Econ 1201 1st EditionExam # 1 Study Guide Lectures: 1 - 10Chapter 1: Art and Science of Economic AnalysisKnow definitions – multiple choice questions; no problem sets for chapter 1Vocab:Economics: the study of how people use scarce resources to satisfy unlimited wantsEconomic problem: allocation of scarce resources to satisfy unlimited wantsScarce : not freely available; price exceeds 0 - without it, there would be no need for pricesUnlimited wants: can never have everything you wantMicroeconomics: study of the economic behavior in particular marketsPieces of a puzzleMacroeconomics: study of economic behavior of entire economies Whole puzzleEconomic Theory: make predictions about cause and effect – simplification of reality Scientific Method: used to study the economic problem 1. Identify the question 2. Specify Assumptions Ceteris Paribas: all things are constant and equal 3. Formulate a hypothesis 4. Test hypothesis Four Factors of production (Scarce Resources):1. Labor: human effortEx. Factory worker2. Capital: equipment and skills used to produce goods and servicesPhysical – factories, tools, classroomHuman – knowledge, skill3. Natural Resources Renewable – timber, water Exhaustible or disposable – Oil, Coal4. Entrepreneurial ability: talent to dream up a new product or lead groups Interest: what resource owners are paid for the use of their capitalFour Decision Makers/economic actors:1. Households a. Goal is to maximized utility (satisfaction)b. Demand goods and services, supply resources2. Firmsa. Goal is to maximize profitsb. Demand resources, supply goods and services3. Governmenta. Buy/sell things 4. Rest of the world: Foreign decision makers that supply to the USMarginal: incremental, additional or extra should you sit for an extra 10 minutes after class to learn about aplia?Markets:1. Product markets: buy and sell goods and servicesa. Ex. shirt, shoes, snow plow market2. Resource Market: buy and sell resourcesa. Ex. labor, capital, machine marketsRational self-interest: People make the best decisions they can given time and information Association is causation fallacy: incorrect idea that because two variables are associated in time, one causes the otherFallacy of Composition: incorrect belief that what is true for the individual must be true for the whole groupChapter 2: Economic tools and systems  will probably be a problem set on opportunity cost/comparative advantage table, PPFOpportunity Cost: value of the best alternative forgone when an item or activity is chosen - varies day to day - time is the ultimate constraint - opportunity cost of going to college is $tuition + $job (work instead of school)Sunk Cost: already occurred and cannot be recovered (not critical in decision making) Ex. If you don’t like a movie while you’re watching it and want to leave, you should leave because you already paid for it whether you stay or leave.Law of Comparative Advantage: the individual with the lowest opportunity cost for a particular good should specialize in that goodComparative Advantage: specializing in a task for which you have the lower opp. cost.Absolute Advantage: making something using fewer resources that other producersProduction Possibilities Frontier (PPF): curve showing alternative combo of goods that are produced when resources are used efficiently1. Points inside the curve are efficient 2. Points outside the curve are inefficientLaw of increasing opportunity cost: to produce 1 good, the economy must sacrifice excessively larger amounts of another good.Changes to the Unattainable/Inefficient points:1. More resources become available (why most countries go to war2. Better technology3. More relaxed rules of the game (relax human rights standards, pollute to heart’s content)Economic Systems: set of mechanisms and institutions that resolve three questionsAll Economic Systems have to answer these 3 questions: 1. What goods and services are produced? 2. How are they produced? 3. For whom are they produced?* Economic systems exist on a spectrum *Communism CommandEconomySocialism MixedEconomiesCapitalism- Decisions madeand resources owned at community level Ex. Think of a family where all the decisions made are balanced and choresare done equally by each member- In bigger systems (countries), therehas to be some type of leader trying to replicate communist decisions- Labor is not communally owned but resources and capital are - Many economies fit under this category (including the US)- Everything is decided in markets  this can lead to problems because if you you’re born with no money, you could end up stuck in thatEx. North Koreaposition- Advantage: can work hard to achieve what you want “American Dream”Chapter 3: Economic Decision Makers** Be sure you know circular flow diagram **Household, firm, product and resource markets – government in middle of flow chart(rest of the world is off to the side)Chapter 4: Supply and Demand*** MOST IMPORTANT CHAPTER *** Know relationship between supply, demand, price andquantity ***Demand: Relation between price of a good and the quantity that consumers are willing ableto buy per periodLaw of Demand: the quantity of a good that consumers are willing and able to buy per period relates inversely or negative the price – when price goes down, quantity demanded goes up Demand Curve: Relation between price of a good and quantity consumers are will and able to buy per period* Any movement along the curve shows a change in QUANTITY demanded, not demandShifts in whole demand curve (to the right):1. For normal goods, if income increases, demand goes up2. Price of other goods - if the price of substitute (a) increases, demand for good (b) shifts to the right - Increase in price of a compliment (peanut butter) would decrease demand for jelly3. Changes in consumer taste (relatively stable)4. Number or composition of consumers in the market5. Consumer expectationsSupply: relationship between prices and quantities suppliedLaw of Supply: quantity supplied is usually directly related to price (lower price, lower quantity supplied)Supply Curve: relation between price and quantity producers willing to sell - slopes upward because want to sell more for high priceShifts in whole supply curve:1. Advances in technology2. Change in price of resources (If labor