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UA EC 110 - ec110 first study guide

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Chapter 11.Def. and Concepts:incentive: something that induces a person to actmarket failure: when the market fails to allocate society’s resources efficiently.Externalities: when the production or consumption of a good affects bystanders (ex. Pollution)Market power: a single buyer or seller has substantial influence on market priceProductivity: the amount of goods and services produced per unit of labor.Inflation: increases in the general level of prices2.What is the study of economics? What is microeconomics and macroeconomics?Economics is the study of how society manages its scarce resources.Macroeconomics: the study of economy-wide phenomena; including inflation, unemployment, and economic growthMicroeconomics: the study f how households and firms make decisions and how they interact in markets.3.What is equality (equity)? What is scarcity?Scarcity: the limited nature of society’s resourcesEquality: when prosperity is distributed uniformly among society’s members.4.What is efficiency?Efficiency: when society gets the most from its scarce resources.5.What are tradeoffs and opportunity costs? How do you measure opportunity costs? Examples.Opportunity costs: whatever must be given up to obtain it. It is the relevant cost for decision making. Making decisions requires comparing the costs and benefits of alternative choices. Ex: going to college for a year is not just the tuition, books, and fees, but also the foregone wages.Tradeoffs: all decisions involve tradeoffs. Ex: going to a party the night before your midterm leaves less time for studying6.What is rationtality and thinking at the margin?Rational people systematically and purposefully do the best they can to achieve their objectives. Rational people make decisions by evaluating cost and benefit of marginal changes- incremental adjustments to an existing plan.7.Benefits of traderather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods.Get better price abroad for goods the produceBuy other goods more cheaply from abroad than could be produced at home.8.What is a market and market economymarket: a group of buyers and sellers of a particular productmarket economy: allocates resources through the decisions of many households and firms as they interact in marketsChapter 2 Thinking like an Economist1.Def. and Concepts.2.What are models? (economics models)Model: a highly simplified representation of a more complicated reality. Economists use models to study economic issues.3.Characteristics of the Circular Flow Diagram.Circular Flow Diagram: a visual model of the economy, shows how dollars flow through markets among households and firms.4.How does the Circular Flow Diagram work? Who are its “actors” and what do they do? What are the two markets? Know what flows from each actor to each market..etc.two actors:Households : own the factors of production, sell/rent them to firms for income; buy and consume goods and servicesFirms: buy/hire factors of production, use them to produce goods and services; sell goods and services.Two markets:The market for goods and services (think of this as walmart.)The market for “factors of production”Flows:Households to factors of production: labor, land, capitalHouseholds to goods and services: spendingFirms to factors of production: wages, rent, interest, profitFirms to goods and services: goods and services soldGoods and services to households: goods and services boughtGoods and services to firm: revenueFactors of production to households: incomeFactors of production to firms: factors of production5.What are the factors of production and the payments to them?Factors of production: the resources the economy uses to produce goods and services including labor->wages, land->rent, capital (buildings and machines used in production)->interest, and entrepreneurship->profit6.Characteristics of the Production Possibility Frontier (PPF).ShapeStraight line: if the opportunity cost remains constant, PPF is a straight line. Essentially, the same resources are equally useful for producing in either industry. (coke vs. pepsi)Bow-shaped: if the opportunity cost of a good rises as the economy produces more of the good, PPF is bow shaped. Essentially, the resources are specialized and not easily adaptable for producing in either industry. (coke vs. automobiles)7.How does the PPF work? What does it tell us?Production Possibilities Frontier: a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.Moving along a PPF involves shifting resources from production of one good to the other.Tradeoff: getting more of one good requires sacrificing some of the otherThe slope of the PPF tells you the opportunity cost of one good in terms of the other.Slope: rise/ run8.Increasing and constant opportunity costs and how they affect the shape of the PPF.Constant is a straight line. Increasing creates bow shape9.What causes the PPF to shift or pivot outward? And what would be the result of the shift?Why bow shaped: when different workers have different skills, different opportunity costs of producing one good in terms of the other. Also when there is some other raw material, or mix of resources with varying opportunity cost (Ex: different types of land suited for different uses.)(crops in florida everglades)10.Normative vs. Positive statementspositive statements: are made by economists as scientists, which attempt to describe the world as it is. Example: capital of Alabama is Montgomerynormative statements: are made by economists as policy advisors, which attempt to prescribe how the world should be. Example: taxes are too highCh. 3 Absolute and Comparative Advantage1.Def. and Concepts.2.Solving for Absolute Advantage.Absolute advantage: produce a good using fewer inputs than another producer.3.Characteristics or Rules of Comparative Advantage.Each good produced by the individual that has the smaller opportunity cost of producing that good.One person can have comparative advantage in both goods. One person cannot have comparative advantage in both goods.For different opportunity costs one person can have comparative advantage in one good and one person have comparative advantage in another.Opportunity cost of one good is the inverse of the opportunity cost of the other.Principle explains interdependence and gains from trade.4.Solving for Comparative Advantage (Calculating


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