Economics Final Exam Review

Economics Final Exam Review

Review Chapter 1-6, 9, 10, 12,

1. What is the economic way of thinking?

The Economic way of thinking is understanding the problem of scarcity, realizing opportunity cost, and analyzing production possibilities. In essence, how do we best deal with the choices we’re faced with.

1. What is economics?

The study of how individuals and societies satisfy their unlimited wants with limited resources.

1. What is the difference between needs and wants? Explain how a need may also be a want?

Needs are things that are necessary for survival. Wants are desires that can be satisfied by consuming a good or service. Food is both a need and a want. You need food to survive. You can get by on Kraft macaroni and cheese, but you’d probably rather have Nino’s.

1. What is scarcity?

Scarcity is when there are not enough goods to satisfy human wants.

1. How does scarcity affect consumers? Producers? Governments?

Consumers: Scarcity affects consumers by limiting what they can buy. Producers: Scarcity affects producers by limiting what they can make. Governments: Scarcity affects governments because governments control both consumers and producers. And the government is also a consumer and producer itself.

1. What are the four factors of production?

Land (natural resources), labor (human effort), capital (resources used by people), entrepreneurship (the creativity, vision, and skills).

1. What is the difference between land and capital?

Land is all the resources used to produce a good or service. Capital is resources used by people to make a good or service. In other words, land is the raw material, and capital is the tools.

1. What is the difference between self-interest and selfishness?

Self interest is looking out for yourself, but selfishness is not caring about anyone else but you.

1. What is the difference between a trade-off and an opportunity cost?

Trade-offs are alternatives people give up when they make choices. Opportunity cost is the value of what you give up to get something you wanted.

1. Why are all choices economic choices?

People base their decisions on the best combinations of costs and benefits.

1. In what ways might the production possibilities curve be unrealistic?

Resources may not be fixed, resources may not be fully employed, more than 2 things can be produced at once, and technology is not fixed.

1. How does the PPC relate to scarcity?

We cannot make infinite amounts of everything. There is a balance. Making more of one thing means making less of another.

1. What does a point’s position in relation to the curve tell us about the level of production?

Whether production is efficient or underutilized.

1. Why is the PPC bow-shaped?

Because as production switches from one product to another, more resources are needed to increase the production of the second product. That’s why it isn’t a straight line.

1. What do guns vs. butter mean?

The more resources used for military reasons means the less that can be used for consumer goods.

1. What might cause the PPC to shift?

An increase or decrease in land labor or capital.

1. What does a point inside the PPC represent? On the PPC?

Underutilization is inside the curve. On the curve is efficiency.

1. What economic data does a PPC bring together?

It combines opportunity costs and scarcity which shows either efficiency or underutilization.

1. What is the difference between macroeconomics and microeconomics?

Macro is the study of the entire economy. Micro is the study of individuals and individual businesses.

1. What is the difference between positive and normative economics?

Positive economics is the way things are, as in facts and figures. Normative economics involve value judgments about the way things should be.

1. What is an economic system?

A way a society uses its resources to satisfy the people’s wants.

1. How does a traditional economy answer the three economic questions?

What is produced is what has always been produced. It is produced in traditional ways, and it is done for the good of the group.

1. How does a command economy answer the three economic questions?

Government makes decisions about what to produce through government-controlled means of production and it is done for the good of the group.

1. How does a market economy answer the three economic questions?

What will be produced is decided by consumers. Resources are allocated by individually owned enterprises. Products can be used for whoever can afford them.

1. What is the difference between communism and socialism?

Socialism is where the government owns some or all of the factors of production. Communism is the same thing, except there is no political freedom. In Russia, product demand you!

1. How can you explain the economic activity of Communist-controlled North Korea with a PPC?

A PPC means a balance between two options. Rather than choosing the good of the people, they chose to put their resources into the military.

1. Why are consumer goods often in a short supply in a command economy?

Prices are usually set below what they would be in a market economy, so demand far exceeds supply which is what leads to shortages.

1. What are the fundamentals of a market economy?

People’s economic activity is motivated by self interest, which leads to having private property rights, and having a market where prices can be determined and property can be exchanged.

1. What are the advantages and disadvantages of a market economy?

Advantages are freedom to make choices, and the ability to make profit. The disadvantages of a pure market economy are that there are no provisions for public goods, and that there is no security for people who can’t work due to age or illness.

1. What are the essential elements of a market economy?

The essential elements of a market economy are private property, limited government involvement, voluntary exchange of business, profit, competition, consumer sovereignty, and specialization.

