The American Economy

Economics 100

Study Guide I

Economics: A logical framework for organizing your thoughts and understanding economics.  We start with basic building blocks and gradually add complexity.  This first exam will concentrate on the initial block presented in Chapter 1, the first application: the PPF from Chapter2, and Supply and Demand from Chapter 3, NO CRITICAL THINKING!

How is my test set-up?

I will have 2,3,or 4 "essay" questions.  An "essay" question can be a normal essay, it could be a math-type problem (we do not have any like that in this section), or it could be a graphing type problem.  For example, I might as you to explain how economists make decisions, or explain opportunity cost and growth in a production possibilities curve, or I could ask some supply and demand examples like in the homework.  They are not giant questions, but they are larger than just a multiple-choice question.

The essays, however, cover too little information that I need to use multiple-choice to get all of the smaller point.  I may have between 15 and 25 multiple-choice type question.

 

scarcity & choice and  model building

A quick review:

Scarcity and Choice

v People Face Tradeoffs

Ø There is no such thing as a free lunch!

Ø Every choice has a tradeoff. These can range from the government tradeoff between national defense and consumer goods to your tradeoff between sleeping and attending class.

Ø Frequently we encounter a tradeoff between efficiency and equity (This is from Chapter 2, but I thought I would throw it in early.)

v The Cost of Something is What You Give Up to Get IT

Ø Making good decisions means knowing the full costs, including the opportunity costs, of making one choice over another.

Ø What is an opportunity cost? Can you cite examples in your life?

v Rational People Think at the Margin

Ø How does a small incremental adjustment or a marginal change affect your existing plan? (Another Chapter 2 point, but it seemed to flow from my previous point)

Ø Why should we ignore the costs or benefits that occurred in the past?

v People Respond to Incentives

Ø When marginal benefits or marginal costs change your incentives will change.

Ø Provide some examples where your incentives have changed

v 

Do you know the economic jargon?

Economics, Scarcity, Efficiency, Equity, Opportunity Cost, Marginal Changes, Market Economy, Factors of Production, Land, Labor, Capital, Entrepreneurship. 

 

Model Building

Economists behave like scientists. We hypothesize, collect data, and analyze the data to see if our theories are supported or not.

 

Remember that economics involves both positive questions and normative questions. Positive questions are great test questions. Normative questions are opinions and, therefore, are subjective and usually are poor test questions, but you may still see one on the test.

 

Chapter 2: The Gains From Trade and the PPC

What is the difference between a straight line PPC and a bowed-out PPC?

What is the Law of increasing Opportunity Cost and how does that relate to the previous question?

What are the sources of growth?

When are we efficient?

Is the US economy efficient?  Why?  Provide examples?

How does your previous answer relate to equity?

 

Chapter 3

Market Transactions: Demand and Supply Analysis

Even though the book does not emphasize this, we are creating a model and all models start with assumptions.

 

Assumptions:

All goods are the same also know as homogeneous.

There are many buyers and many sellers and none can influence the market price.

Everyone is a price taker

 

Some review questions:

v What is demand?

v What is the relationship between price and quantity and how is this related to the Law of Demand?

v What factors change demand? (Remember there is a difference between a change in demand and a movement along the demand curve.)

Ø Income

§ What is a normal good? Examples?

§ What is an inferior good? Examples?

Ø Price of Related Goods

§ What is a complement? Examples?

§ What is a substitute? Examples?

Ø Tastes

Ø Expectations

Ø Number of Buyers

 

What is the difference between an individual's demand curve and the market demand curve?

How do we calculate the market demand curve?

What factors shift the market curve?

Are the factors the same as the factors of an individual's demand curve?

 

Now that we have supply and Demand, can you apply the model to real situations?

The easy questions will examine a situation where one curve moves. Does that mean you need to memorize all of the factors?  No!  I will not ask you to list them.  However, if I state that one of the factors has changed, you should know whether the supply or demand has changed and in which direction.

We will work on Chpt 6--price floors and price ceiling on Monday.