Economics End of Year Exam Comprehensive Study Guide

Definition of Economics: The social science that studies how individuals, governments, firms, and nations make choices on allocating scarce resources to satisfy unlimited wants.
The Basic Economic Problem: Scarcity: This is the central problem in economics where resources are finite, but human wants and needs are infinite.
The Factors of Production: To produce goods and services, four categories of resources are required:
- Land: All natural resources (e.g., oil, minerals, forests, water).
- Labor: The human effort, both physical and mental, used in production.
- Capital: Man-made goods used to produce other goods (e.g., machinery, tools, factories).
- Enterprise (Entrepreneurship): The skill and risk-taking required to combine the other three factors to create a product or service.

Definition: A graphical representation showing the maximum possible combinations of two goods or services an economy can produce when all resources are fully and efficiently employed.
Key Assumptions:
- Resources are fixed in quantity and quality.
- Technology remains constant.
- The economy produces only two products.
Interpreting the Curve:
- Points on the Frontier: Represent productive efficiency. All resources are utilized to their full potential.
- Points Inside the Frontier: Represent inefficiency or unemployment of resources. The economy is producing less than its maximum potential.
- Points Outside the Frontier: Currently unattainable given the current level of resources and technology.
Shifts in the PPC:
- Outward Shift: Indicates economic growth. This can be caused by new technology, discovery of new resources, or improvements in labor productivity.
- Inward Shift: Indicates a decrease in productive capacity, potentially due to natural disasters, war, or resource depletion.

Definition: The value of the next best alternative that is given up when a choice is made.
Context: Because resources are scarce, every choice involves a trade-off. The cost of an item is not just the monetary price, but what you had to sacrifice to get it.
Application to PPC: Moving from one point on a PPC to another shows the opportunity cost of producing more of one good in terms of how much of the other good must be sacrificed.

The Three Fundamental Economic Questions: Every economy must decide:
1. What to produce? (Determining which goods and services are most needed/wanted).
2. How to produce? (Determining the combination of resources and technology to use).
3. For whom to produce? (Determining how the produced goods and services are distributed among the population).
Decision Makers:
- Consumers: Aim to maximize utility (satisfaction).
- Producers/Firms: Aim to maximize profits.
- Government: Aims to maximize social welfare.

Fixed Costs (FC): Costs that do not change with the level of output (e.g., rent, insurance, salaries of permanent staff).
Variable Costs (VC): Costs that change directly with the level of output (e.g., raw materials, packaging, wages for hourly labor).
Total Cost (TC): The sum of fixed and variable costs.
- $TC = FC + VC$
Average Cost (AC): The cost per unit of output produced.
- $AC = \frac{TC}{Q}$
- Where $Q$ represents the quantity of output.
Marginal Cost (MC): The additional cost incurred by producing one more unit of a good or service.

Market Economy (Free Market): Resources are allocated through the price mechanism (supply and demand) with no government intervention. Private individuals own the factors of production.
Command Economy (Planned Economy): The government or a central authority determines what, how, and for whom to produce. Factors of production are state-owned.
Mixed Economy: A system that combines elements of both market and command economies. Private enterprise exists alongside government regulation and public services (e.g., healthcare, education).

Goods: Tangible physical objects that can be seen and touched.
- Consumer Goods: Products sold to the general public (e.g., food, clothing).
- Capital Goods: Products used by firms to produce other goods (e.g., a tractor, a robotic arm).
- Durable Goods: Goods that last for a long time (e.g., a car).
- Non-durable Goods: Goods used up quickly (e.g., a chocolate bar).
Services: Intangible actions or activities performed for a consumer (e.g., hair cutting, insurance, teaching, banking).
Private Goods: Goods that are excludable and rivalrous in consumption.
Public Goods: Goods that are non-excludable and non-rivalrous (e.g., street lighting, national defense).

Definition: The quantity of a good or service that consumers are willing and able to buy at various prices at a given time ( $ceteris\,paribus$ ).
The Law of Demand: There is an inverse relationship between price and quantity demanded. As price ( $P$ ) falls, quantity demanded ( $Q_d$ ) increases, and vice versa.
The Demand Curve: Slopes downward from left to right.
Determinants of Demand (Shifters):
- Changes in consumer income.
- Changes in tastes and preferences.
- Prices of related goods (Substitutes and Complements).
- Population size and demographics.
- Future price expectations.

Definition: The quantity of a good or service that producers are willing and able to offer for sale at various prices at a given time ( $ceteris\,paribus$ ).
The Law of Supply: There is a direct relationship between price and quantity supplied. As price ( $P$ ) rises, quantity supplied ( $Q_s$ ) increases, and vice versa.
The Supply Curve: Slopes upward from left to right.
Determinants of Supply (Shifters):
- Costs of factors of production (e.g., wages, raw materials).
- Changes in technology.
- Government policies (Taxes and Subsidies).
- Natural factors (e.g., weather conditions for agriculture).
- Number of firms in the market.