ECON 1113 Exam 1 study guide
ECON 1113 Exam 1 study guide ECON 1113
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This 6 page Study Guide was uploaded by Aubrie Bowlan on Wednesday February 10, 2016. The Study Guide belongs to ECON 1113 at Oklahoma State University taught by Joseph Mclean in Spring 2016. Since its upload, it has received 37 views. For similar materials see Economics of Social Issues in Economcs at Oklahoma State University.
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Date Created: 02/10/16
ECON 1113 Exam 1 study guide Ch. 1: Opportunity Cost Economics: The study of the allocation and use of scarce resources to satisfy unlimited human wants Scarce: When there is not a freely available and infinite source of it. Resource: Anything we either consume directly or use to make things we will ultimately consume Four resources that society can allocate: land, labor, capital, entrepreneurship of its people Opportunity cost: The forgone alternative of the choice made Production possibilities frontier: A graph which relates the amounts of different goods that can be produced in a fully employed society Model: A simplification of the real world that can be manipulated to explain the real world Simplifying assumption: An assumption that may, on its face, be silly but allows for a clearer explanation Unemployment: A situation that occurs when resources are not being fully utilized Attainable: Levels of production that are possible with the given resources Unattainable: Levels of production that are not possible with the given resources Good: Anything we can consume If the production possibilities frontier is bowed out away from the origin, then opportunity cost is increasing. If the production possibilities frontier is a straight line that is not bowed at all, then opportunity cost is constant. (If every worker possesses identical skills) Circular flow model: A model which depicts the interactions of all economic actors Market: Any mechanism by which buyers and sellers negotiate an exchange Factor market: A mechanism by which buyers and sellers of labor and financial capital negotiate an exchange Foreign exchange market: Buyers and sellers of the currencies of various countries negotiate an exchange Goods and services market: Mechanism by which buyers and sellers of goods and services negotiate an exchange Optimization assumption: An assumption that suggests that suggests that the person in question is trying to maximize some objective Marginal benefit: The increase in the benefit that results from an actions Marginal cost: The increase in the cost that results from an action Net benefit: The difference between all benefits and all costs Ch. 2: Supply and Demand Price: The amount of money that must be paid for a unit of output Output: The good or service produced for a sale Market: Buyers and sellers negotiate an exchange Consumers: People in a market who want to exchange money for goods and services Producers: People in a market who want to exchange goods and services for money Equilibrium price: No consumers wish they had purchased more goods at the price; no producers with they could have sold more Equilibrium quantity: Amount of output exchanged at the equilibrium price Quantity demanded: The amount consumers are willing and able to pay during a particular point in time Quantity supplied: The amount firms are willing to sell at a particular price during a particular point in time Capitalist: Markets, in particular markets for financial resources, are free Socialist: A significant part, but not all, of the decisions regarding the allocation of financial resources is made by a governmental authority. Communist: Governmental authorities determine the allocation, use, and distribution of financial resources. 2 Ceteris paribus: All things equal, meaning there are other factors in real life but we are not considering them Demand: The relationship between price and quantity demanded, ceteris paribus Supply: The relationship between price and quantity supplied, ceteris paribus. Demand schedule: Presentation, in tabular form, of the price and quantity demanded for a good Supply schedule: Presentation, in tabular form, of the price and quantity supplied for a good Equilibrium: The point where the amount that the consumers want to buy and the amount the firm wants to sell are the same (Where the supply and demand curves cross) Shortage: The condition where firms do not want to sell as many goods as consumers want to buy (Excess demand) Surplus: The condition where firms want to sell more goods than consumers want to buy (Excess supply) Law of demand: The statement that the relationship between price and quantity demanded is a negative one (When prices are higher, we tend to buy less) Substitution effect: Purchases of less of a product than originally wanted when its price is too high because a lower priced product is available Realbalances effect: When a price increases, your buying power is decreased, causing you to buy less Marginal utility: The amount of extra happiness that people get from an additional unit of consumption Law of diminishing marginal utility: The amount of additional