ECON 1100 1nd EditionExam # 1 Study Guide LecturesWhat is economics?It is a social science that looks at people’s interactions and the results of these interactions. It studies how people make decisionsHow do companies know to make products?All depends on what the people want/need. They aren’t told to that they need to produce so much of a certain item. We all have the freedom of choice because we live in a capitalist country. What is good about the market?It may have some problems but we adjust to them. It goes along with what the people want.What influences our decision-making?The limits within which we must stay such as the laws we must follow, the monetary resources we have, as well as other resources. What is an economist’s role?Economist are open to different ideas, therefore they are in a neutral zone, simply decide what would be best in a situation.What is a positive economic statement?It states the way the world is. It can be a true or false statementWhat is a normative economic statement? & what words would such contain?It is a value judgment. For the statement to be normative it usually contains the words ‘out to be,’ ‘should be,’ ‘would be better/worse if.’What is marginalism?It is a way of thinking about doing the best you can and could get out of a situation. Essentially it is optimizing, would a change improve the situation?What is absolute advantage?It looks at who produces the most products within a set amount of timeWhat is comparative advantage?It looks at who has the lower opportunity cost in production of a product. To have a greater comparative advantage you must sacrifice the lesser amount.What is specialization and is it good?Specializing in a product means more of that product is produced by one party than the other. It is good because if two parties specialize in a different product each, they will produce more, therefore can trade to gain more of each product.What does a successful economy & production require?Time, knowledge of a task, ability to perform a task, natural resources such as oil, minerals, sun, rain, wind, and many other, but most importantly one must have patience. Without patience you will get nowhere because things don’t happen right away.In regard to scarcity, what 3 questions must be answered?What are we going to produce, how are we going to do it, and who gets what.How are decisions made?Most decisions people make are done without a plan, people simply decide what to do, when, and so on. Within a market system, the market itself decides what to do depending on what happened previously and whether that was a success of failure. Everyone makes decisions depending on the situation they are in.What 3 key things must be shown as well as known in regard to supply and demand?Where, who, and when.Is self-sufficiency a good or bad thing in an economy?Self-sufficiency is not a good thing. It makes life very difficult for the nation because theyare not receiving any outside sources, thus are not profiting. When you depend on other for everything and you have no money to pay for the necessities you become a very poor nation.Why is it important to graph price on the y-axis of a supply/demand curve?When it is plotted on the vertical axis one can see how much people are willing to buy atwhat price, therefore one can predict or hypothesize future numbers or outcomes.What are some determinants of whether a good will be bought or not?People’s tastes, their income, the price, availability, and quality of alternative products.In which direction is the demand curve always going?Always declining… highest to lowest.What is the definition of demand?Relationship between price and quantity demanded.What is a demand curve trying to show?The maximum price a person is willing to pay for a good.What is the relationship between price change and quantity demanded, as well as the demand overall?When the price of a product drops the quantity demanded increases due to the product becoming more affordable to a greater population. When price increases the quantity demanded decreases. Overall the demand does not change. The change in quantity demanded and price are simply movements along the demand curve. What is movement along the demand/supply curve?When a price drops the quantity demanded increases or when price increases the quantity demanded decreases. The demand itself has not changed, simply a point along it has.When a price drops supply decreases or when price increases the supply increases. The supply itself has not changed, simply a point along it has.What is shift of a demand/supply curve?Shift of a demand curve is a change that takes place in a demand curve corresponding toa new relationship between quantity demanded and a good, as well as the price of that good.Shift of a supply curve is a change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good, as well as the price of that good.What shifts a demand curve?Caused by change in original conditions: change in income, preferences, or prices of other goods or services.What shifts a supply curve?Caused by change in original conditions: change in costs, input prices, technology or prices of related goods and services.What causes movement along a demand/supply curve?Caused by change in price of good/service. What is a complement?Goods that “go together.” A decrease in price of one results in an increase in demand of another. Ex. When buying a car, also look at insurance cost, gas, service, etc.What is a substitute?Goods that can serve as a replacement for one another. When the price of one increases, demand for another increases. Ex. If the price of chicken increases, more people will buy beef or pork.How does a normal good work?They are goods for which demand goes up when income is higher and for which demandgoes down when income decreases.Ex. When you get a raise at work, or a bonus, you may go to a restaurant twice a week rather than one. If your work had to cut back pay, you will be less likely to go out to eat.How does an inferior good work?They are goods for which demand tends to fall when income rises.Ex. You are a poor college student who gets paid minimum wage. The money goes toward bills and basic groceries such as ramen. If you were to get a dollar or two raise, or your grandparents just sent you $100 then you are less likely to buy ramen but instead normal pasta, or another good that you enjoy an couldn’t really