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ISU ECO 105 - Exam 1 Study Guide
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Exam # 1 Study Guide Lectures: 1 - 6 Lecture 1 (August 20) What does Economics and scarcity mean? - Economics is the study of how scarce resources are allocated among compelling ends/uses. Then scarcity refers to when demand exceeds supply, meaning resources are scarce. What are the four main factors of production and one example of each? 1) Land (rent) 2) Labor (wages) 3) Capital (interest) 4) Entrepreneurship (profits=sales –costs) Name three economic agents and specify which two are the main ones: - The three economic agents are buyers, sellers and government. Buyers and sellers are the two main agents in economics Describe the difference between a plant, firm and industry. - A plant is an individual manufacturing facility. Then you have firms which are business enterprises, which can have many different plants. With a firm there is only one firm. When it comes to an industry there are many firms within an industry, but all firms are in the same line of business. What are durable and nondurable goods, and provide at least one example for both. - Durable goods are used for many time periods for an example; washing machine, microwave, cars. Nondurable goods are used very quickly such as, groceries, gas and etc. Lecture 2 (August 25) What is opportunity costs? - An opportunity cost is the cost of the next best alternative forgone. Ask yourself what are you willing to give up in order to have/do something else? Maybe if you take an ECON 105hour long nap your opportunity cost would be losing an hour worth of time you could have been doing your homework, so now you have to stay up longer. What are the three questions economist ask when talking about goods and resources? - What to produce? (necessities vs luxuries) - How to produce? (labor intensive vs capital intensive) - For whom to produce? *Be sure to review and look over the circular flow of economic activity* What is money price? What is relative price? - Money price of a good or service in the unit of currency (euros, dollars, pesos). Relative prices are a price in other terms or service Lecture 3 (August 27) What does PPF stand for and what does it mean? Explain as well what points that either lay on the graph, are beyond the graph, or points inside the graph represent. - PPF stands for Production Possibilities Frontier, it shows the maximum combo of goods and services that an economy can produce with a given resource (land, labor, capital) and current technology. If a point is on the PPF it means that it is attainable and efficient. If you have a point that lays beyond the graph those points are unattainable. The points that lay inside the graph are attainable and inefficient. What does a PPF do when resources and/or technology changes? The PPF either rotates or shifts. Example: - Rotate What is the Law of increasing costs, and law of diminishing returns? Which one causes the shape of the curve to be bowed outward? Shift- Law of increasing costs consists of as you produce more of a good its opportunity cost per unit goes up, the trade off becomes more severe. Law of diminishing returns is as you increase one input in equal increments holding all other inputs the same, the additions to output will eventually diminish. The law of increasing costs has a negative slope and causes the curve to be bowed outward. What is law of comparative advantage and what does it focus on? - It is better for other to specialize in those activities in which their comparative advantage over others is the greatest or comparative disadvantage is the least. Law of comparative advantage focuses on specialization. Lecture 4 (September 3) What are public goods? What externalities? - Public goods are non-rivalry in consumption, non exclusion. Many people can use public goods and they are difficult to exclude. Externalities are private costs/benefits. An example of public goods are Mt Rushmore, national defense, and etc. Externality would be something along the lines of pollution. Name three important ingredients for exchange: 1. Well defined property rights 2. Law of transactions costs 3. Information/uncertainty What is demand? - Demand is the amount people are prepared to buy under specified circumstances during a specific time period. What is law of demand? - There is a negative relationship between the price of a good and its quantity demanded, holding all other factors constant - A demand curve shows various quantities demand at different prices, holding other factors constant. What is principle of substitution? - Nearly has every good has a substituteLecture 5 (September 8th) When the price of the good changes what is there along the demand curve, and what do we call that? - When a price of a good changes there is a movement along the demand curve and we call that a change in quantity demanded. *When factors other than price of the good changes there is a SHIFT in the demand curve and we call it a change in demand. NOT a change in quantity demanded!!!! What are four factors that SHIFT the demand curve? 1. Prices of related goods 2. Consumer income 3. Consumer preferences 4. Number of buyers What is the definition of supply? Supply Curve? - Supply is the quantity supplied of a good or service is the amount of the good or service offered for sale at a given price, holding all other factors constant. A supply curve is of a particular good or service that shows various quantities supplied at different prices, as well as holding all other factors constant. Supply curve is GENERALLY positively sloped. List four factors that shift the supply curve: 1. Price of other goods 2. Price relevant resources 3. Technology 4. Sellers expectations 5. Number of sellers What is market equilibrium? - Market equilibrium is at the intersection of demand and supply, it gives the equilibrium price and quantity. Equilibrium price is that price at which the quantity demanded of a good equals its quantity supplied List some of characteristics of market equilibrium: - Quantity demanded = quantity supplied - No shortage or surplus, the market clears - Equilibrium price is stable, no tendency to rise or fallLecture 6 (September 10) What is the effect on market equilibrium of a decrease in consumer income? - You have a decrease in the demand curve, so the demand curve will shift left. Then you have a decrease in quantity supplied, which is just a MOVEMENT along the supply curve. NOT A SHIFT. What is elasticity? -


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ISU ECO 105 - Exam 1 Study Guide

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