BUSI 2203- Final Exam Study Guide

What is scarcity?

The condition where limited resources cannot satisfy unlimited wants.

Why must economic choices be made?

Because scarcity forces individuals and societies to choose how to allocate resources.

What is microeconomics?

The study of individual consumers, firms, and specific markets.

What is macroeconomics?

The study of the overall economy, including inflation, unemployment, and GDP.

What are the three main categories of economic resources?

Land, labor, and capital.

Is money considered an economic resource?

No, money is not a resource; it is a medium of exchange.

What does the PPC represent?

The maximum combinations of two goods an economy can produce using all resources efficiently.

What do points ON the PPC indicate?

Efficient use of resources.

What do points INSIDE the PPC indicate?

Inefficiency or unemployed resources.

What do points OUTSIDE the PPC indicate?

Combinations that are currently unattainable.

Why do economists use simplified models like the PPC?

To better understand complex economic concepts.

How do you identify unemployed resources on a PPC graph?

Any point inside the curve.

What are the main characteristics of a market system?

Private property, competition, self-interest, and freedom of choice.

What is the “invisible hand”?

The idea that self-interest leads to efficient economic outcomes.

Who introduced the idea of the invisible hand?

Adam Smith

What is private property?

Individuals have the right to own and control resources.

What is a command system?

The government owns and controls resources.

In the circular flow model, what do households sell?

Labor

In the circular flow model, what do households buy?

Goods and services.

What do firms sell in the circular flow model?

Goods and services.

What do firms buy?

Labor

What two variables are shown on supply and demand graphs?

Price and quantity.

What is the law of demand?

As price increases, quantity demanded decreases.

What is the law of supply?

As price increases, quantity supplied increases.

What is a movement along a curve caused by?

A change in price.

What causes a shift in a curve?

Non-price factors.

Name three demand shifters.

Income, tastes, prices of related goods.

Name three supply shifters.

Production costs, technology, number of sellers.

What is the difference between a decrease in demand and a decrease in quantity demanded?

Decrease in demand = curve shifts left; decrease in quantity demanded = movement along the curve.

What is equilibrium?

The point where quantity demanded equals quantity supplied.

What is a surplus?

Excess supply caused by a price above equilibrium.

What happens to price during a surplus?

It falls.

What is a shortage?

Excess demand caused by a price below equilibrium.

What happens to price during a shortage?

It rises.

What does price elasticity of demand measure?

How responsive quantity demanded is to a change in price.

What is elastic demand?

Quantity demanded changes significantly with price.

What is inelastic demand?

Quantity demanded changes very little with price.

What does perfectly inelastic demand look like?

A vertical line.

What is unit elastic demand?

Quantity changes proportionally to price.

If demand is elastic, what happens to revenue when price increases?

Revenue decreases.

If demand is inelastic, what happens to revenue when price increases?

Revenue increases.

What does a positive income elasticity indicate?

A normal good.

What does a negative income elasticity indicate?

An inferior good.

What are substitute goods?

Goods that replace each other (e.g., Coke and Pepsi).

What are complementary goods?

Goods used together (e.g., cars and gas).

What are public goods?

Goods that are non-rival and non-excludable.

Give an example of a public good.

National defense.

What are private goods?

Goods that are rival and excludable.

What is a market failure?

When the market does not allocate resources efficiently.

How can the government address market failures?

Taxes, subsidies, and regulations.

When are taxes used?

To reduce harmful goods.

When are subsidies used?

To encourage beneficial goods.

What is the principal-agent problem?

When managers act in their own interest instead of the owners’.

Who are the principals?

Owners/shareholders.

Who are the agents?

Managers

What does total cost include?

Explicit and implicit costs.

What are explicit costs?

Direct monetary payments.

What are implicit costs?

Opportunity costs.

What is the law of diminishing returns?

Adding more workers eventually reduces productivity.

What is the profit-maximizing rule?

Produce where marginal revenue equals marginal cost (MR = MC).

How do you calculate marginal revenue?

Change in total revenue divided by change in quantity.

What defines pure competition?

Many firms, identical products, no barriers.

What defines monopolistic competition?

Many firms, differentiated products, some advertising.

What defines an oligopoly?

Few firms, high barriers to entry.

What defines a monopoly?

One firm, no competition.

In which market structure is price discrimination most successful?

Monopoly

Which market structures use advertising most?

Monopolistic competition and oligopoly.

What market structure is the U.S. automobile industry?

Oligopoly

What is marginal revenue product (MRP)?

The additional revenue from hiring one more worker.

What does MRP represent?

The value of a worker to a firm.

What shifts labor demand?

Product demand, productivity, and technology.

What is elasticity of labor demand?

Responsiveness of labor demand to wage changes.

Name three causes of income inequality.

Education, skills, discrimination.

What are social insurance programs?

Programs based on contributions (e.g., Social Security).

What are public assistance programs?

Need-based aid (e.g., welfare).

What is a progressive tax?

Higher income pays a higher percentage.

What is a proportional tax?

Everyone pays the same percentage.

What is a regressive tax?

Lower income pays a higher percentage.

What type of tax is the U.S. federal income tax?

Progressive

What is a major category of U.S. government spending?

Social Security, healthcare, or defense.