ECON STUDY GUIDE EXAM 1

What is the definition of economics?

Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants. (Scarcity)

What is the distinction between microeconomics and macroeconomics?

Microeconomics focuses on individual and business decision-making, while macroeconomics examines the economy as a whole.

What are the five foundations of economics?

1. Incentives 2. Opportunity Cost 3. Decisions at the Margin 4. Trade Creates Value 5. Tradeoffs

What are the types of incentives?

1. Direct Incentives - rewards given for specific actions (e.g., cash bonuses).

2. Indirect Incentives - unintended secondary effects (e.g., welfare programs may discourage work).

3. Positive Incentives - encourage actions (e.g., tax deductions).

4. Negative Incentives - discourage actions (e.g., penalties or taxes).

What is rational decision-making?

Rational decision-making occurs when individuals compare marginal costs and marginal benefits to determine the best choice.

What is opportunity cost? Provide an example.

Opportunity cost is the value of the next best alternative forgone when a decision is made. For instance, if you spend money on a new car, the opportunity cost is what you could have spent that money on instead.

What is comparative advantage?

Comparative advantage is when an individual or country can produce a good at a lower opportunity cost than others.

What does the Circular Flow Model represent?

The Circular Flow Model illustrates how goods and services flow through the economy, depicting the interactions between households and firms.

What is the Production Possibilities Frontier (PPF)?

The PPF shows the maximum possible output of two goods that an economy can produce given its resources and technology.

What are the points in the PPF model?

1. Efficient - points on the curve where resources are fully utilized.

2. Inefficient - points inside the curve where resources are not fully utilized.

3. Unemployed resources - when resources are available but not in use.

What is economic growth in the context of the PPF?

Economic growth shifts the PPF outward, indicating an increase in the economy's capacity to produce goods and services.

How does loss of resources or technology impact the PPF?

Loss of resources or technology shifts the PPF inward, reducing the economy's production capacity.

What is specialization in the context of trade?

Specialization occurs when individuals or countries focus on producing goods where they have a comparative advantage, facilitating trade and increasing overall economic efficiency.

What is absolute advantage?

Absolute advantage is when an individual or country can produce more of a good or service than others, using the same amount of resources.

What is investment in economics?

Investment refers to the purchase of capital goods that will be used for future production.

What are the components of GDP?

GDP = C + I + G + NX, where C = Consumption, I = Investment, G = Government Spending, NX = Net Exports.

What is Real GDP?

Real GDP is adjusted for inflation and measures the value of all final goods and services produced in an economy, calculated at base year prices.

What is included in GDP?

GDP measures market value of all final goods and services produced in a given period, excluding intermediate goods, used goods, and certain transactions (like financial transactions and domestic non-market services).

What are the four expenditure categories of GDP?

1. Consumption

2. Investment

3. Government Spending

4. Net Exports (Exports - Imports)

What is the definition of economics?

Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

What is choice in economics?

Choice refers to the decisions individuals and societies make regarding how to allocate their limited resources among competing wants.

What is scarcity?

Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

What is the distinction between microeconomics and macroeconomics?

Microeconomics focuses on individual and business decision-making, while macroeconomics examines the economy as a whole.

What are the five foundations of economics?

1. Incentives 2. Opportunity Cost 3. Decisions at the Margin 4. Trade Creates Value 5. Tradeoffs

What are the types of incentives?

1. Direct Incentives - rewards given for specific actions (e.g., cash bonuses).

2. Indirect Incentives - unintended secondary effects (e.g., welfare programs may discourage work).

3. Positive Incentives - encourage actions (e.g., tax deductions).

4. Negative Incentives - discourage actions (e.g., penalties or taxes).

What are incentives and unintended consequences?

Incentives can lead to unintended consequences, which are effects that were not anticipated as the result of a decision, such as encouraging behavior that is contrary to the intended effect.

What is rational decision-making?

Rational decision-making occurs when individuals compare marginal costs and marginal benefits to determine the best choice.

What is opportunity cost? Provide an example.

Opportunity cost is the value of the next best alternative forgone when a decision is made. For instance, if you spend money on a new car, the opportunity cost is what you could have spent that money on instead.

What is comparative advantage?

Comparative advantage is when an individual or country can produce a good at a lower opportunity cost than others.

Who benefits from trade?

Both parties in a trade benefit by specializing in the production of goods in which they have a comparative advantage.

What does the Circular Flow Model represent?

The Circular Flow Model illustrates how goods and services flow through the economy, depicting the interactions between households and firms.

What is the Production Possibilities Frontier (PPF)?

The PPF shows the maximum possible output of two goods that an economy can produce given its resources and technology.

What are the points in the PPF model?

1. Efficient - points on the curve where resources are fully utilized.

2. Inefficient - points inside the curve where resources are not fully utilized.

3. Maximum possible output - the outermost points of the PPF curve.

4. Unemployed resources - when resources are available but not in use.

What is economic growth in the context of the PPF?

Economic growth shifts the PPF outward, indicating an increase in the economy's capacity to produce goods and services.

How does loss of resources or technology impact the PPF?

