#1 Econ Test Review

list and explain each of the four economic resources

-Land - natural resources such as iron ore, gold, diamonds, oil, etc. -Labor - human resources such as wage-earning workers -Capital - plants and equipment used in the production of final goods, such as assembly lines, trucks, heavy duty machinery, factories, etc. -Entrepreneurship - the marshaled of resources, the person or group that marshals resources in the production of final goods (Bill Gates, Steve Jobs, Henry Ford, etc.)

Definition of marginal cost and marginal benefit and applying MC and MB to decision making

-MC- Additional cost due to adding one more unit of good consumption by a consumer -MB- Additional benefit due to adding one more unit of a good for consumption by a consumer

Differentiate between macroeconomics and microeconomics

-Macroeconomics- Studies the behavior and performances of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.7 -Microeconomics- How people make decisions at a small scale. It's concerned with decisions making by individual's customers, workers, households, and business firms

Definition of an entrepreneur-

-Person who organizes and operates a business taking on greater than normal financial - risks in order to do so. (Able to take action and have courage to commit and preserve through all of the challenges and failures)

Give the definitions for and differentiate between positive versus normative economic statements-

-Positive- Objective and fact based (must be able to be tested, proved or disapproved) -Normative- Subjective based (are opinion based, so they can't be proved or disapproved)

Describe each of the determinants of supply and give examples for how a change in one of them could shift the supply curve

1. Change in resource prices- A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline 2. Change in technology- the development of more effective wireless technology increases the supply of cell phones 3. Change in taxes and subsidies- an increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education 4. Change in prices of other goods- an increase in the price of cucumbers decreases the supply of watermelons 5. Change in producer expectations- an expectation of a substantial rise in the future log prices decreases the supply of logs today =o 6. Change in the number of suppliers- an increase in the number of tattoo parlors increases the supply of tattoos; the formation of women's professional basketball leagues increases the supply of women's professional basketball games

Calculating profit (hint: formula is Profit = Total Revenue - Total Cost)

1. Find out the cost of goods sold (ex; 30$) 2. Find out the revenue (How much you sell these goods for) (ex;50$) 3. Calculate the gross profit by subtracting sts from revenue ex; $50 - $30= $20 4. Divide gross profit by revenue ex; $20/$50= 0.4 5. Express it as percentages ex; 0.4 x 100= 40%

What are the five questions every economy must answer? What are their answers?

1. How much is it to be produced? (at what level to what degree should available resources be employed or utilized in the production process) - Market rewards least-cost production, one that produces a given amount of output with the smallest input. 2. What is to be produced? (what collection of goods and services will be best satisfy society's material wants) - Businesses must respond to consumers wants (consumer sovereignty) "dollar votes" determine which industries/ products continue to fail 3. How is the output to be produced? (How should production be organized? What firms should do the producing and what productive techniques should they utilize?) - Products go to those who are willing and able to pay for them 4. How will the system accommodate change? - Markets are dynamic, prices help signal change - increased demand = higher prices = greater output and vice versa - Higher prices = more profits = new firms entering the market and vice versa 5. How will the system promote change? - Creative destruction occurs when new products and production methods destroy the market positions of firms that are not able or willing to adjust.

Describe each of the determinants of demand and give examples for how a change in one or more of them could shift the demand curve (hint: 5 of them but study normal vs. inferior goods and substitutes versus complements)

1. The price of the good or service: when prices rise the quantity of demand falls, when prices drop demand will grow 2. Prices of related goods or services. These are either complementary, those purchased along with a particular good or service or substitutes those purchased instead of a certain good or service

2. Definition and calculation of opportunity costs-

A benefit, profit, or value of something that must be given up to obtain or achieve something else since every resource (land, money, time etc.) can be put to alternative uses, every action, choice or decision has an associated opportunity cost = is the value of the next best option.

