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Economics EOTC
Review- Part 1
What are the three basic questions
faced by people who produce
products?
 What
 How
 For
to produce?
to produce?
whom to produce?
What is the basic fundamental
economic problem facing society?
 Scarcity
What is a traditional economy?
 Allocation
of scarce resources, and nearly all other
economic activity, stems from ritual, habit, or custom.
What are the four factors of
production?
 Land
 Labor
 Capital
 Entrepreneurs
What is a command economy?

One in which a central authority makes the most of the WHAT, HOW,
and FOR WHOM decisions.
What is a market economy?

People and firms act in their own best interests to answer the WHAT,
HOW, and FOR WHOM questions.
What is the major strength of the
traditional economy?
 Everyone
knows what role to play
What is an advantage of a
command economy?
 Can
change direction drastically in a
relatively short time
What is an advantage of a market
economy?
 Adjusts
to change overtime
Name two countries that have a
command economy.
 North
 Cuba
Korea
What is economics the study of?
 How
people try to satisfy what appears to be
unlimited and competing wants through
scarce resources
What is the difference between a
good and a service?
 Good-
physical object
 Service-action
performed
What is the difference between
human and physical capital
 Human
Capital- sum of people’s skills,
abilities, health, and motivation
 Physical
Capital- tools, equipment,
machinery, and factories
What is the disadvantage of a
market economy?
 Does
not provide basic needs for everyone in
society
What is a disadvantage of a
command economy?
 Not
designed to meet wants of consumers
What type of economy does the
United States actually have?
 Market
economy/ mixed economy/ free
enterprise economy
What is the most desirable
alternative given up as a result of a
decision?
 Opportunity
cost
What does capitalism thrive on?
 Economic
freedom, voluntary exchange,
private property rights, profit motive, and
competition
What is an entrepreneur?
 Person
who does something new with existing
resources
What are trade-offs?
 All
possible alternatives
How is land paid for?
 Rent
How is labor paid for?
 Wages
How is capital paid for?
 Interest
How are entrepreneurs paid?
 Profit
What are some ways to increase
productivity?
 Division
of labor
 Specialization
What is the difference between
macroeconomics and
microeconomics?
 Microeconomics-households
 Macroeconomics-
nation
What is profit motive?
 Driving
force that encourages people to
improve their material well-being (capitalism
and free enterprise)
How does the income effect
change the demand of a product?
 When
the price drops consumers pay less for
a product
 As
a result, consumers have extra income to
spend
How does the productivity affect
the supply of a product?

When workers more efficiently, productivity increases
and shifts the supply curve to the right.

If worker productivity decreases, the supply curve shifts
to the left because fewer goods are brought to the
market at every single price.
 Worker
productivity increases= supply of a product
increases
 Worker
productivity decreases= supply of a product
decreases
What are the three stages of
production?
 Increasing
return
 Diminishing
 Negative
return
return
What does surplus do to the price
of a product?
 Price
tends to go down
What does a shortage do to the
price of a product?
 Both
up
price and the quantity supplied will go
What is minimum wage an
example of?
 Price
floor
List the 5 conditions for pure
competition.

All firms sell an identical product.

All firms are price takers.

All firms have a relatively small market share.

Buyers have complete information about the products
being sold and the prices charged by each firm.

The industry is characterized by freedom of entry and
exit.
What is a natural monopoly?

A monopoly in an industry in which is most efficient for
production to be permanently concentrated in a
single firm rather than contested competitively.

Examples: John D. Rockefeller bought all oil refineries
and companies until he owned them all.

Costs of production are minimized by having a single
firm produce a product.
What are some dangers of
monopolies?
 Price
fixing
 Inelastic
 Supply
 No
demand
of inferior products
incentive to innovate
 Can
create inflation
How does technology affect the
price of a product?
 New
technology shifts the supply curve to the
right, which causes price to go down.
How does the consumer taste
affect the demand of a product?
 If
consumers want more of an item, they
would buy more of it at each and every
price. The demand curve would shift to the
right.
 If
consumers get tired of a product the will
buy less. The demand curve would shift to the
left.
What happens when price ceilings
are placed on apartments?
 Price
ceilings occur when government puts a
legal limit on how the price of a product can
be, so they can use rent controls to make
housing more affordable.
Give an example of an elastic
product. What happens to demand
when the price of an elastic
product goes up?
 Example:
gas or fuel
 Demand
goes down
Give an example of an inelastic
product. What happens to demand
when the price of an inelastic product
changes?

