Principles of Economics I Test 1 (Ch 1-4)

What is economics?

The study of scarcity and choices—how people allocate limited resources to satisfy unlimited wants

What are the categories of scarce resources?

Land, labor, physical capital, human capital

What is opportunity cost?

What you give up to get it

Microeconomics

Decisions by individuals/firms

Macroeconomics

Overall economy

What do markets move toward?

Equilibrium

Positive Economics

The way the economy actually works

Normative

The way the economy should work

What is a competitive market?

Many buyers and sellers with no single influence on price

Efficiency

Maximum benefits without making others worse off

Equity

Fairness, often in conflict with efficiency

What is comparative advantage?

Producing goods at lower opportunity cost than others

What does the demand curve show?

Quantity demanded at various prices

What shifts demand?

Price of related goods, income, tastes, expectations, and number of consumers

Substitutes

Demand decreases when the other’s price falls

Complements

Demand increases when the other’s price falls

What shifts supply?

Input prices, technology, expectations, related goods in production, number of producers

What is equilibrium?

The price where quantity demanded equals quantity supplied

What happens when price is above equilibrium?

Surplus → price falls

What happens when price is below equilibrium?

Shortage → price rises

If demand increases, what happens to equilibrium price and quantity?

Both rise

If supply increases, what happens to equilibrium price and quantity?

Price falls, quantity rises

What is the GDP equation?

GDP = C + I + G + X – IM

Nominal GDP

Current prices

What is GDP?

Market value of all final goods and services produced in a country in a year

Inflation

Rising prices

Deflation

Falling prices

What is fiscal policy?

Using government spending and taxes to affect overall demand

What is monetary policy?

Changing money supply/interest rates to influence spending

Trade deficit

Imports > exports

Trade surplus

Exports > imports

What are the 3 ways to calculate GDP?

Total production, total spending, or total income