Chapter 1 Econ 2202

Chapter 1: Key Terms and Concepts

• Scarcity: Fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

• Trade-offs: Every choice involves a trade-off; the next best alternative is foregone.

• Economics: Study of how people manage resources and respond to incentives.

• Efficiency: Optimal use of resources to maximize the production of goods and services.

• Equality: Distribution of economic prosperity among the members of society.

• Opportunity Cost: The cost of the next best alternative foregone when making a choice; includes both explicit and implicit costs.

  • Calculations: Determine opportunity cost by analyzing what is sacrificed for a chosen option.

• Incentive: A benefit offered to encourage people to act in a certain way.

• Rationality: Assumption that individuals act logically and make decisions that provide them with the greatest benefit or satisfaction.

• Marginal Change: A small, incremental adjustment to a plan of action.

• Market Economy: An economic system where decisions are made based on supply and demand; prices are determined in the marketplace.

• Market Failure: A situation in which the allocation of goods and services is not efficient.

• Trade: Exchange of goods and services, enhancing specializations and overall economic gains.

  • Benefit of Trade: Increases variety, lowers costs, enhances efficiency.

• Market Organization: Markets effectively allocate resources, driven by prices and competition.

• Central Planning vs. Market Economics: Central planning involves government decisions, while market economics is decentralized decision-making.

• Mixed Economies: Economic systems that incorporate elements of both market and planned economies.

• Property Rights: Legal rights to use resources, which encourage investment and economic prosperity.

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Chapter 4: Demand and Supply Concepts

• Markets: Structures enabling buyers and sellers to exchange goods and services.

• Competitive Markets: Markets with many buyers and sellers, where no single agent has significant control over price.

• Quantity Demanded: The amount of a good that buyers are willing to purchase at a given price.

• Law of Demand: All else constant, as price decreases, quantity demanded increases, and vice versa.

• Demand Schedule: A table showing the relationship between the price of a good and the quantity demanded.

• Demand Curve: A graph of the demand schedule, downward-sloping.

• Normal Good: A good whose demand increases when consumer incomes rise.

• Inferior Good: A good whose demand decreases when incomes rise.

• Substitutes: Goods that can replace one another; an increase in the price of one increases the demand for the other.

• Complements: Goods that are consumed together; an increase in the price of one decreases the demand for the other.

• Determinants of Demand: Factors that cause shifts in the demand curve including income, preferences, number of buyers, and expectations.

• Law of Supply: Higher prices lead to a higher quantity supplied, all else equal.

• Quantity Supplied: The amount of a good that sellers are willing to sell at a given price.

• Supply Schedule: A table showing the relationship between the price of a good and the quantity supplied.

• Supply Curve: A graph illustrating the supply schedule, upward-sloping.

• Determinants of Supply: Factors that cause shifts in the supply curve including production costs, technology, and number of sellers.

Chapter 3: Market Equilibrium and Adjustments

• Equilibrium: A state where supply equals demand.

• Equilibrium Price: The price at which quantity supplied equals quantity demanded.

• Equilibrium Quantity: The quantity at which supply equals demand at the equilibrium price.

• Surplus: Occurs when quantity supplied exceeds quantity demanded at a specific price.

• Shortage: Occurs when quantity demanded exceeds quantity supplied at a specific price.

• Market Mechanism: The process by which markets adjust to reach equilibrium.

• Role of Prices: Prices signal where resources need to be allocated and help in matching supply with demand.

• Market Demand: Calculating total demand from individual demand curves.

• Market Supply: Calculating total supply from individual supply curves.

• Change in Demand vs. Quantity Demanded: Shift of the entire demand curve versus movement along the existing demand curve.

• Change in Supply vs. Quantity Supplied: Shift of the entire supply curve versus movement along the existing supply curve.

Chapter 10: Macroeconomic Foundations

• Macroeconomics: Study of the economy as a whole; includes inflation, unemployment, and economic growth.

• Microeconomics: Study of individual markets and actors within the economy.

• Big Three in Macroeconomics: Economic growth, unemployment rate, inflation rate.

• Circular Flow Diagram: Represents the flow of goods/services and money in an economy.

• Total Income = Total Expenditure = Total Output: Fundamental identity in macroeconomics; they are equal in a closed economy.

• Factors of Production: Inputs used to produce goods/services (land, labor, capital, entrepreneurship).

• Gross Domestic Product (GDP): Total value of goods/services produced within a country; includes consumer spending, business investment, government spending, and net exports.

  • Included and Excluded from GDP: Includes final goods/services; excludes intermediate products, used goods, and non-production transactions.

• Gross National Product (GNP): GDP plus the value of income earned by residents from overseas investments minus income earned by foreigners from domestic investments.

• Components of GDP: Consumption, Investment, Government Spending, Net Exports; each has specific inclusions.

  • GDP Accounting Identity: GDP = C + I + G + NX (Consumption + Investment + Government Spending + Net Exports).

• Exports vs. Imports: Exports are goods sold abroad, while imports are goods purchased from abroad.

• Transfer Payments: Payments made without any goods/services provided in return (e.g., social security payments).

• Real vs. Nominal Variables: Real variables are adjusted for inflation, whereas nominal variables are measured in current dollars.

Chapter 4: Real and Nominal Variables

• Real GDP: GDP adjusted for inflation, reflecting true value in constant dollars.

• Nominal GDP: Measures a country's gross domestic product using current prices.

• Base Year: A benchmark year used to compare the effect of inflation on economic indicators.

• Economic Growth: Increase in the production of goods/services in an economy over time.

• GDP per Capita: GDP divided by the population, measuring the average economic output per person.

• Real GDP per Capita: Adjusts GDP per capita for inflation, providing a measure of living standards.

Practice Toward Written Part of Exam 1

• Chapter 1 Practice Questions:

  1. Opportunity Cost Scenarios: Understand the concept by calculating the costs of the choices (movies vs. studies, quitting jobs for education).

  2. Application: Use provided situations to calculate opportunity costs and justify them.

• Chapter 4 Practice Questions:

  1. Graphing Demand & Supply Shifts: Practice drawing and explaining shifts in demand and supply curves—influence on equilibrium price and quantity.

  2. Real-World Application: Consider cases such as supply reductions or technological changes affecting markets accordingly.