Download EOCT Unit 1 Study Guide

EOCT Study Guide
Adapted from GA Dept. of Education Economics EOCT Study Guide
Unit 1: Fundamental Economic Concepts
Topic 1: Scarcity & Opportunity Cost (SSEF 1)
- All resources are scarce- Scarcity is the result of unlimited needs/wants combined with limited resources
- Because of scarcity, resources must be allocated-distributed according to a plan
- Economics- the study of the allocation of scarce resources
- Resources (aka: Productive Resources, Inputs, Factors of Production)
o Four Types (Remember CELL)
- Capital- resources made by man that are used to produce goods/services
o Ex: Oven used at bakery or Tractor used by farmer
- Entrepreneurship- the person who combines the other resources to create a product
o Ex: Sam Walton (Wal-Mart) or Bill Gates (Microsoft)
- Land (aka: Natural) - resources created by nature
o Ex: Oil, Coal, Trees, Potatoes
- Labor (aka: Human) - work done by people
o Ex: Truck Driver, Teacher, Carpenter
- Allocation decisions result in tradeoffs and opportunity costs
- Tradeoffs- all of the options not chosen when an allocation decision is made
- Opportunity Cost- the value of the best alternative that could have been chosen but was not
Topic 2: Marginal Cost-Benefit Analysis (SSEF 2)
- Marginal Cost- the cost of producing one additional item
o Decreases at first then increases because some costs of production can be shared
- Marginal Benefit (Revenue)- the benefit from producing one additional item
o Decreases over time because the more of a product there is in the market, the lower the price
- Marginal Cost-Benefit Analysis- the comparison of marginal cost-benefit in order to make economic
decisions
Remember the Apple Tree Story
1st apple: high benefit, low cost= eat the apple (benefit higher than cost)
2nd apple: lower benefit, higher cost= eat the apple (benefit still higher than cost)
3rd apple: even lower benefit, even higher cost= eat the apple (benefit/cost almost the same)
4th apple: very low benefit, very high cost= don’t eat the apple (benefit lower than cost)
- If all the apples were at the same height, you might eat 5 or more and still have a higher benefit than cost.
o But marginal cost & benefit do not remain the same
o Marginal cost increases over time & marginal benefit decreases over time (like the apples)
Marginal Cost Benefit Graphs:
- This graph shows the relationship of marginal benefit (decreases with each unit produced) to marginal cost
(decreases at first then increases)
- Y Axis= Price (if looking at MB) or Cost (if looking at MC)
- X Axis= # of Products
- Where MB & MC meet (intersection) production should stop
o In this graph, the farmer should not make Y2 amount
of wheat (or anything higher), but should make
any lesser amount because benefit is higher than cost
o At Y1 the price is P1 (high) and cost is P2 (low)
o At Y2 the price is P3 and the cost is P3 (equal)
o Any amount higher than Y2, Cost is higher than benefit
Topic 3: Benefits of Specialization (SSEF 3)
- Specialization- focusing on the production of one product
- Individuals specialize, businesses specialize, nations specialize, even machinery can be specialized
- Benefits of specialization: (Why specialize?)
o Increase in overall productivity
- When each individual specializes, they gain knowledge/skills in that area that make them
more productive
o Efficient use of resources
- Specialization allows people to use their knowledge/skills to maximum potential instead of
wasting time/resources on less efficient tasks
- What to specialize in: (2 important terms)
o Absolute advantage- able to produce more total number of a product than another person
o Comparative advantage- able to produce a product at a lower opportunity cost than another person
o Look at the table below: (Non-specialized production)
Person
Sara
Melissa
Total
-
Valentines
15
10
25
-
Total
45
15
75
Sara has an absolute advantage in the production of Eggs & Valentines b/c she can produce
more total # of each than Melissa
Sara has a comparative advantage in the production of Eggs
 The opportunity cost of producing each Egg is only ½ of a Valentine
 The opportunity cost of producing each Valentine is 2 Eggs
Melissa has a comparative advantage in the production of Valentines
 The opportunity cost of producing each Valentine is ½ of an Egg
 The opportunity cost of producing each Egg is 2 Valentines
o Look at the table below: (Specialized production)
Person
Valentines
Sara
0
Melissa
20
Total
20
-
Easter Eggs
30
5
35
Easter Eggs
60
0
60
Total
60
20
80
A person should always specialize in the product in which they have a comparative
advantage and trade for the rest b/c it will be the most efficient use of resources & will boost
overall production
Even if they have an absolute advantage in both!!!
