D089 Study Guide Questions (6)

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D089

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Economics

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Jan 9, 2024

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D089 - Study Guide Questions Module 1 – The Economic Way of Thinking 1. What are the three fundamental questions every economy must answer? Give an example of a “What” question. Who, what, how? What to produce, how to produce it, who to produce it for? 2. What do economists mean when they say that people “think at the margin”? Rational people think at the margin—In most cases, people make better decisions when they consider if the additional benefit they gain from one more unit is greater than the additional cost of that extra unit of a good or service. Suppose you have studied for one hour and are considering if you should study for another hour. In making that decision, you would consider the benefit you would get from studying for one more hour (a higher test grade) against the cost of studying that additional hour (an hour watching TV). The marginal benefit is the additional benefit you gain from consuming one more of something—the higher test grade you get from studying one more hour. The marginal cost is the additional cost you incur from consuming that additional unit—the hour of TV you are giving up. This marginal or incremental plan of action is thinking at the margin. 3. According to the 10 Principles of Economics, what determines a nation’s standard of living? The standard of living for a nation is determined by its ability to produce goods and services. 4. Using the 10 Principles of Economics, explain why trade is beneficial?  Everyone faces tradeoffs.  The cost of something is determined by what someone gives up to get it.  Rational people think at the margin.  People respond to incentives.  Trade can benefit everyone.  Markets are a sound method of organizing economic activity.  Governments may be able to improve market outcomes.  The standard of living for a nation is determined by its ability to produce goods and services.  Printing too much money causes prices to rise.  Society faces a short-run trade-off between inflation and unemployment (Mankiw, 2015). 5. How does printing money impact prices? Printing too much money causes prices to rise— Consistently rising prices for goods and services results in inflation. This economic phenomenon is directly related to excessive government-printed currency circulating. The more a government prints money, the less the money is worth, thus making goods and services more expensive. 6. What are the differences between the Traditional and the Market economy?

7. Identify two disadvantages of a Command economy? 8. Explain one of the advantages of the Mixed economy? o Types of Economies:  Traditional Economy: decisions are based on traditions, beliefs, and customs.  Advantages: roles/contributions are well understood  Disadvantages: vulnerable to environmental changes  Command Economy: The government makes the decisions  Adv: government can transform society  Disadv: discourages innovation  Market Economy: Businesses make decisions in response to consumer demand  Adv: innovation is rewarded  Dis: not enough mechanisms to protect  Mixed Economy: Business makes decisions subject to government regulations  Adv: innovation rewarded  Dis: Businesses may capture government regulations 9. How are macroeconomics and microeconomics different? Microeconomics: Focuses on behaviors of individuals/firms/businesses. Macroeconomics: performance/behaviors of the overall economy/nation/whole economy. 10. Give an example of a normative statement. Positive Statement: How it is Norm Statement: how it ought to be 11. Identify the payment that goes to each of the four factors of production. o Factors of production:  Land: (natural resources) all naturally occurring inputs to production; receives rent as payment  Labor: all human input to production; receives wages as payment  Capital: NOT MONEY; all manufacturing inputs to production; receives interest as payment; (ie: tools – oven)  Entrepreneurship: all organizing and risk-taking that goes into production; receives normal profit as payment. 12. What does the circular flow diagram depict? Economists use a model called the circular flow diagram to depict the interaction of economic actors in the macroeconomy. In the basic version of the diagram, there are two principal actors: firms and households. The model illustrates how transactions between households and firms in both the goods and the factors markets direct the flow of goods and the flow of inputs. You can also see the flow of money that goes along with these transactions.

This version of the circular flow model is stripped down to the essentials to explain how the product and labor markets work in the economy. The diagram is an abstraction of the economy. Module 2 – The Economic Problem 1. Why is the concept of scarcity so important in economics? 2. What does an individual’s budget constraint identify? 3. Identify two ways in which the budget constraint and the PPF are similar and two ways in which they are different. 4. Using the graph below, explain the trade-off associated with a movement from Point A to Point B.

5. Using the graph above, explain why there is no trade-off associated with the movement from Point C to Point B. 6. Identify the points on the above graph that are efficient. Why are these efficient? 7. What does the PPF look like when resources are homogeneous? 8. How does an increase in labor productivity change the PPF? 9. Define the term Opportunity Cost. 10. What causes increasing opportunity costs? 11. Using the information below, what is the opportunity cost of a pound of beef when production is increased from 100 lbs/month to 200 lbs/month? Beef (lbs/month) Wheat (bushels/month) 0 2,000 100 1,600 200 900 300 0 Module 3 – Supply, Demand and Elasticity 1. Explain the “Law of Demand” using a demand curve to illustrate the concept. 2. Describe and illustrate a case where there is an increase in demand. Be sure to identify the market being analyzed and the event leading to the increase in demand. 3. Does a change in the price of a good cause a change in demand or a change in quantity demand? Explain. 4. Explain the “Law of Supply” using a supply curve to illustrate the equipment concept. 5. Describe and illustrate a case where there is a decrease in supply. Be sure to identify the market being analyzed and the event leading to the decrease is supply. 6. Does a change in the price of a good cause a change in supply or a change in quantity supplied? Explain. 7. If the price in the market is $10, is the market in equilibrium? Explain. How will the market adjust to reach equilibrium? Price Quantity Demanded Quantity Supplied $0 50 0 $10 40 15

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