ECONOMICSSTUDY GUIDEFINAL EXAM

The final exam is a cumulative exam covering all the material we have learned since the beginning of the semester. In addition to reviewing your notes, I would recommend emphasizing:

  • Reviewing the vocabulary from each chapter
  • Seven Economic Principles (Chapter 1, summary on p. 11)
  • The Factors of Production (Chapter 2: land, labor, capital, and entrepreneurship)
  • How to determine opportunity cost on a production possibilities frontier (Chapter 2)
  • Bead-making activity for economic systems (Chapter 3: Traditional, Command, and Market Economies)
  • How to calculate absolute and comparative advantage (Chapter 4)
  • The Law of Supply, Law of Demand, and Supply & Demand Shifters (Chapter 5)
  • The different Market Structures (use note sheet and Chapter 7)
  • The different Business Organizations (Chapter 9)
  1. What is “scarcity?”

The condition that results because people have limited resources but unlimited wants; a long-term issue involving limited supply of a good/service that is desirable, limited in quantity, and has multiple uses.

  1. What is “shortage?”

A lack of something that is desired; when there is less of a good/service available than people want at a current price; a short-term problem when demand exceeds supply.

  1. What is the difference between scarcity and shortage?

Shortage is a short-term, solvable problem when demand temporarily exceeds supply. Scarcity is a long-term, unsolvable problem of permanently limited resources.

  1. Why are tradeoffs necessary/unavoidable?

Resources are scarce, therefore not all wants can be satisfied.

  1. What are the 4 factors of production?

Land, Labor, Capital, and Entrepreneurship

  1. What is “utility?”

The degree of satisfaction or usefulness that you receive from a particular product or service

  1. What does “diminishing marginal utility” mean? Can you think of an example?

Getting less satisfaction/usefulness out of “one more” of a service or product.

(Use the graph on the right for #’s 8-11)

  1. Which variable is on the x-axis? Which variable is on the y-axis?

X- axis: Tractors, Y-axis: Bread

  1. Define “opportunity cost.” Rephrase it in your own words.

What you give up to get more of something else.

  1. What is the opportunity cost of moving from A to B on the graph?

2 Bread

  1. What does “X” represent on the graph? What does “Z” represent?

X represents an inefficient point, Z represents an impossible point

  1. If the country is producing 3,000 bicycles, what is the maximum number of shoes it could produce with current resources?

40,000 shoes

  1. Estimate the opportunity cost of increasing shoe production from Point A by 10,000 pairs. Estimate the opportunity cost of increasing shoe production from point B by 10,000 pairs.

Opportunity cost from Point A by 10,000 pairs is about 250 bicycles.

Opportunity cost from Point B by 10,000 paits is about 2,000 bicycles.

  1. Suppose the country is producing 2,000 bicycles and 30,000 pairs of shoes. Mark that point on the graph and label it C. Is the country reaching maximum efficiency at this point?

The country is producing at an inefficient level at Point C.

  1. What are the primary goals of a “traditional economy?” What is less important in a traditional economy?

Primary: Stability and SecurityLess: Freedom

  1. What are the primary goals of a “command economy?” What is less important in a command economy?

Primary: Equity and SecurityLess: Freedom

  1. What are the primary goals of a “market economy?” What is less important in a market economy?

Primary: Freedom and EfficiencyLess: Equity

  1. What did Adam Smith mean by “the invisible hand?”

Buyers and sellers can successfully satisfy their wants in a free market without intervention by a 3rd party

Markets coordinate trade

  1. What is specialization? What are the benefits of specialization? What is its impact on trade?

Become an expert (or more efficient) in one particular field or area. Benefits included improved efficiency, decreased cost, improved quality of output. Allows for areas to specialize on a particular product, maximize their output, and then trade with others that are doing the same thing with other products.

  1. How does specialization lead to economic interdependence? Come up with your own example.

Specialization means that you only produce one good or service, so you are unable to do all the other things that are necessary for survival. This means that you must trade in order to get what you need if you are specializing.

