Econ Final Exam

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ECON 2020 – FINAL EXAM REVIEW
Exam 1 Review

Scarcity
* A situation in which unlimited wants exceed the limited resources available to fulfill those wants. * Scarcity leads to CHOICE
Choice
* A situation caused by scarcity.
* Leads to OPPORTUNITY COST
Rational Choice (Marginal Cost & Benefit)
* Rational consumers will use all available information as they act to achieve their goals * Marginal Benefit – The benefit that arises from an increase in an activity * Marginal Cost – The opportunity cost that arises from an increase in that activity Normative vs Positive

* Normative – “what ought to be” (Subjective)
* Positive – “What is” (Objective)
Specialization & Gains From Trade
* Gains from trade are established through specialization and the division of labor. * Two examples include: “Stout vs Lager” and “The Pizzeria” * Having more employees at the pizzeria allows for each employee to be more productive and focus on what they specialize in. * It makes sense for one person to focus on producing “Stout vs Lager” if he can produce one of them at a lower opportunity cost. Production Possibility Frontier

* Is the boundary between those combinations of goods and services that can be produced and those that cannot. It is the frontier of all the possible outputs that can be produced. * Illustrates scarcity & increasing marginal opportunity cost * Why is it bowed outward?

* Capital & Technology – We don’t use the same machines to produce the same goods. People have different skill sets. * Psychological – gains from trade
Demand & Supple Curves
* 3 Criteria For Demand
* The consumer has to WANT IT
* AFFORD IT
* PLAN TO BUY IT
* 3 Criteria For Supply
* Has resources and technology to produce
* Can profit from producing
* Plan to produce it & then sell it
* Law of Demand
* As Price Increases, Quantity Demanded Increases
* As Price Decreases, Quantity Demanded Increases
* Law of Supply
* The higher the price, the greater the quantity supplied * The lower the price, the lower the quantity supplied * Why does the demand curve shift downwards?
* Law of Diminishing Marginal Returns
* The Substitution Effect
* The Income Effect
* Why does the supply curve shift upwards?
* The higher the price, the more you are willing to produce * Because you are willing to incur the higher marginal cost of producing additional units

* Change in Quantity Demanded vs Change in Demand
* Change (Qd) – is a movement along the demand curve to a change in the PRICE of a good * Change (D) – is when any factors that influence buying plans change other than the price of the good * Preferences

* Price of related goods
* Income
* Expected future income
* Population
* Expected Future Prices
* Change in Quantity Supplied vs Change in Supply
* Change (Qs) – a movement along the supply curve due to a change in PRICE * Change (S) – is when any factors influence selling plans change other than the price of the good * Prices in the factors of production

* Prices of related goods and services
* Expectations
* The number of suppliers
* Technology
* State of Nature
* Equilibrium Price (Market Clearing Price)
* Is the price at which Qd is equal to Qs and where there are no shortages and surpluses * Shortages & Surplus
* Shortage – When more QD than QS
* Surplus – Where more QS then QD
* Price Elasticity of Demand
* Perfectly Inelastic Demand – If the quantity demanded remains the same the price changes (PED = 0) * Inelastic Demand - If the quantity demanded changes a lesser amount relative to the change in price (PED = Between 0 & 1) * Unit Elastic...
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