MIDTERM 1 REVIEW Multiple choice 16 questions 3 points each 3 short answers with at least 2 subsections each 10 points each put your name on each page How to study o Review MyEcon lab questions Look for errors you made and understand why they are wrong or right o Use your notes The course is based on the lectures and notes not on the textbook Only use the text for fuller explanations Preliminary material o Opportunity costs Highest valued alternative that must be given up to engage in an activity Value of next best activity What would you have done o Underlies notion of PPF Production Possibilities Frontier A curve showing the maximum obtainable combinations of 2 products that may be produced with available resources and current technology 3 different shapes reflect different costs Constant straight line Increasing Arch that looks like top right of a circle Decreasing arch that looks like bottom left of circle o Comparative Advantage Being best is not necessarily good enough EVERYBODY has one Supply and demand o Why do curves look like they do Demand Curve slopes down Price is a cost Supply Curve slopes up Price is a reward Equilibrium Everyone is happy How do they move Prices of inputs Technological Change Prices of substitutes in production Number of firms in the market Expected future prices What happens when they move Demand Curve slopes down o Income Effect You can now buy more of everything o Substitution Effect You buy more of one thing and fewer of another Supply Curve slopes up o Current producers make more o New producers are attracted Equilibrium o No tendency to change o Equilibrium What it means to be at equilibrium Where quantity supplied equals quantity demanded What it means to be away from equilibrium Prices Below Equilibrium o Consumers are frustrated willing and able to buy Q1 can only buy Q2 Prices above Equilibrium o Willing and able to sell Q1 but can only o What happens when we interfere sell Q2 Price Ceilings A legally determined MAXIMUM price that sellers may charge Price Floor A legally determined MINIMUM price that sellers may charge Consumer Producer Surplus o Consumer surplus The extra benefit from buying an item Its why we buy things o Producer surplus The extra revenue producers get from selling Not exactly profit o Total gain from market exchange is CS PS Firms Partnership Proprietorship One who owns or owns and o 3 Types of firms manages a business or othe such establishment risk controls etc is split between partners 50 50 recognizing it as a separate legal entity having its own rights privileges and liabilities distinct from those of its members A body that is granted a charter joining in business where the income Corporation o Raise money into ways Stocks part ownership pay dividends Bonds fixed obligation pay interest o Principal Agent Problem A problem caused by an agent A firms top management pursuing his own interests rather than the interests of the principal who hired him Share holders of the corporation How to get you to maximize profits To reduce impact of the Principal Agent Problem they began to tie the salaries of top managers to the profits of the firm or to the price of the firms stock They hoped that this would give top managers an incentive to make the firm as profitable as possible thereby benefiting its shareholders GDP o Measures value of output of an economy o C I G NX o Value added approach o Correctable problems GDP per capita An Approximation of the value of goods produced per person in the country equal to the country s GDP divided by the total number of people in the country o Its not perfect because it ignores distribution issues Real GDP The value of final goods and services evaluated at base year prices o Uncorrectable Problems Counts things we don t like Anti crime expenditure Military expenditure Cleaning up after Natural or environmental disasters Doesn t count things we like Leisure Time Household Productions Underground economy Not all transactions are recorded o Illegal activity crime and undocumented o Tax avoidance under the table aliens payments Associated with weak government high tax rates unofficial o Almost half of Nigeria s economy is Unemployment o Unemployed if not working in labor force o To be employed you must be At least 16 years of age Not in the armed forces Not institutionalized or imprisoned Employed or actively seeking work in at least 4 weeks o Problems Not evenly spread Official rate might understate problem Discouraged worker effect Underemployment by hours or type of job Could over under state the problem Multiple job holdings overtime Underground economy Unemployment is a Lagging Indicator An overall indicator that changes after the overall economy changes o 3 Types Structural Frictional seasonal to find them available ever movement of the economy Cyclical People lack appropriate skills no jobs Jobs come and go with the overall Jobs exist but it takes time o Full Employment doesn t mean everyone is employed Does not mean that everyone has a job Not even 100 of people searching for a job Full employment no cyclical unemployment Can have frictional and structural unemployment They are hard to eliminate Trying to do so would lead to severe inflation UE frictional UE structural Natural rate of UE Also called full unemployment rate VOCABULARY 3 Economic questions that every society must answer 1 1 1 2 Profits Revenue Cost o What goods will be produced o How are the goods produced o Who will receive the goods Product Efficiency cost Allocative Efficiency o Goods and services are produced at the lowest possible o It reflects consumer preferences every good or service is produced up to the point where marginal benefit is equal to marginal cost o Goods are distributed in a way that maximizes benefits to o Goods are distributed in a way that is fair o Situation in which unlimited wants exceed the limited resources available to fulfill those wants Market Economy o Economy in which the decisions of households and firms interacting in markets allocate economic resources Centrally Planned Economy o An economy in which the government decides how economic resources will be allocated 1 3 Economic Data is used to test models Economic Models Efficiency society Equity Scarcity 1 4 2 1 2 2 o A simplified version of reality used to analyze real world economic situations Positive Analysis o Analysis concerned with what is Normative Analysis o Analysis concerned with what ought to be Calculating Real GDP o
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