Example: table salt

When the price of an inelastic product changes, there
is a relatively small change in the quantity demanded.
What do taxes do to the supply of a
product? Subsidies?
 When
taxes on production go down, supply
of a product goes up.
 When
taxes on production go up, supply of a
product goes down.
 Subsidies
lower the cost of production,
causing the supply of a product to go up.
What is a geographic monopoly?
A
monopoly based on an absence of other
sellers in a certain geographical area
Give an example of public goods.
 Uncrowded
 National
 Fire
highways
defense
and police protection
 Flood
control procedures
What does the cost of inputs do for
the supply of a product?
 As
the cost of inputs decrease, the supply of
a product increases.
 As
the cost of inputs increase, the supply of a
product decreases.
Why does production go down in
the Third Stage?
 Production
can go down in the Third Stage
because of firms hiring too many workers. The
workers get in each other’s way and cause
production to go down.
What is a technological monopoly?
A
monopoly based on ownership or control
of manufacturing methods,
What is the equilibrium price?
 The
price when the quantity supplied is equal
to the quantity demanded.
 The
equilibrium price is the price that clears
the market.
What does the number of sellers do
for the supply of a product?
 If
the number of sellers increases, the supply
of a product will increase.
 If
the number of sellers decreases, the supply
of a product will decrease.
What do government regulations
for supply of a product?

When the government establishes new regulations,
the cost of production of a product can change,
causing a change in the supply of the product.

If the government regulations are increase or become
tighter, the supply of a product can be restricted. This
causes the supply curve to shift to the left.

Relaxed regulations allow for lower production costs,
increasing supply. This shifts the supply curve to the
right.
What does the substitution effect
have on the demand of a product?

If adequate substitutes are available, consumers can switch back
and forth between a product and its substitute to take advantage
of the best price.

If the price of beef and butter goes up, buyers can switch to
margarine and chicken.

With enough substitutes, even small changes in the price of a
product will cause people to switch to, making the demand for the
product elastic.

The fewer substitutes available for a produce the more inelastic the
demand.
What is the law of supply?
 Principle
that suppliers will normally offer
more for sell at higher prices and less for sell
at lower prices
What is a government monopoly?
A
monopoly that is owned and operated by
the government
What are some oligopoly
characteristics?
 The
distinctive feature of an oligopoly is
interdependence.
 Oligopolies
are typically composed of a few
large firms. Each firm is so large that its
actions affect market conditions. Therefore
the competing firms will be aware of a firm's
market actions and will respond
appropriately.
In a circular flow, what goes into
the factor market?
 Land
 Labor
 Capital
 Entrepreneurs
In a circular flow, what goes into
the product market?
 Goods
 Services
How does government money get
into the circular flow?
 Taxes
What is a rational economic
decision?
A
logical, multi-step model for choosing
between alternatives that follows an orderly
path from problem identification through
solution.
What are some ways to cause the
production curve to shift outward?
Inward?

Shifts in the production possibilities curve are caused by changes in
these things:

Advances in technology

Changes in resources

More education or training (that's what we call human capital)

Changes in the labor force

To shift outward: More resources and technology

To shift inward: reduction in labor force
Define laissez-faire.
A
philosophy that the government should not
interfere with business activities
Define deregulation. What
industries have been deregulated
recently?
 Deregulation
is the relaxation or removal of
government regulations on business activities.
 Savings
and Loans Institutions and savings
banks were recently deregulated.
List the 3 roles of money.
 Medium
 Store
of exchange
of value
 Common
standard for measuring relative
worth of goods and service.
What is another term for a market
clearing price?
 Equilibrium
price
What is the major difference
between perfect composition and
monopolistic competition?

A monopolistic market and a perfectly competitive
market are two market structures that have several key
distinctions, such as market share, price control and
barriers to entry. In a monopoly, there is only one firm
that dictates the price and supply levels of goods and
services and has total market control.

Contrary to a monopolistic market, a perfectly
competitive market is comprised of many firms, where
no one firm has market control.
On a production possibilities curve,
what would show inefficient use of
resources?
 Any
point inside the PPF line