Define economic growth including how it is represented on the production possibilities curve

An increase in the amount of goods and services produced per head of the population over a period of time

1. Definition of economics

Deals with the production, distribution, and consumption of goods and services (wealth). It's the study of how society uses its limited resources

Describe the circular flow model

Economic model illustrating the flow of goods and services in the model producers are termed as "firms". White consumers are referred to as "households". Firms supply goods and services while households consume these goods and services

Calculate GDP, NDP, PI and DI using the expenditures approach (mark/print the charts in the book and follow them exactly) Make sure you know the C + Ig + G + Xn formula.

GDP= consumption by households+ investment by businesses+ government purchases+ expenditures by foreigners • C= personal consumption expenditures -durable goods -nondurable goods -consumer expenditures for services -domestic plus foreign goods produced • Lg= gross private domestic investment -machinery, equipment, and tools -all construction -positive and negative changes in inventories -creation of new capital assets -noninvestment transactions excluded • G= government purchases -expenditures for goods and services -expenditures for publicly owned capital -excludes transfer payments • Xn= Net exports -add exported goods -subtract imported goods -Xn=exports (x) - imports (m)

Describe the invisible hand concept:

The observable market force that helps the demand and supply of goods in a free market to reach equilibrium (describes the belief that individuals seeking their economic self-interest actually benefits society more than they would if they tried to benefit society directly)

Definition of creative destruction

a process though which something new brings about the end of whatever existed before it (ex: when the transportation changed from a horse and buggy to automobile

Differentiate between a change in demand versus a change in quantity demanded

• A change in demand is a shift of that entire demand curve based on any factor other than the current price • Quantity demanded is the quantity of a product that will be demanded at any one price point on the demand curve. A change in quantity demanded is a movement along the demand curve caused by a change in price. The only thing that can cause a change in quantity demanded is a change in price

Define and give yourself some examples of barter

• Barter- a system under which goods and services are exchanged instead of currency, or the actual goods or services that are being exchanged • EX: people with a community exchange goods and services so that money can't be used • EX: Bread provided in exchange for butter

What are the two most important differences between a command economy (communism) vs. a market economy (capitalism)

• Command economy: is organized by a centralized government which owns most, if not all businesses and whose officials direct all the factors of production • Market Economy: is unplanned, it's not organized by any central authority but is determined by the supply and demand of goods and services Command Economy: - Government controls the supply and cost for goods and services - Government doesn't let consumer demand determine what is produced or imported - Choice is limited to those items that the government decides to produce or import - Public services are provided by the government at a loan out of pocket cost to the population Market Economy - Consumers can purchase nearly anything they want - The demand for products sets the price - Production strives to be efficient since that will make the costs to produce a good more competitive or will increase profit they make on each item sold - If there is no demand for a product, then it will not be produced

Define consumer sovereignty and dollar votes

• Consumer sovereignty- the situation in an economy where the desires and needs of consumers control the output of producers (consumers hold the power to influence production decision) • Dollar votes- the votes that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available

Define and calculate producer surplus including identifying on a graph

• Difference between the actual price a producer receives and the minimum price they would accept • Extra benefit from receiving a higher price

Define and calculate consumer surplus including identifying on a graph

• Difference between what a consumer is willing to pay for a good and what the consumer actually pays • Extra benefit from paying less than the maximum price

Identify equilibrium price and quantity from a graph or a chart

• Equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market interest • (equilibrium price in the chart: when both quantities demanded and supplied equal the same number)

Calculate GDP by the Income Approach (again mark/print the page in your book with the chart)

• GDP= wages+ rents+ interest+ profits+ statistical adjustments

Define the income and substitution effects

• Income-effect is the change in consumption patterns due to the change in purchasing. This can occur from income increases, price changes, or even currency fluctuations • The substitution- effect is the change in consumption patterns due to a change in the relative prices of goods

Define and calculate net exports (Xn)

• Net exports are calculated by subtracting the value of imported goods from the value of exported goods. • Adding up all four components provides a measure of GDP, a measure of the market value of a specific year's total output. • Add exported goods • Subtract imported goods • Xn= exports (X) - imports (M) • GDP = C + Ig + G + Xn

Shortcomings of the calculation of GDP (like the fact that it excludes nonmarket and underground activities)

