Exam 1

Question 1

Economics

Answer 1

Scarce resources with unlimited wants

Question 2

Six principles for thinking like an economist

Answer 2

1. Scarcity
   - When there isn’t enough for everyone to have one for free there has to be a Rationing device (price, speed, government limitation)
2. Rational, Self-Interest
   - This is the reason why people do things or the way that they develop decisions
   - People will weigh out the cost vs. benefit
   - Incentives matter and can encourage a person to choose one thing over another
3. Marginal Analysis
   - Marginal means additional
   - Additional benefits vs. additional costs
4. Unintended effects
5. Opportunity Cost
6. Scientific Method
   - Look at all Variables
   - Make Assumption
   - Create a Hypothesis
   - Gather and look at data

Question 3

Potential Pitfalls

Answer 3

1. Other things constant
   - Be careful of others things that could effect study
2. Fallacy of composition
   - The mistaken belief that what’s good for the individual is good for the whole group
3. Association vs. causation

Question 4

Production Possibilities Frontier Assumptions

Answer 4

• Focus on Product of two goods: Shirts and ice cream
• Focus on given period of time: one year
• Resources are fixed
• Technology is fixed
• Rules of the game are fixed

Question 5

Production possibility

Answer 5

The maximum amount of product you can produce

Question 6

Production Possibilities Frontier (PPF)

Answer 6

Shows all of the different possibilities of products that can be produced at any given time

Question 7

PPF and Scarcity

Answer 7

Points outside PPF are unattainable

Question 8

PPF and Efficiency

Answer 8

1. Productive efficiency
   - It is impossible for you to increase the amount of production of one product without decreasing the production of another
   - Points on the PPF line
2. Allocative efficiency
   - The best point on the graph that gives you what you want

Question 9

PPF and Opportunity Cost

Answer 9

Negative slope

Question 10

PPF and Law of Increasing Opp. Cost

Answer 10

1. Every time that you give up making more of a product, and when doing this you increase the opp. Cost
2. The sloped graph gives me this effect
3. Resources aren’t perfectly substitutable

Question 11

PPF and Economic Growth

Answer 11

o Increase in Technology
o Increase in Resources
o Increase in Rules
o Show growth by PPF shifts

Question 12

Absolute advantage

Answer 12

• The ability to produce more of a good with the same amount of resources
• Task specific

Question 13

Comparative advantage

Answer 13

The ability to produce at a LOWER Opportunity Cost

Question 14

Three concepts of I Pencil

Answer 14

1. No one [person] knows (how to make it)
2. Those that make me do not do so because they want me
3. No master mind (coordinates my production)

Question 15

Advantages Phrase

Answer 15

By specializing and trading they each got to consume more than they could on their own

Question 16

Three Fundamental Economic Questions

Answer 16

What to Produce?
How to Produce?
For whom is it produced?
Pure Capitalism - Markets Determine It
Command Economy - Central Planning

Question 17

Households

Answer 17

1. Demand - goods and services

2. Supply - Resources

Question 18

Firms

Answer 18

1. Demand - Resources

2. Supply - goods and services

Question 19

Roles of Government

Answer 19

1) Public Good
2) Promote Competition
3) Establish Rules
4) Regulate Natural Monopolies
5) Deal with Externalities
6) Redistribute Income
7) Economy Stability

Question 20

Demand

Answer 20

• Changes in QUANTITY demanded
• Function typically has a downward slope
• Dealing with price and quantity

Question 21

Law of Demand

Answer 21

1. As price goes up, Quantity goes down OTC

2. As price goes down, Quantity goes up

Question 22

Reasons for Law of Demand

Answer 22

1) Substitution effect
- When the price of a good goes up other goods seem better and so the Q. demanded for the first good drops
2) Income effect
- As price goes up your real purchasing power goes down and Q. goes down
3) Law of Diminishing Marginal Utility

Question 23

Change in Demand

Answer 23

Shifts of Demand

1. Tastes/Preferences goes up and demand goes up
2. Prices of Other Goods
   a. Compliment: P goes up D goes down
   b. Substitute: P goes up D goes up
3. Consumer Income
   a. Income increases demand increases - Normal Goods
   b. Income increases demand decreases - Inferior Goods
4. Number of Consumers
   a. Number of consumers increase demand increases
5. Consumer expectations
   a. You expect it not to be available so you increase your consumption

Question 24

Law of Supply

Answer 24

• P increase - Q increase
• P decrease - Q decrease
  Higher prices are necessary for attracting scarce resources

Question 25

Changes in Supply

Answer 25

Shifts of Supply 1) # of producers increases supply increases 2) Technology increases supply increases 3) Prices of resources increases supply increases 4) Product expectations 5) Prices of alternate goods to produce 6) Taxes/subsidies on goods 7) Regulations

Question 26

Problem of scarcity of resources

Answer 26

There aren't enough resources to satisfy people's unlimited wants

Question 27

In economics, how is Capital defined

Answer 27

Human creations used in the production process

Question 28

The assumption that individuals act Rationally implies...

Answer 28

People implicitly calculate the costs and benefits of an activity to decide if it is worthwhile

Question 29

When economic choice involves an adjustment to an existing situation, Marginal Analysis...

Answer 29

Involves comparing the additional cost and additional benefits of an activity before deciding

Question 30

Association-is-Causation Fallacy

Answer 30

The incorrect idea that if two variables are associated in time, one must necessarily cause the other

Question 31

Opportunity Cost

Answer 31

The value of the best alternative forgone when an item or activity is chosen

Question 32

Is it Possible for a person to have a Comparative Advantage in the production of all products?

Answer 32

Nope

Question 33

Households act as Suppliers when they provide what

Answer 33

Resources to firms and governments

Question 34

Largest source of incomes for US households

Answer 34

Wages and Salaries

Question 35

What is the most common form of business entity

Answer 35

Sole Proprietorship

Question 36

List the three types of firms in terms of volume of sales

Answer 36

Sole Proprietorship - Partnership - Corporations

Question 37

Public Goods

Answer 37

Available to all regardless of who pays for it

Question 38

Since 1930, US Gov. Spending as a percent of GDP has done what

Answer 38

Increased

Question 39

What mansion is the setting for GREED film

Answer 39

Vanderbilt house

Question 40

Recently it has been discovered that lobsters grown on lobster farms can feed on algae, which is a cheaper food. As a result of this discovery...

Answer 40

The supply curve for lobster will shift to the right