Econ104exam1review - Econ 104 Exam 1 Review Chapters 1 and 2 Society has to make choices as they try to attain their goals o Reduce unemployment and

Econ104exam1review - Econ 104 Exam 1 Review Chapters 1 and...

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Econ 104: Exam 1 Review Chapters 1 and 2: Society has to make choices as they try to attain their goals o Reduce unemployment and stimulate the US economy to close the output gap o Reduce the national debt o Reduce interest rate on student loans o Increase the minimum wage Why do we have to make choices? o Because we have unlimited wants and scarce resources There are three key economic ideas about how people interact and make choices in markets o People are rational- use all available info and don’t deliberately make ourselves worse off o People respond to economic incentives o Optimal decisions are made at the margin Margin = additional Businesses make optimal decisions when MB >= MC Unlimited wants: has to do with improving our standard of living o Standard of living is the amount of goods and services we can buy o To produce more goods and services, society needs resources which are scarce Scarce resources: o Land: water, air, oil, land, any natural resources o Labor: human capital (Factors of Production) o Capital: physical equipment Scarcity leads to trade-offs that lead to opportunity cost o Opportunity cost: the highest valued alternative that must be given up to engage in an activity Society has to choose: o WHAT goods and services to produce? o HOW will goods and services be produced? o WHO will receive the goods and services? o Who decides? Centrally planned economy- government makes all 3 decisions Market economy- consumers & firms make all 3 decisions Mixed economy- market based with some govnt intervention The index of economic freedom based upon: o Size of government o Legal system and property rights o Sound money (high inflation erodes value of property) o Freedom to trade internationally
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o Regulation Most free country: Honk Kong Least free country: Cuba Positive Economics: “If we raise the minimum wage, unemployment will increase.” o Statement can be verified and tested scientifically using real world data and economic models o Economists may disagree about which model is appropriate Normative Economics: “Economic analysis has shown that the minimum wage law is a bad idea because it causes unemployment.” o Statements are based upon opinion and are scientifically untestable o People disagree because opinions are based upon personal values and political views Production Possibility Frontier (PPF): shows the maximum attainable combinations of two products that may be produced, ceteris paribus (illustrates the trade-off) o Points on the PPF are efficient: use all available resources to maximize total output o Points outside the PPF are unattainable o Points inside the PPF are inefficient but attainable o Know how to find opportunity cost as move along the curve o Society decides where we are on the PPF Increasing Opportunity Cost: as an economy moves down along PPF, it can experience increasing opportunity cost o US Economy example: Military vs. consumer goods Assumptions of PPF: o Resources are fixed o Full employment of resources o Technology unchanged
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