Great notes!!! Thanks so much for doing this...
ECON 2306 Test #1 PREVIEW SHEET
**Ten Fundamental Principles of ECONOMICS:
I. Scarcity is inescapable.
II. Risk is unavoidable
III. Therefore all persons must make choices
IV. Incentives matter
V. People generally act in their own self interest
VI. There is often more than one way to produce things
VII. Voluntary exchange is mutually advantageous
VIII. Its wealth not poverty which has causes
IX. Public policies have primary (intent) effects and secondary (unintended)
effects some good some bad.
X. In the end economic laws tend to prevail.
1. What is meant by scarcity? Fixed limited supply/lack of resources
2. What is meant by opportunity cost? The best forgone alternative
Wants approaching∞∨unlimited wants
3. What is the formula for economics?
NOTE: the numerator of the economics formula is represented by a “W with an arrow to the right of it, pointing upwards towards an infinity sign”. While the denominator is represented by an R with a hyphen at the top.
We also discuss several other topics like what is Phonology?
4. What is the CobbDouglas Production Function? Q=f (k, L)
Quantity is a function of (capital, labor) (output)
The maximum amount of output that can be produced with K units of capital and L units of labor
5. What is meant by capitalintensive production? The use of machineries (financial resources) and large amounts of money in creating goods or services. Some industries commonly thought of as capital intensive include oil production and refining, telecommunications and transports such as railways and airlines.
… Laborintensive production? The use of manual labor/ human effort in the creation of goods and services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods/services; the higher the proportion of labor costs required, the more labor intensive the business. Labor intensive industries include restaurants, hotels, agriculture and mining.
We also discuss several other topics like what is epinephrine degradation?
6. Who is the author of the Wealth of Nations? ADAM SMITH
7. When was the Wealth of Nations published? 1776
8. What is meant by the “invisible hand”? The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.
9. What is meant by unintended consequences? Outcomes that are not the ones foreseen and intended by a purposeful action. For example; seat belt laws prevent fatality when accidents occur but because of seat belt laws people feel safer and more accidents happen.Don't forget about the age old question of What is opportunity costs?
10. What were the two most noble professions discussed in class? Manager at McDonalds and plumber/ac repairer. WHY were these considered to be the most noble? No two nations who are involved in the same trade have ever gone to war (no two nations with McDonalds have ever fought).
11. Give an example for each of the Ten Fundamental Principles of Economics.
1) Scarcity is inescapable -Things are limited compared to people’s needs and wants
2) Risk is unavoidable – like in the Titanic millions will sink when there are more life boats, but without life boats, a shipwreck would also mean some people die.
3) All persons must make choices- opportunity cost
4) Incentives manner- manufacturers alter coupons to incentive 5) People generally act in their own self-interest - when choices are made one generally chooses what is better for them (making decisions at the margin)
6) There is often more than 1 way to produce things- labor intensive or capital intensive
7) Voluntary exchange is naturally advantageous- both people benefit from transaction
8) It is wealth, not poverty that has causes- wealthy nations stay wealthy because they specialize and trade.
9) Public policies have primary effects and secondary effects; some
good and some bad. Ex: seatbelt laws decreases fatalities and saves lives but there are more accidents because people assume they are safer. Don't forget about the age old question of What is the history of geology?
10) Economic laws tend to prevail- when people trade they tend to get along, the law of demand and supply prevails. If you want to learn more check out What is leibniz's notation?
12. What is a definition of economics? A social science which attempts to explain how individuals, firms and nations allocate scare resources among competing interests.
13. What is meant by allocation? Allocation means the distribution of resources … Production? The action of making or manufacturing from components or raw materials, or the process of being so manufactured. If you want to learn more check out Why was there no single Hegemon in Europe?
14. What is meant by normative economics? An estimation of value judgement i.e. what should be/what ought to be. For example; inflation should be 5%
15. What is meant by positive economics? It focuses on facts i.e. what is and not what ought to be.
16. How does micro differ from macro? Micro deals with smaller fragments e.g. individuals, while macro deals with aggregates and large institutions. Micro is small picture and macro is big picture. Macroeconomics is looking at all the sectors of the American economic growth. Micro is looking at one sector like for example the financial sector.
17. What are the levels of micro? Individualsentrepreneursfirmsindustryvoters and politicians.
18. What are the sectors of macro? –Business, household, public, government, foreign.
19. What is meant by “aggregate”? Sum/total/whole e.g. aggregate demand, aggregate supply, and aggregate equilibrium. Which branch of economics uses this term? Macroeconomics deals with it.
20. What are the four factors of production? Land, labor, capital and entrepreneur.
21. What are the payments to the four factors of production? Land=rent, labor=wages, capital=interest, entrepreneur=profit.
