A town wants to drain and fill the small polluted swamp shown below. The swamp averages 5 ft deep. About how many cubic yards of dirt will it take to fill the area after the swamp is drained?
EC 201 Bobby Puryear Exam 1 – Chapters 1, 2, 3 Chapter 1: Economics – foundations and models 1. What is scarcity and what is an example of it 2. Who are the three main players in economics What is their relationship with one another (diagram) 3. What are the three key economic ideas 4. What is another word for “marginal” analysis and what does the term mean 5. What is the one major economic problem every society has to solve a. What is the difference between trade-off and opportunity cost 6. What three questions are societies forced to answer when it comes to trade-offs 7. Compare and contrast centrally planned economies with market economies. Where does the America fall a. What is the kind of economy that America has called 8. Compare and contrast productive and allocative efficiency. 9. What are the steps to making an economic model 10. What does “assumption vs. predictive capabilities” mean in microeconomics 11. What is the difference between positive and normative analysis a. Match each of the following with either positive or normative analysis: i. The price of tuition is too high. ii. As tuition prices increase, less people will be able to pay to go to school. iii. As tuition prices increase, less students will leave school debt-free. iv. Tuition should be paid no matter what the price. v. Education has a direct correlation to a steady income in the future. vi. The government should pay for students’ college tuition. 12. How is economics a social science 13. What is the difference between microeconomics and macroeconomics 14. What are the three types of capital 15. What are 4 necessary items to understand microeconomics (Hint: the first one is an entrepreneur). 16. What kind of relationship is shown in a graph if as one item goes up, the other item goes down 17. What does the slope of the line indicate a. As the slope get steeper, what is happening to the value 18. How do you incorporate more than two variables at a time 19. How do you find a slope on a nonlinear curve Chapter 2: Trade-offs, Comparative Advantage and the Market System 1. What is opportunity cost 2. What does a production possibilities frontier show a. What is another name for a PPF 3. True or false a. Scarcity requires trade-offs. b. The more research devoted to an activity, the larger the payoff to devoting additional resources to that activity. c. When graphing a PPF, it matters which product you put on which axis. d. Large and small countries cannot both benefit from specialization. 4. What does it mean to be efficient in microeconomics 5. How is opportunity cost always expressed 6. Compare and contrast absolute and comparative advantage. 7. What is economic growth a. True or false Economic growth only happens when there is a positive change in any sort of the three types of capital or if there is a positive change in technology. 8. What is the difference between a product market and a factor market 9. What are four parts of a factor market 10. What is the circular-flow diagram a. What are the four players in the diagram b. What do the outer arrows represent 11. What is a free market Is there a true free market today 12. Who said, “Individuals usually act in a rational, self-interested way” In what book 13. What is the “invisible hand” 14. What are property rights a. What do patents and copyrights protect Chapter 3: Where prices come from – the interaction between demand and supply 1. What are the three components of a perfectly competitive market 2. What is the difference between a demand schedule and a demand curve a. How does quantity demand affect these 3. What is Law of Demand and what are two factors that explain the Law of Demand 4. What is the Latin phrase that means “all else equal” or when all other factors are held constant 5. What happens to the curve when the quantity demanded is changed (increase or decrease) 6. What are 5 variables that shift the market demand and give an example of each. a. Compare and contrast normal good and inferior good. b. Compare and contrast substitutes and complements. 7. True or false if the price goes down, there would be a rightward shift for demand. 8. What is the difference between supply schedule and supply curve a. How is this different from demand schedule and demand curve b. How does quantity supplied affect these curves 9. True or false In demand, as price goes up, then quantity demanded goes down. 10. What are 5 variables that effect the market supply 11. How will a decrease in income cause the curve to shift 12. True or false If there is a higher price in the market place, companies will want to supply more. 13. What are three things that cause the economy to get out of equilibrium 14. What is equilibrium and how can you find it 15. Why are both demand AND supply important 16. What is surplus What is shortage a. What are their effects on the market price 17. What is the effect of an increase in supply on equilibrium a. How can there be an increase 18. What is the effect of an increase in demand on equilibrium 19. How if the curve of demand and supply changed over time Answer Key: Chapter 1: Economics – foundations and models 1. Scarcity – a situation in which unlimited want exceeds the limited resources available to fulfill those wants. An example is a wallet of a college student. 2. The three main players are consumers, firms (producers) and the government. 3. People are rational, people respond to economic incentives, optimal decisions are made at the margin. 4. Another word to use for “marginal” is incremental. Marginal/incremental analysis refers to analysis that involves comparing marginal benefits and marginal costs. 5. A society has to decide between things (trade-offs) by analyzing the opportunity cost of the items involved. a. A trade-off is the idea that because of scarcity, producing more of one good or service means producing less of another good or service. This is different from opportunity cost which refers to the highest-valued alternative that must be given up in order to create something else. 6. What goods and services will be produced How will the goods and services be produced Who will receive the goods and services produced 7. A centrally planned economy is an economy in which the government decides how economic resources will be allocated. A market economy is an economy in which the decisions of households and firms interacting in markets allocate economic resources. America is a mixed economy. a. A mixed economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. 8. Production efficiency is when the goods/services are produced at the lowest cost. Allocative efficiency is referring to when the production is in accordance with consumer preferences. 9. Decide on the assumptions to use in developing the model, formulate a testable hypothesis, use economic data to test the hypothesis, revise the model if it fails to explain the economic data well, retain the revised model to help answer similar economic questions in the future. 