1. Are there some goods and/or services that should be publicly owned? If so, which ones?

Some things that have been publicly owned in the past are telephone companies and other utilities like water and electric companies. This was done to keep prices down through increased regulation.

1. What is nationalization and privatization?

Nationalization is to change from private ownership to government or public ownership. Privatization is to change from public to private ownership.

1. What is capitalism?

An economic system based on private ownership of the factors of production.

1. What steps can a government take to support free enterprise?

The government can act as both a consumer and producer, participating in the free market, by buying and selling things.

1. What legal rights are built into the American free enterprise system?

Open opportunity – everyone participates in the market by free choice. Legal equality – everyone has the same rights under economic law. Free contract – people decide what legal agreements to enter into.

1. Draw the circular flow model and describe the role of government in the economy in the circular flow model?

1. Why is the US economy referred to as a modified free enterprise system?

The US Economy is based on the free enterprise model, however, the government regulates many aspects of the system.

1. What are some examples of market failures?

A market failure is when people who aren’t part of the market are affected by it. Examples are industrial pollution, second hand smoke, a neighbor hiring a rock band to play in their backyard.

1. What are some examples of public goods?

Highways, mass transit, water system, sewer system, health care, fire and police.

1. How is a transfer payment different from other kinds of payments?

A transfer payment is different because the person who gets the payment doesn’t provide anything back. Think of getting money for your birthday.

1. How does the government limit negative externalities and encourage positive externalities?

A negative externality can be limited by the government imposing taxes and fines on certain companies, such as ones that pollute. The government can encourage positive externalities by paying certain industries that serve the public interest. This is called a subsidy.

1. What are the roles of consumers and producers in allocating resources?

1. Why do price and demand have an inverse relationship?

As the price of a good or service increases, consumers usually buy less of it because they don’t want to pay the larger price.

1. What is the difference between a demand schedule and a market demand schedule?

A demand schedule is for an individual, and a market demand schedule is for all consumers.

1. How is a demand curve related to a demand schedule?

A demand curve graphically shows the data from a demand schedule.

1. How do points on a demand curve reflect change in quantity demanded?

A change in quantity demanded stays on the same curve, so the change in points show that a decrease in price will correspond with an increase in demand, meaning more people want to buy at lower prices.

1. What 6 factors can cause a change in demand?

Income, market size, consumer tastes, consumer expectations, substitute goods, and complementary goods.

1. How is consumer choice related to elasticity of demand?

The more choices you have for something, the more elastic your demand is. Demand for iPods went down when the Zune came out.

1. Why do substitutes affect both demand and elasticity of demand?

Substitutes affect demand because when demand for a product decreases, demand for the substitute increases. Substitutes affect elasticity because the more substitutes for something there are, the more elastic is for the product.

1. What are the factors that affect elasticity of demand and how does each affect elasticity?

Substitute goods (the more substitute goods, the more elastic demand can be), proportion of income (the bigger part of your income you spend, the more elastic your demand is because if price goes up you buy less,) necessities v. luxuries (needs are inelastic, luxuries are elastic).

1. Why do price and supply have a direct relationship?

Because supply is from the producer’s point of view. The higher the price, the more they will want to sell to make more money.

1. Why do producers and consumers have different attitudes toward price?

Producers want to sell at the highest possible price. Consumers want to buy at the lowest possible prices.

1. What do the points on the supply curve represent?

The points represent how much of a good or service a producer is willing to sell items at specific prices.

1. Does change in the number of workers affect fixed costs or variable costs?

Variable costs, because the number of workers can change depending on the situation.

1. How is change in quantity supplied related to the law of supply?

A change in quantity supplied shows that as the price of a good goes up, the supply should also increase.

1. How do points on a supply curve reflect change in quantity supplied?

A change on the supply curve reflects a change in quantity supplied by the direction the points move. If the point moves to the right, there is an increase in both price and quantity supplied. A movement to the left shows a decrease in both price and quantity supplied.

1. What causes a change in supply?

A change in supply is when something makes producers offer different amounts for sale. There are six things that cause a change in supply: input costs, labor productivity, technology, government actions, producer expectations, and the number of producers.

1. What else besides raw materials would be included in input costs?

Since input costs are the price of resources needed to produce something, other things that could be included are machinery, labor. Raw materials are the land, so anything that fits under labor and capital.

