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midterm study guide

midterm study guide - I II III Questions of definition a...

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I. Questions of definition a. What is economics? i. The way a society chooses and the choices individual make in order to satisfy unlimited wants with limited resources ii. Three questions of economics: 1. What to produce 2. How to produce it 3. For whom to produce it b. What is macroeconomics? i. Economic behavior of aggregates on the national scale; top-down c. What is microeconomics? i. Individual decision makers, firms and households II. Some major Macroeconomic Puzzles in History a. What has been the trend over the past 7000 years in population? i. Exponential growth of population after the industrial revolution ii. Before the industrial revolution, the growth was linear because of shorter lifespan and a higher rate of death due to diseases, etc. b. What is the Malthusian theory of population? Why was Malthus wrong? May he yet be proven right? i. Theory of population: population will increase exponentially until it has reach its carrying capacity ii. Wrong: technology uses resources more effectively and efficiently iii. Positive checks of Malthusian theory (keep death rates up): war, famine, disease iv. Preventative checks (keep birth rates down): contraceptive c. What is the law of diminishing returns? Why is it important to the Malthusian population? i. As more factors of production are added, the ratio of the output to factors of product will decrease ii. Important: each new input is a new mouth to feed; add more people, less food per person III. The Determinants of Production and Distribution a. What are the 3 basic economic problems? How are these problems solved in a command economy? in a market economy? i. What get produced? ii. How is it produced? iii. Who gets what is produced? iv. In a command economy: an economy in which a central government either directly or indirectly sets output targets, incomes, and prices; problems solved government ownership and central planning v. In a market economy: the institution through which buyers and sellers interact and engage in exchange; the market decides for itself how to solve the problems; the behavior of buyers and sellers decide b. What are the factors of production? (Warning: watch the definition of
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"capital", and how the "capital stock" [measured at a point in time] is related to "investment" [which involves increments to that stock over time].) i. Land, labor, capital, and enterprise ii. Capital stock is quantity of capital at a given point of time iii. Investment is a flow variable – over a specific time period (investment = capital stock) c. What is a "Production Possibilities Frontier" (PPF) (sometimes called a "Production Possibilities Curve")? i. The maximum output that an economy can achieve with given resources if they are used efficiently d. What does "opportunity cost" mean? What is the relationship between opportunity cost and the shape of the PPF? between the "marginal rate of transformation" and the slope of the PPF?
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