08 Jun Question Study Guide, Chapters 1-4
Question
Study Guide, Chapters 1-4
Terms to know:
Scarcity: a situation which unlimited wants exceed the limited resources available to fulfill these wants.
Market: a group of buyers and sellers of a good or service and the institution/arrangement by which they come together to trade.
Opportunity Cost: the highest-valued alternative given up in order to engage in some activity.
Productive Efficiency: where goods/services are produced at the lowest possible cost
Allocative Efficiency: where production is consistent with consumer preferences: the marginal benefit of production is equal to its marginal cost.
Positive Analysis: the study of “what is?”
Normative Analysis: the study of “what ought to be?”
Entrepreneur: is someone who brings together the factors of production- land, labor, capital to produce good + services.
Innovation:
Technology:
Firm:
Factors of Production: labor, capital, natural resources, and entrepreneurial ability.
Capital: physical capital used to produce other goods.
Production Possibilities Frontier: is a curve showing the maximum attainable combinations of two products that may be purchases with available resources and current technology.
Comparative Advantage: the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Free market: is one with few gov. restrictions on how a good/service can be produced/sold, or on how a factor of production can be employed.
Property rights:the rights individuals or firms have to the exclusive use of their property, including the right to buy/sell it-are essential here.
Law of Demand: the rule that, holding everything else constant when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
Normal Good:a good for which the demand increases as income rise, and decreases as income falls.
Inferior Good: a good for which the demand decreases as income rises, and increases as income falls.
Complements:goods and services that are used together
Substitutes:goods and services that can be used for the same purpose.
Law of Supply:the rule that, holding everything else constant, increases in price cause increases in the quantity supplied, decreases in price cause decreases in the quantity supplied.
Market Equilibrium:a situation in which quantity damned equals quantity supply.
Surplus:
Shortage:
Price Floor:
Price Ceiling:
Consumer Surplus:
Producer Surplus:
Economic Surplus:
Deadweight Loss:
Economic Efficiency:
Tax incidence:
Chapter 1
Know the three economic ideas and what they mean
Know the three economic problems that every society must solve and the two main ways in which these decisions are made. How do these two different approaches differ? Which way tends to be more efficient? What do we call economies that fall in between these two extremes?
Be able to tell the difference between a normative statement and a positive statement.
Why do we need economic models?
Chapter 2
Know how to read a graph of a production possibilities frontier
Know how to determine the opportunity cost from looking at both a graph and a table.
Be able to identify a production possibilities frontier that has increasing marginal opportunity costs.
Know how economic growth looks on a graph and what it means for production.
Be able to determine what different people/firms will specialize in based on comparative advantage, and when they would want to specialize.
Understand how property rights can affect a free market.
Chapter 3
In what situations do we consider a market perfectly competitive? (3 things)
Be able to recognize a supply curve and demand curve on a graph.
Be able to find the equilibrium price and quantity given a graph with a supply and demand curves.
What are the variables that can shift a demand curve? What are the variables the can shift a supply curve? Know how an increase or decrease in these variables will shift the curve. Be able to find the new equilibrium point, new price and new quantity. Be able to identify if the price increased or decreased and whether the quantity increased or decreased.
Be able to identify whether a good is inferior or normal based on how demand for the good shifts when income changes.
Be able to identify goods that are substitutes and goods that are complements.
Know the difference between a change in demand versus a change in quantity demanded.
Know the difference between a change in supply versus a change in quantity supplied.
Understand that sometimes both supply and demand can shift at the same time, be able to find the change in price and quantity that results.
Chapter 4
Be able to find the consumer and producer surplus on a graph.
Marginal Benefit equals marginal cost in competitive equilibrium
At competitive equilibrium, the level of output is economically efficient (the economic surplus is at its greatest.)
Be able to identify the deadweight loss, that results from a tax or an inefficient price, on a graph.
Be able to identify what happens when a price floor or ceiling is used to control prices (how does consumer/producer surplus change? How does economic surplus change? Is there a deadweight loss? Is there a shortage? A surplus?)
Why would the government want to institute price floors or ceilings?
From a graph, be able to identify tax incidence (how much of the burden each side pays.)
Be able to identify the area of the graph that illustrates tax revenue.
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