Econ 102 Final Exam Study GuideI. Test 1 TopicsA. What is economics?1. Economics is the study of how people make choices depending on scarce resources to satisfy their unlimited wantsB. The three basic economic questions are:1. What/how much will be produced?2. How will items be produced?3. For whom will these items be produced? C. The two opposing economic answers are:1. A centralized control/command systema. One person makes all of the economic decisions b. Capital is owned by the governmentc. This system makes it difficult to obtain information that would be captured by prices2. A price/market systema. Millions of people make decisions in this systemb. Individuals and families own the means of productionc. Prices serve as signals that provide info such as why something got more or less expensivei. Example: rising gas prices signal that gasoline supply is low and vice versaD. The foundations of economic thinking are:1. Tradeoffs2. Individuals choose purposefully3. Incentives matter4. Individuals make decisions at the margin5. Info is costly but helps make better decisions6. Secondary effects7. Value is subjective8. The test of a theory is its ability to predict9. Hold all else equal10. Good intentions don’t always equal good outcomes11. Association is NOT always causation12. What is good for the individual is not always good for the groupE. Production Possibilities Curve1. Shows possible combos of output for 2 goods in a country (or firm/industry) at a given time 2. They are used to observe the opportunity cost of production3. Shifts in the PPC are caused by:a. Increases in an economy’s resource baseb. Advances in technologyc. Improvements in rules governing an economyd. Giving up leisure and working hardere. Giving up consumption to invest more4. Think of the Bloody Mary example!F. Trade1. People trade in order to get the most value possible from their items in order to make themselves better off2. Comparative advantage:a. The ability to produce a good of service at a lower opportunity cost compared to other producers b. You have a comparative advantage in one activity whenever youhave a lower opportunity cost of performing that activity 3. Absolute advantage:a. The ability to produce more units of a good or service using a given quantity of labor or resource inputsb. The ability to produce the same quantity of a good or service using fewer units of labor or resource inputsG. Law of Supply:1. The law of supply states that there is a direct relationship between the price of a good or service and the quantity of it that suppliers are willingand able to produce2. In order to count towards supply, producers must be willing and able toproduce some quantity at a given price H. Supply Curve:1. The supply curve shows how much producers are willing and able to supply at a given cost 2. Suppliers must be paid at least the opportunity cost of production to bewilling to produce an item3. The supply curve shifters include:a. Changes in resource prices (cost of inputs)b. Changes in number of producers (# of firms in industry)c. Changes in technologyi. Example: As opposed hand-picking strawberries, a firm uses a new high-tech machine that picks the berries for them, thus creating more supplyd. Natural disastersi. Example: A fire that destroyed the largest bicycle producer in the countrye. Political disruptionsi. Changes in taxes/subsidiesf. Price expectationsi. Expect future price to rise  wait to sell  reduction in current supplyg. NOT CAUSED by own-price changeI. Law of Demand:1. The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.a. As the price of a product increase, the demand will decrease b. As the prices decreases, the demand increases2. Changes in the demand curve are caused by:a. Changes in consumer income (normal goods vs. inferior goods)b. Changes in the number of consumers in marketc. Changes in the price of related goods i. Complement price up  demand for original good up ii. Substitute price up  demand for original good down d. Changes in expectationsi. Expect future price to rise  want to buy it now  demand increasese. Demographic changes (old people need more medical care)f. Changes in consumer tastes & preferences g. NOT caused by an own-price changeJ. Changes in Supply & Demand1. When demand increases, both price and quantity increase, thus causing the whole demand curve to shift right2. When demand decreases, both price and quantity decrease, thus causing the whole demand curve to shift left3. When supply increases, price decreases and quantity demanded increase, thus causing the whole supply curve to shift right4. When supply decreases, price increases and quantity demanded decreases, this causing the whole supply curve to shift left5. Sometimes both supply and demand change, which sometimes resultsin ambiguity K. Opportunity Cost:1. The highest-valued, next-bestalternative that must be sacrificed toobtain something or satisfy a want2. Opportunity costs are specific to everyindividual a. Basically, it’s what you give up3. Opportunity cost can be measuredmany ways:a. Dollar amountsb. Value amountsc. Experience amountsL. Shortages & Surpluses1. Shortage: A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price2. Surplus: A situation in which quantity supplies is greater than quantity demanded at a price above the market clearing price 3. Shortages/surpluses lead to price controls:a. Price controls are government mandated min or max prices for goods & services4. Price controls include:a. Price ceilings:i. The legal maximum price that can be charged for a goodor serviceii. Considered to be “binding” if set below market priceiii. Causes shortages (quantity demanded > quantity supplied)iv. Think of rent controlb. Price floors:i. The legal minimum price that can be charged for a good or servicesii. Considered to be “binding” if set above market price iii. Causes surpluses (quantity supplied > quantity demanded)iv. Think of minimum wagec. Non-price rationing devices:i. Whenever the price system is not allowed to work, non-price rationing devices will evolve to ration the affected goods and servicesii. Examples include waitlists or discriminationIf you choose to make 75 guitars, you can only make 25 UkelelesSocialSocialII. Test 2 Topics:A. Externalities:1. Externalities are