 Sara benefits because she makes more total products when she specializes Eggs
 Melissa benefits because she makes more total products when she specializes in
Valentines
 Overall production also increases from 75 to 80 with specialization
Topic 4: Types of Economic Systems (SSEF 4)
-
-
Economic System- the method by which a nation answers the 3 basic economic questions of: what to
produce, how to produce, and for whom to produce
4 Main types of economic systems:
o Market (aka: Free Market or Capitalism)
 Private individuals and firms (businesses) own the resources and the price & quantity of all
goods are determined by the interaction of supply & demand without government
intervention
 “Invisible Hand” (market forces) naturally leads to efficient results which corrects any
market failures- see topic 5 Government Regulation
 Consumers have a high degree of consumer sovereignty (economic freedom), producers are
motivated to produce by the ability to make a profit (profit motive), competition provides the
regulating force in a market economy, government regulation is non-existent
 Ex: USA, France, Japan, United Kingdom
 Benefits: Freedom, Efficiency, Growth, Stability,
 Problems: Equity (Equality), Security
o Command (aka: Centrally Planned Economy) Ex: (Communism/Socialism)
 Government owns the resources and the price & quantity of goods are determined by
centralized planning committees
 Consumers have a low degree of consumer sovereignty, producers are not motivated to
produce by profit potential (low profit motive), and the regulating force in a command
economy is government regulation, not competition
 Ex: Former USSR, China, Cuba
 Benefits: Equity (in theory) Security
 Problems: Freedom, Efficiency, Growth, Stability
o Mixed
 All economies are mixed!!!
 Some combination of the above three types
The type of economic system an economy uses is based on cultural and political choices and can change
over time
Topic 5: Government Regulations (SSEF 5)
- The US has a mixed economy b/c the government gets involved in the economy in the following ways:
- Regulatory Agencies- organizations within the government which regulate different areas of the economy
o Goals: each agency has a different set of specific goals, but the overall goals of regulatory agencies
are to provide for the health and safety of its citizens and businesses
- Examples:
o FDA: Food and Drug Administration- inspects the safety and quality of food & drugs
o CPSC: Consumer Product Safety Commission- tests products for potential problems & issues
recalls on unsafe products
- Market Failures- economic issues that are not resolved by the free market system
o Examples: Negative Externalities (negative impacts of production to people other than the
producers)
 The government must get involved to prevent this from happening (EPA: pollution)
- Public Goods- the government provides the products that are used by the public (bridges, roads, schools)
that individuals cannot afford
- Redistributes Income- market systems lead to inequality- the government tries to correct the extremes
through taxes & assistance programs
- Protects Property Rights- individuals & businesses own the productive resources, which must sometimes be
protected by the government.
Topic 6: Investment & Economic Growth (SSEF 6)
-
-
-
Production Possibilities Curves- graphs that show all the possible combinations of the production of two
different goods
This graph shows all the possible combinations of the production of two different types of goods
(watermelons & shoes)
The curved line (frontier) on the graph represents an efficient use of resources.
B
E
S
Any point on the line (B, C, D) = efficiency
C
H
Any point inside the line (A) = underutilization of resources (inefficiency)
O
E
Any point outside the line (E) = not possible (based on current resources)
A
S
D
The PPF curves because it demonstrates the tradeoffs that occur when production
shifts from one good to another.
On this graph, if the country switched from producing watermelons to producing
WATERMELONS
shoes, inputs (resources) would have to be taken away from watermelons and used to
produce shoes.
o Not all resources will be best utilized in making shoes. For example, some of the land is excellent for
growing watermelons, and would be wasted if a factory was built on it and some workers are
excellent watermelon farmers, but poor factory workers.
PPCs can be used to illustrate the effects of changes in a nation’s production capacities. See the graphs
below:
o Case 1 represents an overall reduction in productive capacities
 This could have been caused by a natural disaster such as a hurricane
o Case 2 represents an overall increase in productive capacities
 This could have been caused by increased migration to this nation
PPCs can also be used to illustrate the effects of investment in an economy.
o Case 3 represents an increase in the capacity to produce capital goods only
 This could have been caused by investment in new technologies for the production of capital
goods
o Case 4 represents an increase in the capacity to produce consumers goods only
 This could have been caused by an increase in the labor force caused by investment in
education.