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Basic Economics Concepts Reading Guide – Chapters 1, 2, and 3 Chapter 1: The Nature and Method of Economics Objectives . . . 1. Define the science of economics. 2. Distinguish between opportunity cost, scarcity , and tradeoffs. 3. Distinguish between macroeconomics and microeconomics. Questions The Economic Perspective p. 3-4 1. What is the definition of economics? 2. Explain the role scarcity plays in opportunity cost. 3. Explain why rational self-interest is different for everyone. 4. What does the word marginal mean to economists? 5. What does marginal analysis compare? Economic Methodology p. 6-9 6. Why are economic theories, principles, and laws generalizations? 7. Explain the term ceteris paribus and how it relates to economics. Macroeconomics and Microeconomics p. 9-12 8. What is the difference between macro and micro economics? Chapter 2: The Economizing Problem Objectives. . . 1. Distinguish between opportunity cost, scarcity and tradeoffs. 2. Define comparative advantage and specialization and benefits of exchange. 3. Use a production possibilities curve to demonstrate opportunity cost and growth. 4. Construct and interpret a simple circular flow model with households and business and resource and product market Questions The Foundation of Economics p. 22-24 1. Explain the economizing problem. 2. List and explain the four categories of economic resources. Economics: Employment and Efficiency p. 24 3. Explain how economists use the term full employment. 4. Explain how economists use the term full production. Production Possibilities Table p. 25 5. What does the production possibilities model help us to understand? 6. What assumptions must we make when using the production possibilities model? Production Possibilities Curve p. 26-27 7. Draw and correctly label a production possibilities curve. 8. What do points on the curve represent? 9. What do points inside the curve represent? 10. What do points outside the curve represent? 11. Explain how the production possibilities curve illustrates opportunity cost. 12. Explain the law of increasing opportunity cost. 13. Why is the production possibilities curve bowed out? Unemployment, Growth, and the Future p. 29-31 14. What happens to the production possibilities curve when we drop the assumption that the quantity and quality of resources and technology are fixed? 15. Give an example of how resources might increase over time. 16. What happens to the production possibilities curve when resources increase? 17. What happens to the production possibilities curve when technology improves? A Narvaizville Capital Goods Capital Goods Floydlandia Consumer Goods A Consumer Goods 18. Refer to the figure above. (a similar diagram is on page 31). Explain why Narvaizville’s production possibilities curve has shifted so much farther to the right than Floydlandia’s The Circular Flow Model p. 34-35 19. What happens in the resource market of the circular flow model? 20. What happens in the product market of the circular flow model? Chapter 3: Individual Markets – Demand and Supply Objectives . . . 1. List the determinants of demand and supply. 2. Recognize which factors will cause demand curves or supply curves to shift. 3. Distinguish between changes in quantity demanded and the change in demand. 4. Distinguish between changes in quantity supplied and a change in supply. 5. Determine effects on pride and quantity when equilibrium changes. 6. Construct and interpret demand and supply graphs showing efficiency, inefficiency, attainable and unattainable combinations, growth, equilibrium, and shifts in the curves. Questions Markets p. 40 1. What is a market? Demand p. 41-46 2. What is the law of demand? 3. Explain the reasons for the inverse relationship between price and quantity demanded: Common sense Diminishing marginal utility Income effect Substitution effect 4. Draw a properly labeled demand curve. 5. Explain what causes a change in demand (the determinants of demand). Tastes Number of buyers Income Related goods – substitutes Related goods – complements Expectations 6. Draw a properly labeled demand curve that shows both an increase and a decrease in demand. 7. What causes a change in QUANTITY demanded and how is it represented graphically? Supply p. 46-49 8. What is the law of supply? 9. Draw a properly labeled supply curve. 10. Explain what causes a change in supply (the determinants of supply). Resource prices Technology Taxes and subsidies Prices of other goods Price expectations Number of sellers 11. Draw a properly labeled supply curve that shows both an increase and a decrease in demand. 12. What causes a change in QUNTITY supplied and how is it represented graphically? Supply and Demand: Market Equilibrium p. 49-53 13. Draw and label a graph that has both a supply and demand curve. Label where a shortage and a surplus would be on the graph. 14. When the economy is operating with a surplus . . . Demand is ___________________________supply. ( Eventually prices will _______________________. (rise, fall, stay the same) , , ) 15. When the economy is operating with a shortage . . . Demand is ___________________________ supply. ( Eventually prices will _____________________. (rise, fall, stay the same) , , ) 16. When the economy is operating at equilibrium . . . Demand is ___________________________ supply. ( Prices will _____________________. (rise, fall, stay the same) , , ) 17. Draw a properly labeled demand and supply curve that shows what happens to equilibrium price and quantity when there is an increase in demand. 18. Draw a properly labeled demand and supply curve that shows what happens to equilibrium price and quantity when there is an decrease in supply.