedAttainable and efficientNot attainable Attainable, but inefficientCHAPTER 2: TRADEOFFS, COMPARATIVE ADVANTAGE, AND MARKETS (CONT)- A bowed out PPF curve illustrates increasing, rather than constant, production. (This is more realistic)- Marginal Opportunity Cost- As the economy increases its production of 1 good in 1-unit increments, it must decrease its production of the other good by larger and larger amounts (pg. 42)- Some places are better suited to produce one good over another. This is why trade occurs- PPF- illustrates the relationship between the production quantities of 2 goods on the X and Y axes. (Resources and technology are constant and not shown on the graph)o When a variable on an axis changes we move along the curveEXAMPLES OF SHIFTS:TConstantIncreasingComputersCornScarcity in labor to make corn shifts the point below the PPF curve. (Now inefficient)ComputersCornAn increase in the technology used to make corn shifts the entire curve outward because the firm can produce at a more efficient level than beforeComputersCornWhen resources used to make goods are destroyed, the entire curve shifts downward. This is because scarcity increases.When consumer preferences change such that they will want more computersand less corn, some workers quit farmingto produce computers. (Frontier curve will not shift in or out. Instead, the point on the curve shifts)ComputersCornCHAPTER 2: TRADEOFFS, COMPARATIVE ADVANTAGE, & MARKETS (CONT)- There are two ways to satisfy wants: self-sufficiency and specialization/trade- Self-Sufficiency- Produce everything you want within your own country (doesn’t really work out. There aren’t enough resources for that)o The closest country to reaching self-sufficiency right now is North Korea- Specialization- Produce or do one thing more than another (whichever you’re better at)o Once specialized, you can trade with another country- Trade- The act of buying or sellingo Ex) Trade services for money, then trade that money to get whatever you wanto No one makes us trade, we do it because it’s better for us—we can consume a greater quantity and variety of goods and services- PPFs- Depict the combinations of 2 goods that can be produced and consumed without tradeo Where each individual firm or country produces and consumes on their PPF depends on their preferences- Absolute Advantage- The ability of an individual, firm, or country to produce more of a good or service than competitors using the same resourceso Ex) Assume that without trade, country 1 chooses to produce and consume 50 carts and 300 swords per week, while country 2 chooses to produce and consume 120 carts and 600 swords per week.  In this case, Country B would have the absolute advantage in both swordsand carts because they can produce more of each good than Country A can.- Comparative Advantage- The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.o Comparative advantage determines what country trades what goodo Unlike absolute advantage, one country cannot have a comparative advantage for both goods. - It is possible to