Download Economics Review, pt. 1

Economics Review, pt. 1
Fall 2008
Economics Review, pt. 1
• What is the basic economic
problem?
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Scarcity
• List the four factors of production:
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Land
Labor
Capital
Entrepreneurship
Economics Review, pt. 1
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What are the three basic economic
questions?
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What to produce?
How to produce?
For whom to produce?
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Self-sufficiency means that nothing is needed
from outside the system in order to maintain the
system
Interdependence is when two independent
systems cooperate to achieve common goals
to a greater result than if each system were to
work on its own
What is the difference between selfsufficiency and interdependence?
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Economics Review, pt. 1
• What are the three characteristics of
money?
– Portable
– Durable
– Unique
And
– Medium of exchange
– Unit of account
– Store of value
Economics Review, pt. 1
• What is the difference between
demand and quantity demanded?
– Demand is the amount of a good or
service that consumers are willing and
able to purchase at various prices
• ∆D = movement of the demand curve
– Quantity demanded is the amount of a
good or service that consumers are willing
and able to purchase at a specific price
• ∆QD = movement along the demand curve
Economics Review, pt. 1
• List the five determinants of demand:
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Consumer tastes and preferences
Market size
Income
Substitute goods
Complementary goods
Economics Review, pt. 1
• Explain the difference between
substitute goods and complementary
goods, and give two examples of
each.
– Substitute goods – comparable goods or
services (HyTop and Kraft, Coca-Cola and
Big K Cola)
– Complementary goods – related goods or
services (peanut butter and jelly, Xbox 360
and Xbox 360 games)
Economics Review, pt. 1
• What is the difference between supply
and quantity supplied?
– Supply is the amount of a good or service
that producers are willing and able to
provide at various prices
• ∆S = movement of the supply curve
– Quantity supplied is the amount of a
good or service that producers are willing
and able to provide at a specific price
• ∆QS = movement along the supply curve
Economics Review, pt. 1
• List the six determinants of supply:
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Change in resource prices
Technology
Profit motives
Producers’ expectations
Price hikes (temporary effect)
Sales & discounts (temporary effect)
Economics Review, pt. 1
• Who was Adam Smith?
– Wrote Wealth of Nations, 1776
– Market operates on individual supply & demand
decisions
• Producers will meet consumer demand at a profitable
price
• Consumers will purchase valuable goods & services at
a competitive price
• Producers make profit, consumers get cheaper and
better goods – everyone is reasonably happy (and thus,
society as a whole benefits)
– Laissez Faire: roughly “let it be”—govt. disrupts
the market; Smith says the govt. should
participate only to keep market fair
Economics Review, pt. 1
• What is the “invisible hand”?
– Adam Smith’s shorthand for the ability of
the free market to allocate factors of
production, goods and services to their
most valuable use
Economics Review, pt. 1
• Why is self-interest important in a
market economy? What does it have
to do with the “invisible hand”?
– If everybody acts from self-interest,
spurred on by the profit motive, then the
economy will work more efficiently, and
more productively, than it would do were
economic activity directed instead by
some sort of central planner
– The “invisible hand” is this self-interest and
leads to the common good
Economics Review, pt. 1
• Give examples, at least two, of positive
and negative externalities:
– Positive: a restaurant near a factory
making money because of the workers’
going to lunch; a hotel near a convention
center getting customers
– Negative: pollution; inability to drive down
a public road because of sports event
Economics Review, pt. 1
• Give two examples of public goods:
(good or service consumed by all members
of a particular group)
– National defense
– Law enforcement
• What is so special about market
equilibrium?
– It is the ultimate goal of both producers
and consumers since both are equally
satisfied with the price
Economics Review, pt. 1
• How do you solve the problem of a
shortage?
– Raise price and increase production
• How do you solve the problem of a
surplus?
– Lower price and decrease production
Economics Review, pt. 1
• What are the three negative
consequences of rationing?
– It is unfair
– It is expensive
– It creates black markets