22. What is the largest part of national income? Wages (labor)
… Smallest? Rent (Land)
23. What are three questions all economic systems must answer?
∙ What to produce (allocation of input)
∙ How to produce (production)
∙ For whom to produce for (allocation of output)
24. What are the four types of economics systems?
Capitalist/free market/ laissez faire e.g. Hong Kong
Command and control e.g. north Korea
Compromise e.g. USA
25. In each of the economic systems, how are the three economic questions answered? o Capitalist: PRICE
o Command and control: GOVERNMENT
o Compromise: PRICE AND GOVERNMENT
o Customary: TRADITION
26. What is meant by a circular flow diagram? The circular flow diagram (also called the circular flow model) is perhaps the simplest diagram/model of economics to understand. In essence, the circular flow diagram displays the relationship of resources and money between firms and households.
27. What lessons can be learned from a circular flow diagram? Flow of goods, services, and payments (money) between households and firms in the economy. One important lesson of the circular flow diagram is that "one person's output is another person's income." It describes the income between producers and consumers. Businesses receive revenues from households in exchange for providing goods and services and use those revenues to buy inputs from households. Households receive income from businesses in exchange for providing inputs and use that income to buy goods and services from businesses.
28. What are the six economic warnings?
I. Post hoc ergo propter hoc fallacy
II. Fallacy of composition
III. Correlation does not necessarily mean causation
IV. Violation of ceteris paribus
V. Inclusion of irrelevant variation
VI. Exclusion of relevant variable
29. What is meant by post hoc ergo propter hoc? After this therefore because of this
30. What is meant by timeseries data? Looking at one individual for a specific time period …crosssectional data? Looking at a group of individuals at one point in time.
31. What is the fallacy of composition? What holds true for an individual must hold true for a group as a whole.
32. How does correlation differ from causation? Just because things are happening together (correlation) doesn’t mean it’s causing an event (causation).
33. What is meant by “shaving with Ockham’s razor”? Parsimony of parameters/less is more. It states that the simplest theory is often the best. It is often used to reduce the number of competing theories under discussion. It doesn't rule out a theory, as you need empirical evidence to prove or disprove something.
34. What is meant by the “guns and butter” metaphor? Represents military goods and consumer goods respectively. A nation decides which of these to produce.
35. Draw the graph for a production possibilities frontier (PPF).
36. What does the slope of a PPF represent? Opportunity cost
37. What does the shape of a PPF represent? Law of Increasing opportunity cost with increased output of a good
38. What is meant by the law of increasing opportunity cost? Continuing to give up a good x for more of good y. the law of increasing costs is a principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.
…Why does this happen? Resources are not perfectly adaptable, one can’t go from producing good x straight to producing good y.
39. What does it mean to be operating INSIDE, OUTSIDE, or ON the PPF? Inside: inefficient, outside: unattainable, on: productive efficiency.
40. How does allocative efficiency and productive efficiency relate to a PPF? All points on the PPF are productive efficiency, the right methods of production (P= minATC). The most effective point on the PPF is called allocative efficiency, the right mix of goods (P= MC).
41. How do consumer goods and capital goods differ? Consumer goods: A final good. An example of this would be food. This causes a bigger shift increase in efficiency. Capital goods: goods that produce other goods. An example would be buildings, machines, equipment, furniture and fixtures. This causes a smaller shift increase in efficiency.
42. Over time, what happens if a nation devotes more of its production to capital goods? PPF curve shifts out faster and faster
… Consumer goods? PPF curve shifts out slowly and not as far
43. What is the opposite of an economic “good”? Economic bad
44. What is meant by a “bad”? An economic bad is an item that is not wanted and if given a choice a consumer would want less of it than more.
45. What is the definition of demand? (8 parts)
of goods or services
which a consumer
Is both willing and able
At various prices
Per unit of time
46. What is the definition of supply? (8 parts)
The various quantities
Of goods and services
Which a producer/seller
Is both willing and able
At various prices
Per unit of time
47. Graph a demand function:
… Supply function:
48. Write out the demand function: Qd=F(P)
… Supply function: Qs=F(P)
49. What are the nonprice parameters of demand? Price of other goods, income, number of buyers, tastes/preferences, advertising, price expectations of buyers.
50. What are the nonprice parameters of supply? Number of sellers, expectations of sellers, price of inputs, technology, taxes/subsidies, weather.
51. using the demand function, demonstrate what happens when price changes & what happens when a nonprice parameter changes: when price changes, there is a movement along the demand curve and a change in quantity demanded. When nonprice parameters change, there is a shift in demand curve and a change in demand.
52. using the supply function, demonstrate what happens when price changes & what happens when a nonprice parameter changes: if price changes, that’s a change in quantity supplied
and a movement along the supply curve. If a nonprice parameter changes, it’s a shift in the supply curve and a change in supply.
