Economics Study Guide Directions: Test and study guide covers the following chapters in your Economic Textbook

. Chapter 1, 2, 3, 4, 5 and 6. There will be a total of 65 Questions on your exam. YOUR UNIT EXAM IS WORTH 6 GRADES! 1. What is the difference between a shortage and scarcity? Shortage: A situation in which a good or service is unavailable Scarcity: Limited quantities of resources to meet unlimited wants 2. Explain the difference between a need and want Need: something that is essential for survival Want: something we desire but is not essential for survival 3. What are the factors of production? Land: all natural resources used to promote goods and services Labor: effort that a person devotes to a task for which a person is paid Capital: any human made resource that is used to produce other goods and services (Physical & Human Capital)

4. How are opportunity costs and tradeoffs different Opportunity costs: the most desirable alternative given up as the result of a decision. Tradeoffs: an alternative that we sacrifice when we make a decision.
5. What occurs when a decision at the margin is made? You are deciding the best way to do something that more beneficial. How much more or less to do. 6. What does the phrase Guns or butter mean? Example: a country that decides to produce more military goods (guns) have fewer resources to devote to consumer goods (butter)

7. What is the role/ function of the production possibilities frontier Production possibilities frontier: the line on a production possibilities graph that shows the maximum possible output. 8. Explain underutilization and efficiency in regards to production? Efficiency: using resources in such a way as to maximize the production of goods and services Underutilization: using fewer resources than an economy is capable of using. 9. What function does a production possibilities graph have in economics? Used to show alternative ways to use an economy’s productive resources.
10.What key factor will determine how society answers the key economic questions for production? What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services? 11.What is a mixed economy? Explain how it functions in economics Mixed economy: marked-based economic systems in which government plays a limited role. (Modern Economy) Functions in economics by some interaction by the government with taxes, free enterprise. 12.What are the three economic questions do manufacture or societies try to answer? What is produce? How to produce it? Who consumes it?

13.Explain the following terms for factors of production a. monetary inputs: b. capital investments: c. factor payments: the income people receive for supplying factors of productions, such as land, labor or capital. 14.What is a centrally planned economy? Economic system in which the central government makes all decisions on the production and consumption of goods and services. 15.What is an economic system? The method used by a society to produce and distribute goods and services. 16.How does consumer sovereignty factor into economics? The power of consumers to decide what gets produced. Advantages of the free market. Offer wide variety of goods and services than any other systems. 17.According to Adam Smith, what are the two factors that regulate a market place? Self interest and competition 18.How does the following terms factor into our economy? a. incentive: an expectation that encourages people to behave in a certain way. How consumers will respond to prices. b. laissez-faire: The doctrine that states that governments generally should not intervene in the marketplace. Some needs and wants of modern society are difficult to answer in the marketplace. c. competition: The struggle among producers for the dollars of consumers. It’s a regulating force. Entrepreneurs are big contributors to innovation which leads to growth.

19. In the economic explain the role of Households and firms into terms of production? Government purchases factors of production from households (Factor Market) and purchases items created by firms (Product Market)
20.What is demand? How does it factor into the law of demand? Demand: the desire to own something and the ability to pay for it. Consumers buy more of a good when its price decrease and less when its price increases. 21.What two patterns of behavior result from the law of demand? Substitution Effect: Consumers react to an increase in a good’s price by consuming less of that good and more of the other goods. Income Effect: the change in consumption resulting from a change in real income. 22.Explain the purpose and function of a market demand schedule? Demand Schedule: a table that lists the quantity of a good a person will buy at each different price. Market Demand Schedule: a table that lists the quantity of a good all consumers in a market will buy at each different price. 23.Explain the following terms in regards to demand. a. income effect: The change in consumption resulting from a change in real income. b. normal goods: a good that consumers demand more of when their income increases. c. substitutes: are goods used in place of one another. d. complements: are two goods that are brought and used together. e. consumer expectations: the demand for a good is positively related to its expected future price. 24.Explain the following terms

a. total cost: fixed costs plus variable cost. b. variable cost: a cost that rises or falls depending on how much is produced. c. operating cost: The cost of operating a facility such as a store or factory. d. marginal cost: The cost of producing one more unit of a good. e. labor cost: The cost of labor. 25.What is the elasticity of demand? Elasticity of Demand: A measure of the way quantity of the way quantity supplied reacts to a change in price. 26.What are the factors for determining elasticity of demand? The supplier has a longer period of time to respond to price changes. 27.What is the law of supply? Tendency of suppliers to offer more of a good at a higher price. 28.What does it mean when supply is elastic? Tell us how firms will respond to changes in price. Supply is very sensitive to changes in price. 29.Explain the function of a supply curve? A supply curve is very familiar to a demand curve, except the horizontal axis now measures the quantity of the good supplied, not the quantity demanded. 30.Explain the concept elasticity of supply? A measure of the way quantity supplied reacts to a change in price.

31. What key factor will determine whether the supply of a good will be elastic or inelastic? Elastic: greater than one, supply is very sensitive to change in price. Inelastic: Not very responsive to changes in price.
32.What relationship does the law of supply describe? Higher the price, the larger the quantity produced. Quantity supplied. 33. What is a subsidy? What is an Excise tax? Subsidy: A government payment that supports a business or market. Excise Tax: A tax on the Production or sale of a good. 34.What happens to supply when input costs go up You have Excess supply, less buyers. 35.Explain the following concepts a. Equilibrium: The Point at which quantity demanded and quantity supplied are equal b. Disequilibrium: Describe any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market. c. Surplus: Situation in which quantity supplied is greater than quantity demanded; also known as excess supply d. Shortage: Situation in which quantity demanded is greater than quantity supplied; also known as excess demand. 36.What causes prices to rise in a market? 37.Explain how prices serve as signals to consumers? 38.How do market forces react when there is disequilibrium? Disequilibrium: describes any price or quantity not as equilibrium; when quantity supplied is not equal to quantity demanded in a market. 39.How are goods and services distributed in a free market economy?

40.In ways does the U.S. government intervene in the economy? To keep order, provide vital services, and general welfare. Protect Private property, trade restrictions, banks. 41.What are search costs? The financial and opportunity cost consumers pay when searching for a good or service. 42.What is supply shock? What is the quickest way to resolve the problem? A sudden shortage of a good. Divide the available supply among consumers.

43. What are the four main advantages of prices in a free market economy?
SHORT RESPONSE: 1. 4 types of Economies, which one is US and why. 1. Traditional Economy 2. Market Economy 3. Command Economy 4. Mixed Economy US is Mixed, because we have little involvement with the government. 2. Role US play in our economy Welfare, provide vital services, and general welfare. Protect Private property, trade restrictions, banks. 3. Role play in market place, benefit produces. 4. 4 Economic goals of the free market system 1. Economic efficiency 2. Freedom 3. Growth 4. Consumer Sovereignty 5. Summarize Supply and Demand. Factors change supply and demand. Supply- amount of goods available Factors that change supply- Price, Demand: The desire to own something and the ability to pay for it. Factors: Substitution Effect (Reaction to price, increase in price) Income Effect (the change in consumption depending on income)