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Study Guide Test 1

by: Paige Peterson

Study Guide Test 1 ECON 2105

Paige Peterson

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Professor's guide questions with answers found in the textbook and lectures.
Economics in a Global Society
Bill Yang
Study Guide
Econ, Economics
50 ?




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This 7 page Study Guide was uploaded by Paige Peterson on Wednesday September 14, 2016. The Study Guide belongs to ECON 2105 at Georgia Southern University taught by Bill Yang in Fall 2016. Since its upload, it has received 3 views. For similar materials see Economics in a Global Society in Economics at Georgia Southern University.


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Date Created: 09/14/16
ECON2105: Study Guide for Exam 1 (Chapters 1-3) Chapter 1.  What does economics study? (Or What is the basic economic question?) o Economics studies WWW:  What to produce (and how much)  What resources to use? (how to produce?)  Who works? (who earns?) o Generally, economics studies:  How to allocate scarce resources; Or  How to make a choice under scarcity(Want>Have)  What is the opportunity cost (of a choice)? o Opportunity cost- the value of the next best option to be given up  Ex: What is cost to attend college?  Tuition, room and board, books, transportation  What is opportunity cost: rank priority first  1. Attending college, 2. Working, 3. Playing Tennis  Include the loss of money from choice #2 because you have to give it up in order to do #1  Is a rational choice for A also rational for B? o No? Not always. Depends on the situation  What are One Problem, Two Concepts, and Three Models? o Problem: Assumptions must be made o 2 Concepts: People are rational, Market is competetive o Models: Graph, diagram, equations  How do economists work? o Use economic models to analyze real-world topics in steps  1. Observations (See and address questions)  2. Theories (explain how and why)  3. More observations (test theories, ie double check)  What is economic model? o Examples: Map, street directory, o Model: simplified version of reality  Graph/diagram, equations  What is the difference between macro and micro economics? Which one does this course focus on? o Microeconomics  How individuals make choices  How they interact in markets  How the government can influence their choices  By using individual variables (price, quantity, ect.) o Macroeconomics  Studies the economy as a whole (the behavior of the 5 aggregate variables)  1. GDP- econ growth, business cycle;  2. CPI- inflation; (consumer Price Index)  3. U-rate- unemployment rate  4. I-rate- Interest rate  5. Ex-rate- exchange rate  What is the difference between positive and normative analysis? o Positive Statement- Whenever inflation goes up, the unemployment rate goes down (observation/fact) o Normative statement- I really hate inflation, since it makes me poorer in terms of purchasing power (opinion) o Positive analysis: the study of ‘What is?’ And ‘What if?’ o Normative analysis: study of ‘what ought to be?’ Chapter 2.  What is PPF? Does it represent the possible output combination an economy could normally produce or exhaustively? o Production Possibilities Frontier (PPF)  Shows the maximum attainable combinations of two products given  Resources available  Technology developed  On PPF: attainable and efficient  Below PPF: inefficient  Beyond PPF: unattainable  Slope of a PPF measures the opportunity cost  What does the slope of PPF measure? How is it linked to opportunity cost of good X?  Opportunity costs are often increasing  Some resources are better suited to one task than another  The first resources to ‘switch’ are the one best suited to switching  How does PPF show efficiency, trade-off, scarcity and economic growth? o The shapes of PPF  Bowed out- when resources are not equally productive  Straight- equal production of workers  Bowed in-when machinery is used. Same cost to produce w/out workers  Why do people/nations trade with each other? o In order to receive more goods at a lower cost than if to produce them themselves, as well as make a profit off of the goods produced  What is the source for gain from specialization and trade?  Absolute advantage- ability of an induvial, firm, country can produce the same amount of output with less inputs than others  Comparative advantage- Can produce same amount of output at a lower opportunity cost than others. (gives up less of another output)  The source from trade is specialization based on comparative advantage, not absolute advantage  Who should specialize in doing what based on what principle? o Based on comparative advantage  What is absolute advantage and comparative advantage?  Absolute advantage- ability of an induvial, firm, country can produce the same amount of output with less inputs than others  Comparative advantage- Can produce same amount of output at a lower opportunity cost than others. (gives up less of another output)  What is the price range for trade between two countries if you know their PPFs’ slopes? o Trade-off  How do people determine what to specialize? Compare one’s PPF with what? o Compare one’s PPF with another, as well as possible trade-offs  If international trade makes all countries better off, why do some groups object against it? o Some groups feel like they are more successful being self- sufficient and not needing to rely on others for goods  Who gain from international trade and who suffer from it? o Everyone gains from international trade in some way. Those that suffer are local or have fewer resources and are unable to compete with the global competitors.  What is circular flow diagram? How many groups of decision makers in it? How many markets? o Illustrates how market economy allocates resources (WWW)  Households and firms are decision makers  Product markets and Factor Markets  How does circular flow diagram describe the resource allocation in a market system?  Physical flow- movement of factors, goods, and services  Money flow- wage, rental, interest, goods and service cost, income  What is the most important (starting) point implicitly assume behind the circular flow diagram? o Households, the every-day people  Who are buyers/sellers in the market for goods and services? In the market of factors? o Buyers are the households in physical flow, and receivers of money flow. Chapter 3.  What is the difference between quantity demanded and demand? Quantity supplied and supply? o Quantity Demand is a shift along the curve itself, change in Demand is a shift of the curve itself  What are the law of demand, law of supply and law of demand and supply? o Law of demand- if the price goes up, demand goes down and vice versa o Law of Supply: Price up, quantity supply up  What change would cause quantity demanded to change? Demand to change? o D:  Ex: Income, taste, fashion, vacations (time of year) Normal Goods  Inferior Goods- goes down when income goes up. Ex: Second hand clothing, Ramen noodles, ect.  Substitutes: 2 related goods. Price in Big Macs go up, demand for Whoppers go up  Complements: Big Mac and Fries (Taken together)- Price goes up, whole demand for packages go down o QD: Price- Price goes up, demand goes down  Income- Normal goods- income up, demand up, inferior goods- income up, demand down  Related goods: Substitutes- Price up, demand for other one goes up, Complements: Price up, demand down  Tastes: Taste up, demand up  Population: Up, demand up  Expected future prices: Expected price up, current demand up  Normal good vs. inferior goods? Substitutes vs. complements? o Normal goods are things people prefer if they can afford them o Inferior goods are cheaper goods, such as second hand clothing, drive thru burgers, ect  What is the market equilibrium? Equilibrium price and quantity? Another term for equilibrium price? Where quantity demanded and quantity supplied are equal/balanced o Demand Price=Supply Price= Quantity o Surplus: When more is produced than demanded  Drives price down o Shortage: Price is lower than equilibrium  Drives prices up  Indicates that the current price is too low  When do we have surplus? Shortage? How would price adjust to equilibrium in each case? o Surplus: When more is produced than demanded  Drives price down o Shortage: Price is lower than equilibrium  Drives prices up  Indicates that the current price is too low  Why would price change? o Change in income, change in technology, change in supply vs demand, change in cost of labor/supplies, ect  What are the three steps in the curve shift analysis? o Draw initial demand and supply o Decide which way which curve shifts o Compare new equilibrium with old to see what happened


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