53. How does a “movement along a curve” differ from a “shift”? Refer back to number 51 and 52 for answer
54. What causes a “movement along a curve” (demand or supply curves)? Refer back to 51 and 52
55. What causes a “shift” (demand or supply curves)? Refer back to 51 and 52 56. List which direction each of the nonprice parameters of demand shifts the demand curve: Positive relationships ( ↑ ,↑∨↓ ,↓ ) on nonprice parameters shifts the demand curve
out to the right. Negative relationships ( ↑ ,↓∨↓ ,↑ ) on nonprice parameters shifts the demand curve to the left.
57. Do the same (AS ABOVE #56) for the nonprice parameters of supply:
Positive relationships ( , OR , ) on nonprice parameters shifts the supply curve out ↑ ↑ ↓ ↓ to the right. Negative relationships ( , OR , ) on nonprice parameters shifts the ↑ ↓ ↓ ↑ supply curve to the left.
58. What is meant by shortage? Quantity demanded is greater than quantity supplied … Surplus? Quantity supplied is greater than quantity demanded
59. What happens in a market graph if a price is BELOW, ABOVE, and AT EQUILIBRIUM?
∙ If the market price is above the equilibrium price, quantity supplied is greater than
quantity demanded, creating a surplus. Market price will fall.
∙ If the market price is below the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. The market is not clear. Market price will
∙ Market equilibrium occurs where supply = demand. At this point, there is no tendency for prices to change. We say the market clearing price has been achieved.
60. What are the three steps of “comparative statics”?
A. Identify initial equilibrium price and quantity
B. Identify the shift
C. Identify the new equilibrium price and quantity
61. What is meant by a price floor? A case in which the government says you can charge no less than or you must charge at least a given/ specific price. Sides with the seller. Minimum.
…When is it effective? When it is set above equilibrium
…What is the effect? Must result in a surplus
…Give an example: minimum wage
62. What is meant by a price ceiling? A case in which the government says you must charge no more than a certain amount. Sides with the buyer. Maximum.
…When is it effective? When it is set below equilibrium
…What is the effect? Must result in a shortage.
…Give an example: rent control.
63. In terms of equilibrium price and quantity, what happens when supply and demand shift in opposite directions? … The same direction?
D → S →
D ← S ←
( ?) ↑↓
D → S ←
( ?) ↑↓
D ← S →
( ?) ↑↓
64. What is meant by elasticity? A measure of responsiveness
65. What makes a good more (or less) elastic?
∙ # of substitutes: more= elastic, less= inelastic
∙ Time: short run= inelastic, long run= elastic
∙ Product definition: narrowly= elastic, broadly= inelastic
∙ % of budget: small= inelastic, large= elastic
∙ Luxury vs necessity: luxury= elastic, necessity= inelastic
66. In terms of slope, what demand curves are more elastic than others? Vertical demand curves are perfectly inelastic, horizontal demand curves are perfectly elastic.
67. In terms of slope, what supply curves are more elastic than others? Vertical supply curves are perfectly inelastic, horizontal supply curves are perfectly elastic.
68. What is meant by elastic? ∆Qd
¿∆ P¿ 1 ∆ Qd
… Unit elastic:
¿∆ P =1 ∆Qd
…perfectly elastic: …perfectly inelastic:
¿∆ P = 0
69. How does elasticity vary along a demand curve? At higher prices, that is where it is most elastic, at the middle it is unit elastic, and at the bottom prices it is most inelastic
70. How is Total Revenue affected by elasticity? If total revenue increases as price decreases then demand is elastic.
71. What is the midpoint formula for elasticity?
(Q 2+Q 1)÷(P2−P1) (P2+P1)
72. What is meant by income elasticity? Measures how much the quantity demanded of a good responds to a change in consumers' income.
…Do we care about the sign or magnitude? SIGN
…How do we interpret the sign? (+) normal, () inferior.
73. What is meant by crossprice elasticity? An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another
…Do we care about the sign or magnitude? SIGN
…How do we interpret the sign? (+) substitute, () complements, ( ?) unrelated.
74. In terms of an income elasticity, what is meant by a normal good? For normal goods, when your income rises, your demand for such goods rise as well. E.g. luxury cars, Nike shoes, diamond jewelry etc.
… Inferior good? When your income rises, your demand less of such goods. E.g. ramen noodles
… A luxury (or superior) good? A luxury good is a good for which demand increases more than proportionally as income rises, and is a contrast to a "necessity good", for which demand increases proportionally less than income. Luxury goods are often synonymous with superior goods and Veblen goods.
75. In terms of crossprice elasticity, what is meant by a complement? E.g. racket and ball, peanut butter and jelly etc. When price for one of these goods increases, the demand for the other decreases and vice versa.
… A substitute? E.g. coke or Pepsi, sprite or 7up etc. When the price of one good goes up here, the demand for the other increases as well and vice versa.
… An unrelated good? If the price of an unrelated good goes up or down, it doesn’t affect the demand for the other in any way because they are not related.