Loss of resources or technology shifts the PPF inward, reducing the economy's production capacity.

What is specialization in the context of trade?

Specialization occurs when individuals or countries focus on producing goods where they have a comparative advantage, facilitating trade and increasing overall economic efficiency.

What is absolute advantage?

Absolute advantage is when an individual or country can produce more of a good or service than others, using the same amount of resources.

What is the definition of investment in economics?

Investment refers to the purchase of capital goods that will be used for future production.

What is the difference between investment and consumption?

Investment involves purchasing goods that will be used for future production, while consumption is the use of goods and services for immediate satisfaction.

What is the law of demand?

The law of demand states that, all else being equal, as the price of a good falls, the quantity demanded rises, and vice versa.

What does quantity demanded on a demand curve represent?

It represents the total amount of a good that buyers are willing and able to purchase at a given price.

What is a change in demand/shift/NOTIE?

Shift occurs when demand changes due to factors such as the number of buyers, other goods, tastes, income, and expectations.

What is the difference between inferior goods and normal goods in how they affect demand curves?

Normal goods see an increase in demand as income rises, while inferior goods see a decrease in demand as income rises.

What are substitutes?

Substitutes are goods that can replace each other; when the price of one rises, the demand for the other increases.

How does advertising affect consumer tastes?

Advertising can shift consumer tastes and preferences toward specific products, increasing their demand.

How does the number of buyers affect demand shifts?

An increase in the number of buyers leads to an increase in demand, shifting the demand curve to the right.

What is the difference between movement along a curve versus a shift in the demand curve?

Movement along a curve occurs due to price changes of the good itself, while a shift occurs due to changes in determinants of demand.

What distinguishes a change in quantity supplied from a change in supply?

A change in quantity supplied refers to a movement along the supply curve due to a price change, while a change in supply refers to a shift of the entire curve due to other factors.

What distinguishes a change in quantity demanded from a change in demand?

A change in quantity demanded refers to movement along the demand curve due to price changes, while a change in demand refers to shifts in the entire curve due to determinants.

What are the supply shifters in the change in supply/shift/CENTTS?

Shifters include Cost of resources, Expectations, Number of sellers, Technology/Productivity, Taxes/Subsidies.

What is the law of supply?

The law of supply states that, all else being equal, an increase in the price of a good results in an increase in the quantity supplied.

What are inputs in production?

Inputs, or factors of production, include land, labor, and capital used to produce goods and services.

What is shortage and surplus in relation to equilibrium?

A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price, while a surplus occurs when the quantity supplied exceeds the quantity demanded.

What is equilibrium in the market?

Equilibrium is the price point where supply equals demand, resulting in a stable market condition.

What causes changes in equilibrium price and quantity?

Changes in supply or demand due to shifts will cause changes in equilibrium price and quantity.

Why do we measure GDP?

GDP measures the overall economic performance of a country by representing the market value of all final goods and services produced.

What is GDP?

GDP = Gross Domestic Product = C + I + G + NX, where GDP is the market value of all final goods and services produced in an economy in a period of time.

What does output (GDP) equal to?

Output (GDP) equals income and spending; if GDP increases, income and output increase.

What is per capita GDP and what does it measure?

Per capita GDP measures the average economic output per person, indicating the economic prosperity of a population.

What is the business cycles model? How do you identify the different parts?

The business cycles model illustrates the fluctuations in economic activity; parts include peak, trough, contraction (recession), and expansion.

What are goods and services in GDP?

Goods are tangible products, while services are intangible activities; both contribute to the GDP.

What is included and excluded in GDP?

Included are final goods and services produced within a country, while excluded are intermediate goods, used goods, financial transactions, and domestic services by families.

What are intermediate goods? Provide examples.

Intermediate goods are products used in the production of final goods, such as raw materials or components.

What is not included in GDP? Examples?

Used goods, unemployment payments, stocks/bonds transactions, and domestic services are not included in GDP.

What are the four expenditure categories of GDP?

1. Consumption

2. Investment

3. Government Spending

4. Net Exports (Exports - Imports).

What is the difference between exports and imports?

Exports are goods and services sold to other countries, while imports are goods and services purchased from other countries.

What is included in business investment?

Investment includes capital goods, residential home construction, and inventory.

What does government spending include? Provide examples.

Government spending includes expenditures on public services, infrastructure projects, and salaries for public employees.

How is economic growth measured and defined?

Economic growth is measured as the percentage change in real GDP over a period of time.

What is Real GDP?

Real GDP is a measure adjusted for inflation, reflecting the value of all final goods and services produced at constant prices.

What is the GDP Deflator?

The GDP Deflator is a price index that measures the overall change in price level of GDP components (C + I + G + NX).

What are the shortcomings of nominal GDP?

Nominal GDP does not account for inflation, which can inflate the perception of economic growth.

What is the underground economy? How does it relate to GDP?

The underground economy consists of unreported or illegal activities that are not included in GDP calculations.

How is economic growth measured as a percentage change in real GDP per capita?

Economic growth is assessed by comparing the increase in real GDP to the population, indicating economic health on a per-person basis.