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Econ 200, Exam 1 Study Guide

by: Brianna Dowell

Econ 200, Exam 1 Study Guide ECON 200

Marketplace > James Madison University > Economcs > ECON 200 > Econ 200 Exam 1 Study Guide
Brianna Dowell
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About this Document

These notes cover what will be on our first exam.
Amanda Deerfield
Study Guide
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This 7 page Study Guide was uploaded by Brianna Dowell on Saturday February 6, 2016. The Study Guide belongs to ECON 200 at James Madison University taught by Amanda Deerfield in Spring 2016. Since its upload, it has received 259 views. For similar materials see Macroeconomics in Economcs at James Madison University.


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Date Created: 02/06/16
Econ 200 Exam 1 Study Guide CHAPTER O NE What is Economics? Economics is… The study of choices; it’s a social science Scarcity The state of being in short supply; shortage. Forces us to make choices Incentives Something that encourages or penalizes us Goods Tangible items that are produced and have value Services Intangible items, but still have value Factors of Production Land, labor, capital, entrepreneurship Land Gifts of nature Labor Work, time, and effort put into producing goods Capital Tools, machines, buildings Human Capital Knowledge and skill that is obtained from education, training, and experience; has increased over time Entrepreneurship Organizes land, labor, and capital Self-interest Choices you think are best for you Social interest Choices best for society as a whole; 2 dimensions: efficiency and equity Opportunity cost The loss of potential gain from other alternatives when one alternative is chosen CHAPTER TWO The Economic Problem Production possibilities frontier (PPF) Boundary of what can and cannot be produced PPF Example  Points on frontier are good Opportunity cost = Give up Get Marginal cost Opportunity cost of producing one or more unit of a good Comparative advantage When a person can perform an activity at a lower opportunity cost than anyone Econ 200 else Absolute advantage When a person is more productive than others; ex. England during the Industrial Revolution Economic coordination To make coordination work, 4 complimentary social institutions have evolved: firms, markets, property rights, money Firms Economic unit that hires factors of production to produce and sell goods/services Market Arrangement that enables buyers and sellers to do business with one another Property rights Ownership and control over a resource or good. Includes our labor Money Generally accepted as a means of payment Social institutions Norms; 2 kinds: formal and informal Formal Written law (ex. fraternities and sororities) Informal No written law (ex. hallway traffic) CHAPTER T HREE Supply and Demand Demand Unlimited desires 1. Want it 2. Can afford it 3. Made a definite plan to buy it Law of Demand The higher the price of a good, the smaller is the quantity demanded and vice versa Quantity demanded Amount consumers plan to buy What are the 2 reasons why change in Substitution effect and income effect price, changes quantity demanded? Substitution effect When relative price of a good rises, we Econ 200 seek an alternative Income effect When price of a good rises relative to income, people can’t afford it, so quantity demanded decreases Demand curve As price changes we move along the curve. BUT, if anything besides the price changes it will cause a change in demand and the curve will change. Demand increasing Demand decreasing What are the six main factors that Prices of related goods, expected future change demand? prices, income, expected future income, population and preferences Econ 200 Substitute A good that can be used n place of another good (ex. bud light and miller light) Complement A good that is used in conjunction with another good (ex. tequila and limes) Future income Expected increase income means demand increase Population Large population  greater demand Preferences People that have the same income may have different demands Supply If a firm supplies goods or services, then the firm… 1. Has the resources and technology to produce it 2. Can profit from producing it, and 3. Has made a definite plan to produce and sell it Law of Supply The higher the price of a good, the greater is the quantity supplied and the lower the price the smaller the quantity Supply Curve As price changes, we move along the curve. If something else changes, the curve will move. Shifts of the supply curve Golden Rule Anything that makes it more expensive Econ 200 to produce – we produce less What are the six main factors that Prices of factors of production, prices of change supply of a good? related goods produced, expected future prices, number of suppliers, technology, state of nature Substitute in production Another good that can be produced using same resources (ex. energy bars and trail mix) Complements in production 2 goods that must be produced together (ex. whole milk gets skimmed and now we have skim milk and heavy cream) Future prices If price of good is expected to rise, supply of the good decreases Number of suppliers Larger the number of suppliers, the greater is the supply of the good Technology Advances in technology create new goods and lower cost of producing existing goods State of nature Includes all natural forces that influence production (ex. weather) Market equilibrium Where quantity demanded equals quantity supplied Surplus Quantity supplied is greater than quantity demanded (ex. ugly sweater goes on sale) Shortage Quantity supplied is less than quantity demanded (ex. sold out concert tickets) U NIT TWO Price Control Price controls Government establishing prices to be charged for goods and services Price ceiling Legal max. price; prevents prices from rising; set below equilibrium price Rent control Landlords are unable to raise rent Price floor Legal min. price; prevents prices from falling too low; set above equilibrium Econ 200 price U NITT HREE Measuring GDP Gross Domestic Product (GDP) The market value of all final goods and services produced within a country in a given year Market value Dollar value Real GDP Adjusts our GDP measurement for inflation Final goods and services Things that undergo no more processing before they’re sold Intermediate goods Good/service used as a component of a final good (ex. bike tires) Spending: Expenditure Method GDP = Consumer expenditure + Investment + Government + Net exports Do we count stocks and bonds in GDP? No, because they don’t produce anything Exclusions of GDP 1. Used goods and services 2. Household production 3. Underground production 4. Government transfer payments 5. interest on debt 6. Leisure time Per-capita GDP GDP divided by population; this is what economists mean when they discuss the "standard of living" of a nation U NITT HREE Measuring Inflation Inflation When overall price level is rising Consumer price index (CPI) Measures trends in the prices of certain goods Market basket A fixed basket of goods (ex. housing, transportation, food); Stays the same! Index numbers Allows us to reference everything to a base period Reference base period Period we compare everything to; base Econ 200 period is always 100 To calculate a price index… To calculate percentage change…


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