Econ 104 Exam 1 Study Guide Chapter 1 Central Theme Society has to make choices as they try to attain their goals Society needs to Stimulate the U S economy to close the output gap Reduce unemployment Reduce the national debt Reduce interest rate on student loans Increase the minimum wage Why do we have to make choices 1 Resources are scarce o Scarce Resources Factors of production o Land o Labor o Capital o Scarcity leads to Trade offs and opportunity costs o Suppose you increase the number of iPads produced the opportunity cost would be less iPhones produces 2 We have unlimited wants o Unlimited wants have to do with improving our standard of living o Standard of living the amount of goods and services we can buy o To produce more goods and services society needs resources which are scarce These two are economic problems confronted by every society Society has to choose What goods and services to produce How goods and services will be produced Who will receive the goods and services Who decides Centrally Planned Economy Government decides Market Economy Collective actions of individuals with some government intervention Mixed Economy Usually run by the people but government can intervene The Three Key Economic Ideas About how people interact and make choices in markets 1 People are rational o Rationality we use all available information o Ex Movie ticket price is 7 The movie turned out to be bad so was going to it an irrational decision NO o Exante before value of the movie 7 o Exposte after value of the movie 7 2 People respond to economic incentives 3 Optimal decisions are made at the margin o Margin Marginal additional o How much should an airline charge passengers who fly standby o 200 seat cost to fly NY Cali 100 00 o Average Cost 100 000 200 500 o Marginal Cost 1 25 peanuts and soda o Marginal Benefit 300 offered by standby passenger o Airline says yes because Marginal Benefit Marginal Cost o In conclusion Rational airline can increase profits by thinking at the margin Economic Freedom Based on Size of government Legal system and property rights Sound money Freedom to trade internationally Regulation Positive Vs Normative Economics Positive Economics If we raise the minimum wage unemployment will increase Statement can be verified and tested scientifically using real world data and economic models Economics may disagree about which model is appropriate because there are different ways of looking at the same data Normative Economics The minimum wage law is a bad idea because it causes unemployment Statements are based upon opinion and are scientifically untestable People disagree because opinions are based upon personal values and political views ex who to vote for 1 A 50 cent per pack tax on cigarettes will lead to a 12 percent reduction in smoking by teenagers Positive 2 The federal government should spend more money on AIDS research 3 Rising paper prices will increase textbook prices Positive Examples Normative Summary 3 Key economic ideas describe how people interact in the Marketplace The economic problem confronted by every society is Scarcity Tradeoffs and Opportunity Cost What How and Who depends on the role of the Government Normative Opinion Based Microeconomics Economy as a whole Positive Verified Macroeconomics About the consumer Chapter 2 Production Possibilities Frontier PPF Shows the maximum attainable combinations of two products that may be produced ceteris paribus Ceteris Paribus A Latin phrase that means while certain variables change All other things remain unchanged PPF resources and technology unchanged PPF Apple Computer Opportunity Cost is Constant so the PPF is linear downward See Graph in notes Page 2 of 6 Points on the actual line Are attainable and efficient All resources are used to maximize total output there is no excess capacity Points below the line Are attainable but inefficient Points above the line Are unattainable because we would need more resources Opportunity Cost The highest valued alternative that must be given up to engage in an activity Ex number of iPhones not produced PPF U S Economy Opportunity Cost is increasing because our gains are being held constant so the PPF is curved downward See Graph in notes Page 3 of 6 In order to go from producing tanks to producing computers you are going to need training and education It is much more costly as u move along the curve Increasing Opportunity Cost As an economy moves down along PPF it can experience increase in Opportunity Costs increase as we move alone because our gains are being opportunity costs held constant Assumptions of PPF Resources are fixed all land labor and capital Technology unchanged Full employment of resources Economic Growth and the PPF See Graph in Notebook PPF shifts outward Economic Growth increases the Standard of Living goods and services available to us Economic Growth occurs when there is an increase in the o Resource base o Technological advance goods and services available Result a country s standard of living increases in terms of the number of 2 Most Important Sources of Economic Growth 1 Increase in capital stock number of machines and buildings used resources Examples of Increase in Resources factors of production o Baby Boom increase in labor and more workers o Discovery of Oil o Lifting Trade restrictions countries will demand our goods and services and us theirs o Increase in Capital investment o Increase in human capital trained workers 2 Technological advance innovation Examples of Technological Advance Helped us to produce more output than before o Converting Shale rock into Oil o Computer and Internet o Wheel o Light bulb o Innovations of entrepreneurship Someone who starts their own business ex Fred Smith Creator of FedEx 1 and 2 together increase worker productivity which results in economic growth Productivity Output hour Worksheet in binder Summary PPF illustrates tradeoffs and opportunity costs Increasing opportunity costs o Shape of PPF is bowed or concave to the origin Economic Growth o PPF shifts outward o Increases the Standard of Living Chapter 3 Where do prices come from Markets have buyers and sellers Supply Curve represents sellers and the cost of producing their output The Product Market 1 Demand Curve Households purchase goods and services 2 Supply Curve Firms supply goods and services 3 Market Equilibrium Quantity demanded Quantity supplied The Law of Demand Inverse relationship between price of a good and quantity demanded