Define the following terms:
Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfil those wants
Economics: The study of the choices people make to attain their goals, given their scarce resources
Economic Model: A simplified version of reality used to analyze real-world economic situations
Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
What are three important assumptions that we make in economics?
Give a brief description of each
1. People are rational
-Economists assume that consumers and firms use all available information as they act to achieve their goals, weighing the benefits and costs of each action, and choosing an action only if the benefits outweigh the costs.
2. People respond to economic incentives
incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. Rational people respond to incentives because they make decisions by comparing costs and benefits
3. Optimal decisions are made at the margins
Many decisions are not “all or nothing,” but involve marginal changes – incremental adjustments to an existing plan.
Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB = MC.
Explain two economic problems all societies must solve
1. Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service.
2. Opportunity cost The highest-valued alternative that must be given up to engage in an activity.
What are the two roles that economists play?
1. Scientists: try to explain the world
2. Policy advisors: try to improve it
What are the 5 steps economics use (generally) to develop a model?
- 1. What assumptions to use
- 2. Formulate a testable hypothesis
- 3. Use economic data to test the hypothesis
- 4. Revise the model if it fails to explain the economic data well
- 5. Retain the revised model to help answer similar economic questions in the future.
Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
What is the formula for a percentage change?
Give an example
Percentage change = (Value in the second period - value in the first period) / value in the first period x 100
GDP (2010) - GDP (2009) divided by GDP (2009) x 100
1. How do you measure a firms total revenue?
2. How do you measure a change in total revenue?
1. Total quantity x price (area of rectangle under price point of demand curve)
2. (ΔQ x ΔP) ÷ 2 (area of the triangle underneath the two price points of a demand curve)
What is the Circular Flow Model?
What are the 4 components?
A visual model of the economy, shows how dollars flow through markets among households and firms. In other words, it is a model that illustrates how participants in a market are linked.
- Two types of “actors”:
- 1. households
- 2. firms
- Two markets:
- 1. the market for goods and services
- 2. the market for “factors of production”
Define the following terms
Factors of production
Product market A market for goods—such as computers—or services—such as medical treatment.
Factor market A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
Factors of production The inputs used to make goods and services.
What are the four broad categories dividing the factors of production?
1. Labour includes all types of work, from the part-time labour of teens working at McDonald’s to the work of CEOs of large corporations..
2. Capital refers to physical capital, such as computers, machines, and buildings that is used to make other goods.
3. Natural resources include land, water, oil, iron ore, and other raw materials (or “gifts of nature”) that are used in producing goods.
4. An entrepreneur is someone who operates a business. Entrepreneurial ability is the ability to bring together the other factors of production to successfully produce and sell goods and services.
What is a free market?
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
What is a coefficient in algebra?
A numerical or constant quantity placed before and multiplying the variable in an algebraic expression (e.g. 4 in 4x y).
What are the steps to solving this simultaneous equation?
2x + 3y = 9 and x - y = 4
1. Multiply the second equation by one of the same coefficient as the first equation. In this example, we'll multiply the second equation by 2, from the 2x.
2x + 3y = 9 and 2x - 2y = 8
2. Then cancel the 2x's out by subtracting in the second equation from the 2x in the first.
3y = 9 and - -2y = 8
3. Two negatives make a positive
3y = 9 and 2y = 8
4. Now add 3y and 2y, and subtract 9 and 8
5y = 1
5. Divide 1 by 5 to cancel out the other side
y = 1/5
6. Now you can plug 1/5 in for y in either equation, and get the x variable
x - 1/5 = 9