happiness that you get from an additional unit of consumption falls with each additional unit Law of supply: There is a positive relationship between price and quantity supplied Technology: The ability to turn input into output Price gouging: The pejorative term applied to the circumstance when firms raise prices substantially when demand increases unexpectedly 3 Price ceiling: The level above which a price may not rise Price floor: Price below which a commodity might not sell Ch. 3: Elasticity and Consumer and Producer Surplus Elasticity: Responsiveness of quantity to a change in another variable (Elasticity= percent of change in quantity divided by the percent of change in price) Price elasticity of demand: The responsiveness of quantity demanded to a change in price Price elasticity of supply: The responsiveness of quantity supplied to a change in price Income elasticity of demand: The responsiveness of quantity to a change in income Crossprice elasticity of demand: The responsiveness of one good to a change in the price of another good Elastic: The circumstance when the percentage change in quantity is larger than the percentage change in price Inelastic: The opposite Unitary elastic: When the percentage change in quantity is equal to the percentage change in price Total expenditure rule: If the price and the amount you spend both go in the same direction, then demand is inelastic, whereas if they go in opposite directions, demand is elastic Perfectly inelastic: When price changes have no effect on quantity Perfectly elastic: When price cannot change Consumer surplus: The value you get that is in excess of what you pay to get Producer surplus: The money the firm gets that is in excess of its marginal cost Market failure: The market outcome is not the economically efficient outcome Exclusivity: The degree to which the consumption of the good can be restricted by a seller to only those who pay for it Rivalry: The degree to which one person’s consumption reduces the value of the good 4 for the next costumer Purely private good: Has the characteristics of both exclusivity and rivalry Purely public good: Has neither exclusivity nor rivalry Excludable public good: Exclusivity but not rivalry Congestible public good: Rivalry but not exclusivity Ch. 4: Production, Cost, and Revenue -Profit: The money that a firm makes; revenuecost -Cost: The expense that must be incurred to produce goods and services for sale Revenue: The money that comes into the firm from the sales of goods and services Economic cost: All costs of a business; those that must be paid as well as those incurred in the form of forgone opportunities Accounting cost: Only those costs that must be explicitly paid by the owner of a business Production function: A graph that shows how many resources are needed to produce various amounts of output Cost function: A graph that shows how much various amounts of production cost Fixed inputs: Resources that do not change Variable inputs: Resources that can be easily changed Division of labor: Workers divide the tasks in such a way that each can build momentum and not have to switch jobs Diminishing returns: There exists a point where the addition of resources increases production but does so at a decreasing rate Fixed costs: Costs of production that cannot be changed Variable costs: Costs of production that can be changed Marginal cost: The addition to cost associated with one additional unit of output Average total cost: Total cost divided by output (The cost per unit of production) 5 Average variable cost: Total variable cost divided by output (Average variable cost per unit of production) Average fixed cost: Total fixed cost divided by output (Average fixed cost per unit of production) Marginal revenue: Additional revenue the firm receives from the sale of each unit Perfect competition: A situation in a market where there are many firms producing the same good Monopoly: A situation where there is only one firm producing the good A firm should produce an amount so that marginal revenue equals marginal cost A firm should shut down is the price is less than the average variable cost at the quantity where MR=MC Ch. 8: Aggregate Demand and Aggregate Supply Aggregate demand: The amounts of real domestic output that domestic consumers, businesses, gov agencies, and foreign buyers collectively will desire to purchase at each possible price level Foreign purchases effect: When domestic prices are high relative to their imported alternatives, we will export less to foreign buyers and will import more from foreign producers; higher prices lead to less domestic output Interest rate effect: Higher prices lead to inflation, which leads to less borrowing and lowering of RGDP (Real GDP) Aggregate supply: The level of real domestic output available at each possible price level Demandpull inflation: Inflation caused by an increase in aggregate demand Costpush inflation: Inflation caused by a decrease in aggregate supply Supplyside economics: Government policy intended to influence the economy through aggregate supply by lowering input costs and reducing regulation 6
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