• Nonmarket activities • Leisure • Improved product quality • The underground economy • GDP and the environment • Composition and distribution of output • Noneconomic sources of well-being

Define a price floor and a price ceiling

• Price floor: Lowest legal price an item can be sold at price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage (the minimum price that can be paid for labor) For a price floor to be effective It must be set above the equilibrium price • Price Ceiling: occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium

List and define the characteristics of a market system

• Private property • encourages investment, innovation, exchange, maintenance of property, and economic growth • Freedom of enterprise • firms can obtain economic resources, use the resources to produce products of the firms' choosing, and sell their products in any market • Freedom of choice • resource owners can employ/dispose of resources as they see fit • Self-interest • motivating force through free choice expression, each economic unit tries to achieve its own particular goal, gives the economy direction and consistency • Competition • requires independently acting sellers and buyer's operation in a particular market and the freedom of buyers and sellers to enter or leave markets based on self-interest *regulates market system and diffuses economic power * • Markets and prices- market is the organizer that records, summarizes, and balances individual free choices • Technology and capital goods- most direct methods are often the least efficient * Efficient production = more abundant output * • Specialization- use of resources of an individual, region, or nation to produce one or a few goods rather that all *increases the total output* • Division of labor- human specialization: makes use of differences in ability, fosters learning by doing, and saves time • Geographic specialization- regionally and internationally, economies produce more than is needed locally • Use of money- serves as a medium of exchange *eliminates the need for a coincidence of wants* • Active/limited government- can increase overall effectiveness of the economic system

Define productive efficiency and allocative efficiency

• Productive efficiency- o Producing goods in the least costly way o Using the best technology o Using the right mix of resources • Allocative efficiency- o Producing the right mix of goods o The combination of goods most highly valued by society

How to profit and/or losses affect the size of an industry

• Profit Is the amount that your business ultimately earns after subtracting expenses, such as operation costs from gross revenue. Profit provides you with the money to pay your expenses, pay yourself and pay off debts and invest in growing your company • A loss is a decrease in net income that is outside the normal operations of the business

Define and give example of a public good including the characteristics of a public good

• Public goods are goods provided by government • Offered for free Characteristics: • No rivalry • No excludability • Free-rider problem

Define and give formula for the GDP deflator (price index); including using the price index calculate real GDP

• Real GDP= nominal GDP/price index (in hundredths)

Define and calculate gross domestic investment, including the definition of net private domestic investment and consumption of fixed capital (depreciation)

• Resource Extraction • Production • Distribution • Final Output (GDP) • Larger than GDP Better reflection of productive side of economy

Define diminishing marginal utility

• States that the marginal utility (the benefit gained from consuming one additional unit of a good or service) of a good or service declines as it's available supply increases • Ex: consuming one candy bar may satisfy a person's sweet tooth if a second candy bar is consumed the satisfaction of eating that second bar will be less than the satisfaction gained from eating the first

Describe the relationship between price and quantity demanded and supplied

• There is a direct relationship between price and quantity supplied. If the product cost is given a higher price means greater profit and this can incentive to increase the quantity supplied (price and quantity supplied are directly related) • There is an inverse relationship between price and quantity demanded. As a price of a good increases the quantity demanded of the good falls and as the price of a good decreases, the quantity, demanded of the good rises

Define and give an example of a positive externality; including how the government could correct; effect on price and output and effect on resource allocation

• Too little is produced • Demand-side market failures • EX: Subsidies • EX: Government provision

Define and give an example of a negative externality; including how the government could correct; effect on price and output and effect on resource allocation

• Too much is produced • Supply-side market failures • EX: Direct Controls • EX: Pigovian (specific) tax

Write out specific steps for calculating total cost to choose the most efficient production technique

• Total cost- all the costs incurred in producing something or engaging in an activity (total cost is made up of variable costs and fixed costs) • Variable costs- costs that change based on how many goods you buy or how much of a service you use (the cost varies as your usage varies) • Fixed costs- costs that don't change from month to month and don't vary based on activities or number of goods produced • Formula of Total Cost- tfc (total fixed cost + tvc (total variable cost)