Econ 104 Exam #1 Study GuideChapter 1: Central Theme: Society has to make choices as they try to attain their goalsSociety needs to:- Reduce unemployment - Stimulate the U.S. economy to close the output gap- Reduce the national debt- Reduce interest rate on student loans- Increase the minimum wageWhy do we have to make choices?1. Resources are scarceo Scarce Resources = Factors of productiono Lando Labor o Capital o Scarcity leads to Trade-offs and opportunity costso Suppose you increase the number of iPads produced, the opportunity cost would be less iPhones produces2. We have unlimited wantso Unlimited wants have to do with improving our standard of livingo Standard of living: the amount of goods and services we can buyo 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 decidesMarket Economy: Collective actions of individuals with some government interventionMixed Economy: Usually run by the people but government can interveneThe Three Key Economic Ideas: About how people interact and make choices in markets.1. People are rationalo Rationality: we use all available informationo 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 > $7o Exposte (after): value of the movie < $72. People respond to economic incentives3. Optimal decisions are made at the margino Margin/Marginal: “additional”o How much should an airline charge passengers who fly standby?o $200 seat, cost to fly NYCali = $100.00o Average Cost = ($100,000/200) = $500o Marginal Cost = $1.25 (peanuts and soda)o Marginal Benefit = $300 offered by standby passengero Airline says yes because Marginal Benefit > Marginal Costo In conclusion: Rational airline can increase profits by thinking at the marginEconomic Freedom Based on:- Size of government- Legal system and property rights- Sound money- Freedom to trade internationally- RegulationPositive Vs. Normative EconomicsPositive 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 aredifferent ways of looking at the same dataNormative 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?Examples:1. A 50-cent per pack tax on cigarettes will lead to a 12 percent reduction in smoking by teenagers: Positive2. The federal government should spend more money on AIDS research: Normative3. Rising paper prices will increase textbook prices: PositiveSummary: - 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- Positive… Verified- Microeconomics…Economy as a whole- Macroeconomics… About the consumerChapter 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 unchangedPPF: 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 resourcesOpportunity Cost:The highest valued alternative that must be given up to engage in an activity Ex: number of iPhones not producedPPF: 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 toneed training and education- It is much more costly as u move along the curveIncreasing Opportunity Cost:- As an economy moves down along PPF, it can experience increase in opportunity costs- Opportunity Costs increase as we move alone because our gains are being held constantAssumptions of PPF:- Resources are fixed (all land, labor and capital)- Full employment of resources- Technology unchangedEconomic 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- Result: a country’s standard of living increases in terms of the number of goods and services available2 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 Oilo 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/innovationExamples of Technological Advance (Helped us to produce more output than before):o Converting Shale (rock) into Oilo Computer and Interneto Wheelo Light bulbo 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 outwardo Increases the Standard of LivingChapter 3:Where do prices come from?- Markets have buyers and sellers. Supply Curve represents sellers and the cost of producing their outputThe Product Market:1. Demand Curve: