ECO 181 1ST EditionExam # 1 Study Guide Lectures: 1,2,7,8,9Chp 1:I. Economicso Studies how society distributes and utilizes its scarce resources to its members in order to satisfy unlimited wants.- Resourceso Anything used to produce goods and serviceso Four resources: Labor / human capital (skills, knowledge of labor) Land / natural  Physical capital - Capital- people made goods and services used to make other goods and services Entrepreneurial ship - “Courage” embodied in some workers that enables them to take risks to combine resources to produce goods and services- What about money?o Money is a medium of exchange but it is NOT a resourceII. Resources- Resources are scarce when supply < demando Limited supply: Land Labor  Capital Entrepreneurship Limited resources and timeo Unlimited demand Food Clothing Shelter Security Comfort- Three basic questions that every society must answer!o 1) What to produce- Deals with how resources are allocatedo 2) How? – Deals with production processo 3) For Whom? – Deals with distribution of goods and services- Economy is the mechanism that allocates the scarce resourceso I. Markets – through price and wage adjustmentso II. Government allocation  Central plannero III. Mixed Economies  Both forms of allocationIII. Two Divisions of Economies- I. Microeconomics o Studies the individual components of an economy (firms, households, and governments)and how they interact- II. Macroeconomicso Studies the “whole” economyo Aggregate measuresIV. Three Steps of Macroeconomics- I. Understand the primary components of measuring the aggregate (whole) economyo Most important measure is GDP GDP measures income and production Unemployment inversely related to GDP - Want low GDP and low inflation- II. Develop modes to understand how the economy workso Long run growth approx. 3.2% each year annually (over) the last 100 yearso SR fluctuations (business cycle)V. Why cant we just study Microeconomics and apply it to the whole economy?- I. The whole is greater than the sum of it’s parts-o The combined effects of individual decisions can have a very different results than what the individuals had intended Ex) The Paradox Of Thrift – For individuals to increase future income you should save more! However if everyone saves more this could reduce future income thus the paradox- 2. Government policy is much less controversial in macroeconomicsVI. Economics is a Social Science- They use the scientific method to study how society (people, government, firms) deals with scarcityVII. Scientific method- The dispassionate development and testing of theories about how the world workso Must be objective- The key to the scientific method is that the researcher be objectiveVIII. Assumptions:- Why must economists use assumptions?o To simplify a very complex reality- Common Assumptions Made by Economists:o 1) Rationality Assumption: People make choices to maximize self interest Implies that people respond to incentives and disincentives cost- Ex) people make choices by comparing benefits to cost Do people always behave rationally?- No but…. We will assume they are.o 2) Ceteris Paribus Assumption: Must assume that everything else is not changing (being held constant)IX. Models:- A model is a simplified representation of realityo Sometimes simpler is better….- Once a model is developed, how can economists test them?o Can use experiments but still mostly use historical dataX. What do economists do?- I. Scientists: o As scientists, economists make positive statements: Objective statements that attempt to describe how the economy is- II. Policy Advisors:o As policy advisors, economists make Normative Statements: Subjective statements that prescribe how the economy should beo Positive statements can be tested (refuted or verified) while normative statements cannot Chp 2:- When societies are deciding how best to use their scarce resources they must consider the opportunity cost of using that resource- I. Opportunity Costo The next best alternative that must be sacrificed to obtain something or to satisfy a want- II. Production Possibility Frontier / Curve (PPF) (PPC)o Shows the different combinations of goods and services an economy can produce at a given time, given the available resources and technology, assuming that resources are fixed and fully utilizedo Technology – society’s pool of knowledge(Draw example from notes)o In order to produce more chocolate we must produce fewer cans of cola. This is due to scarcity. Slope of curve is negative OC of 1st 10 chocolate bars is _______ OC of 2nd 10 chocolate bars is _______ OC of 3rd 10 chocolate bars is ________ The OC of producing more Tablets is increasing. This is because resources are specialized - Better at producing some goods than others Slope of the curve is “bowed out”- Increasingo The curve is bowed out because of increasing opportunity costo PPF EXAMPLE(Draw example from notes) OC of producing 1,000 bushels of wheat is ________________________________. Thus resources for producing computers and wheat are ________________________________________________________________________o Summarize Points on the PPF (like A-E) are efficient (fully utilizing resources) Points under the PPF (like F) are inefficient (could simply be because economy is in a recession) Points above the PPF (like G) are unattainable- III. Difference between moving to Efficiency vs. Economic Growth(Draw example from notes)o X  represents “low demand”, slow economy, high unemploymento Moving from X to A, B, or C would result from economic recovery, unemployment starts fallingo PPC curve would not shito Moving from A, B or C to Y would result from economic growth, shifting curve outwardo This would occur if there were more resources or technological innovation- IV. Trade –off between present and future consumptiono Suppose that goods produced by an economy can be broken down to either: 1) Consumer Goods- Goods produced for personal satisfaction- Food, clothing, shelter, basic necessities 2) Capital Goods- Goods used to produce other goods- Machinery, equipment(Draw example from notes) If the economy were at point A there would be ______ growth…. (PPC unchanged) If the economy was at point D, ____________________ If the economy were at