Economics Review, pt. 1

Fall 2008

Economics Review, pt. 1

• What is the basic economic problem?

– Scarcity

• List the four factors of production:– Land– Labor– Capital– Entrepreneurship

Economics Review, pt. 1

• What are the three basic economic questions?

– What to produce?– How to produce?– For whom to produce?

• What is the difference between self-sufficiency and interdependence?

– Self-sufficiency means that nothing is needed from outside the system in order to maintain the system

– Interdependence is when two independent systems cooperate to achieve common goals to a greater result than if each system were to work on its own

Economics Review, pt. 1

• What are the three characteristics of money? – Portable– Durable– Unique

And– Medium of exchange – Unit of account – Store of value

Economics Review, pt. 1

• What is the difference between demand and quantity demanded? – Demand is the amount of a good or

service that consumers are willing and able to purchase at various prices• ∆D = movement of the demand curve

– Quantity demanded is the amount of a good or service that consumers are willing and able to purchase at a specific price• ∆QD = movement along the demand curve

Economics Review, pt. 1

• List the five determinants of demand: – Consumer tastes and preferences– Market size– Income– Substitute goods– Complementary goods

Economics Review, pt. 1

• Explain the difference between substitute goods and complementary goods, and give two examples of each. – Substitute goods – comparable goods or

services (HyTop and Kraft, Coca-Cola and Big K Cola)

– Complementary goods – related goods or services (peanut butter and jelly, Xbox 360 and Xbox 360 games)

Economics Review, pt. 1

• What is the difference between supply and quantity supplied? – Supply is the amount of a good or

service that producers are willing and able to provide at various prices• ∆S = movement of the supply curve

– Quantity supplied is the amount of a good or service that producers are willing and able to provide at a specific price• ∆QS = movement along the supply curve

Economics Review, pt. 1

• List the six determinants of supply: – Change in resource prices– Technology– Profit motives– Producers’ expectations– Price hikes (temporary effect)– Sales & discounts (temporary effect)

Economics Review, pt. 1

• Who was Adam Smith? – Wrote Wealth of Nations, 1776– Market operates on individual supply &

demand decisions• Producers will meet consumer demand at a

profitable price• Consumers will purchase valuable goods & services

at a competitive price• Producers make profit, consumers get cheaper and

better goods – everyone is reasonably happy (and thus, society as a whole benefits)

– Laissez Faire: roughly “let it be”—govt. disrupts the market; Smith says the govt. should participate only to keep market fair

Economics Review, pt. 1

• What is the “invisible hand”? – Adam Smith’s shorthand for the ability

of the free market to allocate factors of production, goods and services to their most valuable use

Economics Review, pt. 1

• Why is self-interest important in a market economy? What does it have to do with the “invisible hand”? – If everybody acts from self-interest,

spurred on by the profit motive, then the economy will work more efficiently, and more productively, than it would do were economic activity directed instead by some sort of central planner

– The “invisible hand” is this self-interest and leads to the common good

Economics Review, pt. 1

• Give examples, at least two, of positive and negative externalities: – Positive: a restaurant near a factory

making money because of the workers’ going to lunch; a hotel near a convention center getting customers

– Negative: pollution; inability to drive down a public road because of sports event

Economics Review, pt. 1

• Give two examples of public goods: (good or service consumed by all

members of a particular group)– National defense– Law enforcement

• What is so special about market equilibrium? – It is the ultimate goal of both producers

and consumers since both are equally satisfied with the price

Economics Review, pt. 1

• How do you solve the problem of a shortage? – Raise price and increase production

• How do you solve the problem of a surplus? – Lower price and decrease production

Economics Review, pt. 1

• What are the three negative consequences of rationing? – It is unfair– It is expensive– It creates black markets