  1. How does voluntary exchange relate to “coincidence of wants”?

A coincidence of wants is often found in barter economies where specific products are traded. In a market economy, voluntary exchanges involve the use of money to allow both sides to get what they want.

  1. What is a “barter system”?

Specific products are traded for other specific products (no money is used in the exchange).

  1. Define absolute advantage. What gives you an absolute advantage over someone else?

When someone can produce more of a good or service using fewer resources or in less time.When you can produce more than someone than else with all other things remaining equal.

  1. Define comparative advantage. What gives you a comparative advantage over someone else?

When you can produce something at a lower opportunity cost than someone else. When you can produce something more cheaply per item, even if the other person can produce more.

  1. How does trade increase the value of a good? Give an example.

Trade increases the value of a good because it gets products to those who want them most. Value is determined by each individual, so when a good is in the hands of the individual who wants it most its value has increased.

  1. In the following scenario…

Tables / Chairs / Opportunity Cost to produce 1 Table / Opportunity Cost to produce 1 Chair
Roger / 20 / 40 / 2 chairs / ½ tables
Simon / 25 / 75 / 3 chairs / 1/3 tables
  1. Who has the absolute advantage? Simon
  2. Who has the comparative advantage in making Tables? Roger
  3. Who has the comparative advantage in making Chairs?Simon
  1. What is GDP? What is the equation for GDP?

GDP measures the total output of a nation. The equation for GDP is C+I+G+NX

  1. What is the Law of Demand? What is the slope of the demand curve?

The inverse relationship between price and quantity demanded. As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up. Negative slope.

  1. What is the Law of Supply? What is the slope of the supply curve?

The direct relationship between price and quantity supplied. As price goes up, quantity supplied goes up. As price goes down, quantity supplied goes down. Positive slope

  1. What is a Complementary Good?

A product that is used or consumed jointly with another product. (ex.: cheeseburgers and buns, tennis rackets and tennis balls)

  1. What is a Substitute Good?

A product that may be used in place of another product. (ex.: Toms and Bobs shoes, iPod and Zune)

  1. List the Demand Shifters: (have these memorized for the test!)
  • Tastes and preferences
  • Related goods
  • Income
  • Buyers (# of)
  • Expectations of consumers
  1. List the Supply Shifters: (have these memorized for the test!)
  2. Resources
  3. Opportunity cost of alternative production
  4. Technology
  5. Taxes and subsidies
  6. Expectations of future profits
  7. Number of sellers
  8. What is Equilibrium and how do you find it?

Equilibrium is the point at which the quantity of a product demanded by consumers in a market equals the quantity supplied by producers. You find it by locating where the supply and demand curves intersect.

  1. What is a shortage and what causes you to have one?

A shortage is when the quantity demanded is higher than the quantity supplied. This occurs when the price is set too low, such as with a price ceiling.

  1. What is a surplus and what causes you to have one?

A surplus is when the quantity supplied is higher than the quantity demanded. This occurs when the price is set too high, such as with a price floor.

  1. Give an example of a positive externality and one example of a negative externality.

When I get a flu shot I provide a positive externality to people I encounter who won’t be exposed to me with the flu. Pollution from a factory is a negative externality to neighbors of the factory.

  1. What is a public good?

A public good is a good or service that is not provided by the market system because of the difficulty of getting people who use them to pay for their use.

  1. Characteristics of a sole proprietorship? (explain what each characteristic means)

Easily started, unlimited liability to the entrepreneur, easy to shut down, profits are “pure” personal income

  1. Characteristics of a partnership? (explain what each characteristic means)

Fairly easily started, fairly easily managed, each partner has limited liability

  1. What are some of the characteristics of a corporation? (explain what each characteristic means)

Attracts talent, no liability to the officers, stock shares must be specified

  1. Foundations and land trusts are examples of__nonprofit organizations