1. Why do excise taxes and subsidies affect supply differently?

An excise tax is a tax on a specific good or service, usually on alcohol or tobacco. The government wants people to consume less of these, so the taxes increase the producers’ costs and supply goes down. A subsidy is where the government helps cover the cost of making something and reduce the producers’ costs, so subsidies increase the supply.

1. How is elasticity related to the law of supply?

The law of supply states that as price increases, so will the supply of a good or service. So, if the price goes up, how quickly the producer responds to that is how elastic they are.

1. Why is supply more elastic over a year than over a month?

Supply is more elastic over a longer period of time because that gives the business more time to respond to changes in the marketplace such as changes in demand.

1. Why are service industries more likely to have elastic supply than manufacturing businesses?

Manufacturing businesses are less elastic because they take longer to respond to changes in the market. Car manufacturers are very large and use resources that are difficult to obtain. On the other hand, service industries use far fewer raw materials and are usually smaller in size, so they can respond much more quickly.

1. Draw market demand and supply curves. Label the equilibrium price, surplus, and shortage.

1. Why is it difficult for markets to maintain equilibrium?

There are always factors that cause supply and demand to change constantly. This results in disequilibrium, and a new equilibrium must then be established.

1. What happens to the equilibrium price as demand decreases or supply increases?

If demand decreases or supply increases, equilibrium price would fall.

1. What are the characteristics of the price system?

Neutral – prices do not favor the producer or the consumer. Market driven – forces of the free market determine prices, so it runs itself. Flexible – Prices can change quickly to respond to different market conditions. Efficient – Prices adjust so the maximum amount of goods and services are sold, which leads to an efficient use of resources.

1. Why is the price system an efficient way to allocate resources?

It is an efficient way to allocate resources because it uses competitive pricing, which is a balance between companies making the most profit and losing customers because prices are too high. The equilibrium means it is efficient.

1. What is the difference between a price ceiling and a price floor?

A price ceiling is the legal maximum price that sellers may charge for a product. An example is rent control laws. A price floor is a legal minimum price that buyers must pay for a product. An example is minimum wage. It is the minimum price companies pay for labor.

1. Draw the supply and demand graph for labor. Label the equilibrium wage, minimum wage, and shade in the section that would represent unemployment.

1. Of the four forces that influence wage rates, which one do workers have the most control over?

Those 4 factors are: human capital, working conditions, discrimination in the workplace, and government actions. Workers have the most control over human capital, which is the knowledge and skills people have that enable them to be productive. The company controls working conditions, the government controls their own actions, and discrimination is very difficult to change.

1. What is a glass ceiling?

An unseen barrier to advancement, usually faced by women and minorities who are denied advancement but who are still qualified.

1. What may account for some changes in the labor force?

The general trend in labor is a move away from manufacturing jobs and towards service-related jobs (also known as tertiary jobs). Other changes to the labor force are: the addition of many more women, the workforce has become better educated.

1. What possible relationship might there be between the growth in service sector jobs and the spread of technology?

As the number of service sector jobs in the economy grow, the spread of technology increases. As manufacturing jobs have declined and service jobs have risen, that is due largely to technology. The examples given in the book are gas stations and bank tellers. Jobs that used to be done by people, but are now largely automatic.

1. What effect do you think the creation of jobs in foreign nations through American outsourcing has had on the people of those foreign nations?

This is your opinion. On one hand, outsourcing gives people in those countries jobs they may not have had otherwise. On the other hand, those countries may not have minimum wage laws and the people may have been exploited.

1. What is the difference between outsourcing and insourcing?

Outsourcing is the practice of making goods or services in a foreign country usually to save on production costs. Insourcing is foreign companies bringing jobs to the US.

1. How did the government strengthen unions during the great depression?

Even though union membership declined because people lost their jobs, the government strengthened unions through new laws. The Norris-LaGuardia Act made it illegal to only hire non-union labor. The National Labor Relations Act gave workers the right to unionize and to strike. The Fair Labor Standards Act set a minimum wage and overtime rates and made most child labor illegal.

1. Which of the reasons for the decline in union membership offered here seem to be the most influential? Why?

The reasons given are: bad union reputations, changes in the labor force, and laws restricting union influence. The most influential reason is probably the changes in labor force, because in the last 30 years, manufacturing jobs have declined in this country.

1. What might economist Milton Friedman (see pg 76) think about labor unions? Why?

Friedman was big on freedom and the right to choose. He believed that the free-market and the “invisible hand” would take care of everything, and that regulations would only limit people’s right to chose.