Final Exam Study Guide This a very useful study guide for the final exam, but not all inclusive. This study guide is a starting point for preparing for your final and you also need to go over old exams, quizzes and problem sets. Good Luck!!! • Scarcity - the imbalance between our desires and the means of satisfying those desires. • The opportunity cost is the value of the best foregone alternative. • Rational Behavior – Acting in a way that seeks to gain by taking actions for which the extra benefit exceeds the extra cost. • Marginal Benefit – the value placed on the satisfaction obtained from an additional unit of an item. • Marginal Cost – the value of the sacrifice made to obtain an additional unit of an item • A rational person will continue to take action as long as MB>MC. • In cases when it is possible, a rational person will take action until MB=MC • When MC > MB, a rational person will stop adding additional units • Opportunity Cost - The highest valued alternative forgone in making any choice. • Inputs in the production process are called economic resources: o (1) Labor (2) Capital (3) Natural Resources (4) Entrepreneurship • Production Possibilities Curve - Four Assumptions: o The quantity and quality of economic resources available for use during the year are fixed. o There are two broad classes of outputs we can produce with available economic resources o Some inputs are better adapted to the production of one good than to the production of another. o Technology is fixed and doesn't advance during the year. • Opportunity Cost = Number of Goods Given Up Number of Goods Gained • The Production Possibilities Curve o All points on or within the production possibilities curve represent possible annual combinations of goods that can be produced o Any point along the PPC Curve represents the full utilization of available resources o Points within (not on) the curve represent resources being underutilized, wasted or mismanaged. o Points outside the curve are unattainable given available resources and technology. • Law of Increasing Opportunity Cost – says that as more scarce resources are used to produce additional units of one good, production of another good falls by larger and larger amounts.• Expanding the Production Possibilities Curve: from year to year, economic growth can cause the PPC curve to shift outward. Three Sources of Economic Growth include: o Increased quantities of economic resources the more workers willing and able to work, the more capital, and the more land. o Increased quality of economic resources improvement in skills, education, or training of the labor force can also increase the output obtainable from any given combination of inputs. o Advances in technology increased productive potential resulting from the development of new technologies is a very important source of economic growth • Market – an arrangement through which buyers and sellers meet or communicate in order to trade goods or services • Law of Demand – rule stating that, other things being equal, the lower the price of a good, the greater the quantity of that good buyers will purchase over a given period. • "Demand" is the relationship between the price that is charged and the amount that will be bought at that price. From this definition, demand is not a single quantity. Rather, it is a table or graph showing some prices that might be charged and the corresponding amounts that buyers will want to buy. "Quantity demanded" is the amount that will be bought at a particular given price. • Demand can shift. A shift in demand means that the relationship between price and quantity demanded changes. • Demand – the relationship between the price of an item and the quantity demanded • Quantity Demanded – the amount that buyers are willing and able to purchase over a period at a certain price, given all other influences on their decision to buy. (Change in QD, movement along the demand curve) • Change in Demand – a change in the relationship between the price of a good and the quantity demanded caused by a change in something other than the price of the good. (Causes the entire demand curve to shift) • What can cause a change in demand? o Changes in income o Changes in wealth o Changes in the price of other goods § Substitutes - items that serve a purpose similar to the good § Compliments - goods whose use together enhances the satisfaction a consumer obtains from each o Changes in expectations of future prices o Changes in tastes and fashiono Changes in the number of buyers served by the market o Demand for particular goods can also be influenced by weather, demographic trends, or government subsidies or taxes. • Law of Supply – states that, in general, other things being equal, the higher the price of a good, the greater the quantity of that good sellers are willing and able to make available over a given period • Supply – the relationship between the price of an item and the quantity supplied. • Quantity supplied – the quantity of a good that sellers are willing and able to make available in the market over a given period at a certain price, other things being equal. (Change in QS, movement along the supply curve) • Change in Supply – a change in the relationship between the price of a good and the quantity supplied in response to a change in a supply determinant other than the price of the good. • What can cause a change in supply? o Changes in the price of inputs used to produce the item o Changes in technology o Changes in the prices of other goods that can be produced with the seller's resources o Changes in the number of sellers serving the market o Supply can also be influenced by factors such as weather, expectations of future prices of goods, services and inputs, as well as taxes and subsidies. • Market Equilibrium – the situation attained when the price of a good adjusts so that the quantity buyers are willing and able to buy at that price is just equal to the quantity sellers are willing and able to supply o Equilibrium occurs where QD = QS (or where there is an intersection of the supply and demand curves) o Shortage – exists when the quantity demanded of a good exceeds the quantity supplied over a given period (QD>QS) o Surplus – exists when the quantity supplied of a good exceeds the quantity demanded over a given