Econ 104 Study Questions Exam 1 Chapter 2 1 What is economics economics is the study of the choices people make to attain their goals given scarce resources 2 How is microeconomics different from macroeconomics microeconomics is the decisions of household s firms industry local government macroeconomics is the decisions of the economy as a whole 3 What is the economic problem confronting all societies scarcity of resources resources factors of production are land labor capital capital machinery equipment etc because resources are scarce we have to make choices tradeoffs 4 How is a centrally planned economy different from a market economy What is a mixed economy centrally planned economy government decides what how who managers follow government orders market economy consumers decide what is produced firms decide how goods are produced market decides who receives the goods what is produced mixed economy ex US Canada etc US is not a pure market economy our government plays a significant role in the economy environmental protection minimum wage social security etc 5 How is positive economics different from normative economics positive economics factual concerned with things that are verifiable data show Bush tax cuts stimulated economic growth in the U S normative economics opinion opinion based statements usually made about what ought to be if the minimum wage is increased to 7 50 some workers will have difficulty finding jobs 6 In economics capital refers to machinery equipment etc 7 What do we mean by factors of production Opportunity cost Ceteris paribus factors of production land labor capital opportunity cost what you give up to achieve something else ceteris paribus all equals holding everything constant resources fixed technology fixed full employment of resources 8 What points in the PPF diagram are unattainable Efficient Attainable Which points reflect full employment of resources unattainable outside efficient on the curve and attainable attainable inside but inefficient full employment of resources on the line efficient attainable 9 Why does the production possibilities curve display a bowed out shape i e concave to the origin illustrates increase in opportunity cost concave to origin the opportunity cost increases as the production of one output expands the law of increasing opportunity cost 10 What are the ceteris paribus assumptions behind the production possibilities curve How would technological advance an increase in the capital stock i e investment or an increase in the labor force affect the production possibilities curve ceteris paribus assumptions fixed resources technology fixed full employment of resources 1 Increase resources e g size of increased labor force increase of physical capital machinery etc PPF shifts rightward 2 Technological change advance technology advance in the direction of household appliance industry PPF shifts rightward 11 What does an outward shift in the PPF represent economic growth What must occur for an economy to experience economic growth Why economic growth when there is an increase in resources base or increase in technology technological advance and the standard of living increases in terms of goods and services available there must be an increase in resources i e baby boom discover oil reduce trade barriers or a technological advance i e wheel inventions light bulb internet computer fax machines innovations of entrepreneurship 12 What is society s tradeoff between producing more investment goods that is capital goods versus consumer goods in the present as the production of consumer goods increases opportunity cost increases cost is increased because workers are better suited for military goods A B low skilled workers are moved from production of military goods to consumer goods B C and C D more and more highly skilled workers in the production of military goods are being utilized in production of consumer goods opportunity cost increases because they need more training 13 What is the law of increasing opportunity cost How is it related to the production possibilities curve law of increasing opportunity cost the opportunity cost increases as the production of one output expands bowed shape concave to origin of PPF illustrates the increasing opportunity cost 14 Because of scarcity all societies are limited to which points on the production possibility curve Chapter 8 15 What is gross domestic product Which goods are counted Which goods are not counted Gross Domestic Product GDP market value today s of all final goods and services produced in a nation during a period of time e g 1 year only counts new goods final goods we don t count intermediate goods i e computer chips used to produce final good 16 What are the assumptions behind the basic circular flow a household s HH supply or own all the factors of production b HH spend consume everything they earn on goods and services produced no savings no taxes c firms spend all their revenues on resources land labor capital from factor market 17 What is the intuition meaning behind the basic circular flow Answer Total Production Total Expenditures Total Incomes in this closed economy means approximately equals If we add in financial markets government and foreign markets what are the leakages and injections to the spending flow leakages savings taxes imports injections exports government investment firms buy new buildings equipment delivery trucks etc 18 How do we calculate GDP using the expenditure approach What is gross private domestic investment I Net Exports NX Consumption C Government G GDP C I G NX C household HH consumption I firms investment expenditures G government NX x m exports imports net exports 19 Consumption spending is approximately of total expenditures on GDP 20 How do we calculate GDP using the income approach What is depreciation add up all incomes earned in exchange for the factors of production wages interest rent profits indirect business taxes sales taxes income to government National Income Depreciation GDP 21 What is disposable personal income DI equal to Just know the simplified version given in class National income NI Transfers disposable personal income DI national income NI taxes state local federal transfers social security unemployment insurance welfare veterans benefits Medicaid etc DI tells how much HH s have to spend and save after taxes and transfers 22 How did rising stock prices and home prices in the early 2000s affect consumer saving S and