10. Economic models make behavioral assumptions about the motives of consumers and firms. 11. Positive analysis is the analysis that is concerned with what is (if-then statements) and normative analysis is concerned with what ought to be (statements of opinion). a. Match each of the following with either positive or normative analysis: i. Normative analysis ii. Positive analysis iii. Positive analysis iv. Normative analysis v. Positive analysis vi. Normative analysis 12. Economics is a study of the actions of individuals; It considers human behavior, like decision- making. 13. Microeconomics is more concerned with how consumers make choices, how the interact with markets and how the government attempts to influence their choices. Macroeconomics is the study of the economy as a whole, including topics like inflation, unemployment rate and economic growth. 14. Physical (infrastructure, etc.), human (workers), and fiscal (monetary) 15. Entrepreneur, goods and services, consumers/households and capital. 16. Negative/inverse relationship 17. The slope shows the change in the y-axis in comparison to the change in the x-axis. a. The value is increasing. 18. Microeconomics wants to show the relationship between more than two variables. To show both on one curve, the curve is shifted to show multiple variables. 19. The slope is computed by the line tangent to the curve. Chapter 2: Trade-offs, Comparative Advantage and the Market System 1. The highest-valued alternative that must be given up to engage in an activity. 2. PPF is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. a. Production model 3. True or false a. True b. False c. False d. False 4. Being technically efficient in microeconomics means to use all the resources that are allocated. 5. Opportunity cost is expressed in terms of the other product. 6. Absolute advantage is the ability of an individual, firm or country to produce more goods/services than the competitors while using the same amount of resources. Comparative advantage is when a company produces a good/service at a lower opportunity cost than competitors. Comparative advantage is the basis for trade, not absolute advantage. 7. Economic growth is the ability of the economy to increase the production of goods and services. a. True 8. A product market is a market for goods or services and a factor market is a market for the factors of production. 9. Labor, capital, natural resources and an entrepreneur. 10. The diagram that shows how the major players are connected. The blue arrows show the flow of the factors of production. The red arrows show the flow of goods and services from firms to households. The green arrows show the flow of funds. a. Households, factor markets, product markets and firms. b. The outer arrows represent the flow of money. 11. A free market is a market with few government restrictions on how a good or service can be produced or sold on how a factor of production can be employed. They are “free” by the virtue of not being restricted by the government. 12. Adam Smith in An Inquiry into the Nature and Causes of the Wealth in Nations 13. Smith said that firms would be led by the “invisible hand” of the market to provide consumers with what they want. 14. The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. a. Intellectual property Chapter 3: Where prices come from – the interaction between demand and supply 1. A perfectly competitive market has many buyers and sellers, all the firms are selling identical products and there are no barriers to new firms entering the market. 2. A demand schedule is a table that shows the relationship between the price of a product and the quantity of the product demanded whereas the demand curve shows the relationship between the price of a product and the quantity of the product demanded. a. Quantity demanded shows the amount of a good or service that a consumer is willing and able to purchase at a given price. 3. The Law of Demand is the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. 4. Ceteris paribus 5. There is movement along the curve if the price increases or decreases. The curve doesn’t change. 6. Income since the more income means the more things that are bought. Prices of related goods matter since consumers might purchase elsewhere if the prices are better. Tastes of a particular product or service show what products are popular. Population and demographics help firms determine where their products/services would thrive. Expected future prices can help anticipate when consumers will purchase a good or service. a. Normal good is when a good that is in demand increases as income rises and decreases as income falls. Income good is a good for which demand increases as income falls and decreases as income rises. b. Substitutes are goods and services that are interchangeable since they are used for the same purpose. Complements are goods and services that are used together (iPods and iTunes). 7. False 8. A supply schedule is a table that shows the relationship between the price of a product and the quantity of the product supplied. A supply curve is a curve that shows the relationship between the price of a product and the quantity of the product supplied. a. The demand curve and schedule show how demand is being affected while these show how supply is being affected. b. Quantity supplied refers to the amount of a good or service that a firm is willing and able to supply at a given price. 9. True 10. Prices of inputs, technological change, prices of substitutes in production, number of firms in a market and expected future prices 11. It will cause a shift in the opposite direction. 12. True 13. When the market is competitive, the government gets involved or if there is a short run shock to the system 14. Equilibrium is where the demand curve crosses the supply curve. This determines market equilibrium. Only at this point is the product that the firm is willing to make is equal to the amount that the consumers are trying to buy. 15. The interaction of demand and supply determines the equilibrium price. Neither consumer nor firms can dictate what the equilibrium price will be. No firm can sell anything at any price unless it can find a willing buyer, and no consumer can buy anything at any price without finding a willing seller. 16. Surplus is a situation in which the quantity supplied is greater than the quantity demanded. Shortage is a situation in which the quantity demanded is greater than the quantity supplied. a. When the market place is above the equilibrium, there will be a surplus. When the market price is below the equilibrium, there will be a shortage. 17. If a firm enters a market, the equilibrium price will fall, and the equilibrium quantity will rise. a. Number of firms increased, positive increase in technology, prices of inputs decreased, prices in a substitute in production 18. Increases in income, assuming they are a normal good, will cause the equilibrium price and quantity to rise. 19. Whether the price of a product rises or falls over time depends on whether demand shifts to the right more than supply.