CLEP Microeconomic Notes 1 - Basic Economics 1 Economics the social science that focuses on the usage of resources 2 Microeconomics branch of economics

CLEP Microeconomic Notes 1 - Basic Economics 1 Economics...

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Basic Economics 1)Economics – the social science that focuses on the usage of resources2)Microeconomics – branch of economics that studies use of resources by individuals, households, firms and industries3)Macroeconomics – study of the national economy4)Production Possibility Curve (PPC) – opportunity costs associated with two goodsa)Inefficient and unemployed resources – operating inside the PPCb)Outward shift indicates economic growth5)Economic Resources & payments a)Land – all natural resources (raw materials) – PAYMENT = RENTa.i) Ex: beach, crude oil, timber, oceans, mineral depositsb)Capital – equipment and machinery (used to create goods) – PAYMENT = INTERESTb.i)Ex: computers, buildings, assembly line machineryc)Labor – intellectual and manual human attributes (human resources) – PAYMENT = WAGESd)Entrepreneurship – PAYMENT = PROFITS6)Rent – the money one pays to use someone’s land 7)Interest – the money one pays to use someone’s capital8)Opportunity Costs – are forgone or missed opportunities, tradeoffs, what one gives up to purse the next best alternative9)Opportunity Costa.i) ButterMilk (a.i.1)010(a.i.2)105(a.i.3)200a.ii)To determine opportunity cost divide 10 lbs of butter by 5 gal of Milk = 2 10) Opportunity Costs – found by adding explicit costs and implicit costs a)Explicit cost – you have to pay for access to the system (money well spent)b)Implicit – you have to spend time studying (time well spent) 11) Absolute Advantage – produce more of a good than another12) Comparative Advantage – produce a good at a lower opportunity cost13) Normative economics – based on the way someone believes “Things ought to be” - opinions not facts14) Positive Economics – states facts based on empirical evidence, forms a hypothesis and tests it using scientific evidence15) Command Economy – the government dictates production and consumption16) Free Market Economic System – aka Capitalism – supply and demand determine price of goods17) Mixed Market Economic system - blends free market (capitalism) with the government run (command system) 18) Adam Smith – Scottish economist - father of modern economics, wrote The Wealth of Nations in 1776Supply and Demand19) Law of Demanda)Increase in Price (P) = decrease in quantity (Q) demandedb)Decrease in Price (P) = increase in quantity (Q) demandedb.i)Demand is the relationship between the amount of goods that a consumer is willing and able to buy at the price b.ii)Inverse relationship between price and quantity
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20) When demand decreases: market equilibrium price and quantity decreases21) Relative Price – the price of one product expressed in terms of anther producta)Calculate relative price by dividing one by the othera.i) An iPod is $100, Tv is $500 the Tv is 5 ipodsa.ii)$10 movie ticket and $100 NBA ticket = relative price of NBA ticket is 10 movie tickets 22) Externality – is the impact (cost or benefit) of a transaction on a party that is not directly involved in the transactions
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