ECON 102 TEST #1

There will be 20 multiple choice questions (3 points each) and 3 short answer questions. The topics included are:

Introduction:

  • What is Economics? The social science that studies how individuals, governments, firms, and nations make choices on allocating scarce resources to satisfy their unlimited wants.

  • Positive vs Normative

    • Positive Economics: Objective and fact-based statements that can be tested, proven, or disproven. (e.g., "An increase in the minimum wage leads to a decrease in employment.")

    • Normative Economics: Subjective and value-based statements that cannot be proven or disproven; they are opinions about "what ought to be." (e.g., "The government should increase the minimum wage to improve living standards.")

  • Micro vs Macro

    • Microeconomics: The study of how households and firms make decisions and how they interact in specific markets. Focuses on individual economic agents.

    • Macroeconomics: The study of economy-wide phenomena, including inflation, unemployment, and economic growth. Focuses on aggregates.

  • Ceteris Paribus A Latin phrase meaning "all other things being equal." Used to analyze the effect of one change while holding all other variables constant.

  • Rationality The assumption that individuals make choices to maximize their own self-interest, given the available information.

  • Scientific Method A systematic approach used by economists to develop and test theories by observing, hypothesizing, collecting data, analyzing, and concluding.

  • Fallacies:

    • Post Hoc ergo Propter Hoc: The fallacy that assumes that because event B occurred after event A, event A must have caused event B. (Correlation does not imply causation)

    • Fallacy of Composition: The erroneous belief that what is true for a part is also true for the whole.

Opportunity Cost

  • Definition: The value of the next best alternative that must be foregone when a choice is made.

Absolute Advantage

  • Definition: The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources; or to produce the same quantity using fewer resources.

Comparative Advantage

  • Definition: The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

PPF (Production Possibilities Frontier)

  • Definition: A curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same limited resources. It shows the maximum possible output combinations of two goods or services when resources are perfectly and fully employed.

  • Shifts (Economic Growth): An outward shift of the PPF indicates economic growth, meaning an increase in the economy's ability to produce goods and services, often due to technological advancements or an increase in resources.

  • Points inside vs points outside

    • Points inside the PPF: Represent inefficient production or underutilization of resources.

    • Points on the PPF: Represent efficient production, where resources are fully and efficiently utilized.

    • Points outside the PPF: Represent combinations of goods that are currently unattainable with existing resources and technology.

  • Shape (Law of Increasing Opportunity Cost): The PPF is typically bowed outward (concave to the origin) due to the Law of Increasing Opportunity Cost, which states that as more of one good is produced, the opportunity cost of producing an additional unit of that good increases because resources are not perfectly adaptable to the production of both goods.

  • MRT (Marginal Rate of Transformation - Slope of PPF)

    • Definition: The slope of the PPF at any given point, representing the opportunity cost of producing one more unit of the good on the horizontal axis in terms of the good on the vertical axis. It measures how many units of one good must be given up to produce an additional unit of another good.

    • Formula: MRT=−(ΔYΔX)MRT = - (\frac{\Delta Y}{\Delta X}) (where Y is the quantity of the good on the vertical axis and X is the quantity of the good on the horizontal axis).

  • Find points on the PPF: Requires understanding the underlying production function or equation that defines the curve.

Supply and Demand

  • Quantity Demanded/Supplied

    • Quantity Demanded (Qd): The specific amount of a good or service that consumers are willing and able to purchase at a particular price at a specific time.

    • Quantity Supplied (Qs): The specific amount of a good or service that producers are willing and able to offer for sale at a particular price at a specific time.

  • Law of Demand/Supply

    • Law of Demand: As the price of a good or service increases, the quantity demanded decreases, ceteris paribus (and vice versa).

    • Law of Supply: As the price of a good or service increases, the quantity supplied increases, ceteris paribus (and vice versa).

  • Change in Qd vs Change in Demand (Qs vs Supply)

    • Change in Quantity Demanded (Qd): A movement along the demand curve, caused solely by a change in the price of the good itself.

    • Change in Demand: A shift of the entire demand curve (either left or right), caused by a change in a non-price determinant of demand.

    • Change in Quantity Supplied (Qs): A movement along the supply curve, caused solely by a change in the price of the good itself.

    • Change in Supply: A shift of the entire supply curve (either left or right), caused by a change in a non-price determinant of supply.

  • Things that cause a Change in Demand/Supply

    • Change in Demand (Shifters): Tastes and preferences, Income (normal vs. inferior goods), Prices of related goods (substitutes vs. complements), Expectations, Number of buyers.

    • Change in Supply (Shifters): Input prices, Technology, Expectations, Number of sellers, Government policies (taxes, subsidies).

  • P* and Q* (Equilibrium Price and Quantity)

    • Definition: The price (P) and quantity (Q) at which the quantity demanded equals the quantity supplied in a market.

  • Equilibrium

    • Definition: A state in which economic forces are balanced, and in the absence of external influences, the equilibrium price and quantity will not change.

    • Formula: Equilibrium occurs where Q<em>d=Q</em>sQ<em>d = Q</em>s

  • Shortage/Surplus

    • Shortage (Excess Demand): Occurs when the quantity demanded exceeds the quantity supplied at a given price (price is below equilibrium).

    • Surplus (Excess Supply): Occurs when the quantity supplied exceeds the quantity demanded at a given price (price is above equilibrium).

  • Simultaneous Shifts of Demand and Supply When both demand and supply curves shift, the effect on either equilibrium price or quantity will be determinate, and the other will be indeterminate, depending on the magnitude of the shifts.

  • Price Floors and Price Ceilings

    • Price Floor: A legal minimum price that can be charged for a good or service. To be effective, it must be set above the equilibrium price, often leading to a surplus.

    • Price Ceiling: A legal maximum price that can be charged for a good or service. To be effective, it must be set below the equilibrium price, often leading to a shortage.

Price Elasticity of Demand (PED)

  • Definition and Interpretation: A measure of the responsiveness of the quantity demanded of a good to a change in its price. A high PED means demand is elastic (quantity demanded changes significantly with price changes), while a low PED means demand is inelastic (quantity demanded changes little with price changes).

  • Calculate using midpoint method

    • Formula:
      PED = \frac{\text{% Change in Quantity Demanded}}{\text{% Change in Price}}
      Where:
      \text{% Change in Quantity Demanded} = \frac{(Q2 - Q1)}{((Q2 + Q1) / 2)}
      $$\text{%