Economics

Study Guide  #1                                      Econ 202                                         Summer 2016

1. What is the Law of Tannstafal?  Explain it’s meaning.

 It is the cost of decision making it explains the idea that sometimes a thing may seem free but there is always cost. “PROFIT”

1. Define ‘Economics” and explain the meaning of the ‘Institutional Structure’ Economics deals with limited resources and unlimited wants and maximize which is “profit.” 

Institutional structure means any structure or mechanism of social order governing the behavior of a set of individuals within a given community

1. What are the two aspects of scarcity?

 Limited resources and Unlimited wants

1. Describe the coordination problems of the economy and relate them to the concept of ‘economic efficiency’.  

Coordination problems are: what to produce? How to produce? For whom to produce?

When limited resources produces the most valuable combination of outputs possible.

1. Name the scarce resources and describe the payments for each resource.

Land: rent

Labor: wages

Capital: interest

Entrepreneurship: profit

1. Define and describe’ opportunity cost’.

 The value of the best alternative given up when u choose.

1. Describe how consumers make ‘rational decisions.” (economic reasoning)

 Based on the calculation of cost and benefits.

1. Define a production possibilities table and production possibilities curve.

Table: is the maximum combinations and cost of each choice.

Curve: Is the maximum combination of outputs that can be obtained with a given number of inputs.

1. What are the assumptions of the PPC? Describe each one.

1. Only two goods can be produced
2. Full employment of resources
3. Fixed resources
4. Fixed technology

1. Clearly understand the meaning of a point on the PPC, inside the PPC and outside the PPC.

a. on PPC means maximum combination outputs that can be obtained with given number 

b. inside PPC means unemployment, not fully inefficiently using all resources 

c. outside PPC means unattainable at individual level, in macro countries need to trade with other countries

1. Describe the factors that push the PPC outwards.

Technological advances, mainly

expanding the resource base,

international trade.

1. Explain the shape of the real-world PPC. MACRO

The shape of the real world PPC would be a line curving outwards. The line curves because because some economies are better at producing one thing than another.

1. Explain when and why you would have a straight-line PPC with a negative slope.

The only time we would be able to have a straight line PPC with a negative slope would be in a

 1. Micro economy,

 2. With similar resources

3. If they were producing similar products.

1. Describe the conditions that are necessary to maximize world output.

The conditions necessary would have to be trading with a nation that has a better comparative advantage in something that they are not good in producing.

. Cooperative production/division of labor

. Specialized production and exchange according to comparative advantage

1. Define economic efficiency and describe each type of efficiency.

1. Economic efficiency: when a given amount of resources produces the most valuable combination of outputs possible.
2. Allocative efficiency: the use of resources to produce what people want.
3. Productive efficiency: producing a given output at the lowest possible cost.
4. Distributive efficiency: distributing the production as evenly as possible.

1. Compare the features of Capitalism and Socialism.

                                   Capitalism         socialism

Ownership                  Private               Public

Income distribution     unequal             equal

Social values               Individualism    collectivism

1. What are the functions of price?

Rational device