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Economics EOTC Review- Part 1 What are the three basic questions faced by people who produce products? What How For to produce? to produce? whom to produce? What is the basic fundamental economic problem facing society? Scarcity What is a traditional economy? Allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. What are the four factors of production? Land Labor Capital Entrepreneurs What is a command economy? One in which a central authority makes the most of the WHAT, HOW, and FOR WHOM decisions. What is a market economy? People and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions. What is the major strength of the traditional economy? Everyone knows what role to play What is an advantage of a command economy? Can change direction drastically in a relatively short time What is an advantage of a market economy? Adjusts to change overtime Name two countries that have a command economy. North Cuba Korea What is economics the study of? How people try to satisfy what appears to be unlimited and competing wants through scarce resources What is the difference between a good and a service? Good- physical object Service-action performed What is the difference between human and physical capital Human Capital- sum of people’s skills, abilities, health, and motivation Physical Capital- tools, equipment, machinery, and factories What is the disadvantage of a market economy? Does not provide basic needs for everyone in society What is a disadvantage of a command economy? Not designed to meet wants of consumers What type of economy does the United States actually have? Market economy/ mixed economy/ free enterprise economy What is the most desirable alternative given up as a result of a decision? Opportunity cost What does capitalism thrive on? Economic freedom, voluntary exchange, private property rights, profit motive, and competition What is an entrepreneur? Person who does something new with existing resources What are trade-offs? All possible alternatives How is land paid for? Rent How is labor paid for? Wages How is capital paid for? Interest How are entrepreneurs paid? Profit What are some ways to increase productivity? Division of labor Specialization What is the difference between macroeconomics and microeconomics? Microeconomics-households Macroeconomics- nation What is profit motive? Driving force that encourages people to improve their material well-being (capitalism and free enterprise) How does the income effect change the demand of a product? When the price drops consumers pay less for a product As a result, consumers have extra income to spend How does the productivity affect the supply of a product? When workers more efficiently, productivity increases and shifts the supply curve to the right. If worker productivity decreases, the supply curve shifts to the left because fewer goods are brought to the market at every single price. Worker productivity increases= supply of a product increases Worker productivity decreases= supply of a product decreases What are the three stages of production? Increasing return Diminishing Negative return return What does surplus do to the price of a product? Price tends to go down What does a shortage do to the price of a product? Both up price and the quantity supplied will go What is minimum wage an example of? Price floor List the 5 conditions for pure competition. All firms sell an identical product. All firms are price takers. All firms have a relatively small market share. Buyers have complete information about the products being sold and the prices charged by each firm. The industry is characterized by freedom of entry and exit. What is a natural monopoly? A monopoly in an industry in which is most efficient for production to be permanently concentrated in a single firm rather than contested competitively. Examples: John D. Rockefeller bought all oil refineries and companies until he owned them all. Costs of production are minimized by having a single firm produce a product. What are some dangers of monopolies? Price fixing Inelastic Supply No demand of inferior products incentive to innovate Can create inflation How does technology affect the price of a product? New technology shifts the supply curve to the right, which causes price to go down. How does the consumer taste affect the demand of a product? If consumers want more of an item, they would buy more of it at each and every price. The demand curve would shift to the right. If consumers get tired of a product the will buy less. The demand curve would shift to the left. What happens when price ceilings are placed on apartments? Price ceilings occur when government puts a legal limit on how the price of a product can be, so they can use rent controls to make housing more affordable. Give an example of an elastic product. What happens to demand when the price of an elastic product goes up? Example: gas or fuel Demand goes down Give an example of an inelastic product. What happens to demand when the price of an inelastic product changes? Example: table salt When the price of an inelastic product changes, there is a relatively small change in the quantity demanded. What do taxes do to the supply of a product? Subsidies? When taxes on production go down, supply of a product goes up. When taxes on production go up, supply of a product goes down. Subsidies lower the cost of production, causing the supply of a product to go up. What is a geographic monopoly? A monopoly based on an absence of other sellers in a certain geographical area Give an example of public goods. Uncrowded National Fire highways defense and police protection Flood control procedures What does the cost of inputs do for the supply of a product? As the cost of inputs decrease, the supply of a product increases. As the cost of inputs increase, the supply of a product decreases. Why does production go down in the Third Stage? Production can go down in the Third Stage because of firms hiring too many workers. The workers get in each other’s way and cause production to go down. What is a technological monopoly? A monopoly based on ownership or control of manufacturing methods, What is the equilibrium price? The price when the quantity supplied is equal to the quantity demanded. The equilibrium price is the price that clears the market. What does the number of sellers do for the supply of a product? If the number of sellers increases, the supply of a product will increase. If the number of sellers decreases, the supply of a product will decrease. What do government regulations for supply of a product? When the government establishes new regulations, the cost of production of a product can change, causing a change in the supply of the product. If the government regulations are increase or become tighter, the supply of a product can be restricted. This causes the supply curve to shift to the left. Relaxed regulations allow for lower production costs, increasing supply. This shifts the supply curve to the right. What does the substitution effect have on the demand of a product? If adequate substitutes are available, consumers can switch back and forth between a product and its substitute to take advantage of the best price. If the price of beef and butter goes up, buyers can switch to margarine and chicken. With enough substitutes, even small changes in the price of a product will cause people to switch to, making the demand for the product elastic. The fewer substitutes available for a produce the more inelastic the demand. What is the law of supply? Principle that suppliers will normally offer more for sell at higher prices and less for sell at lower prices What is a government monopoly? A monopoly that is owned and operated by the government What are some oligopoly characteristics? The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. In a circular flow, what goes into the factor market? Land Labor Capital Entrepreneurs In a circular flow, what goes into the product market? Goods Services How does government money get into the circular flow? Taxes What is a rational economic decision? A logical, multi-step model for choosing between alternatives that follows an orderly path from problem identification through solution. What are some ways to cause the production curve to shift outward? Inward? Shifts in the production possibilities curve are caused by changes in these things: Advances in technology Changes in resources More education or training (that's what we call human capital) Changes in the labor force To shift outward: More resources and technology To shift inward: reduction in labor force Define laissez-faire. A philosophy that the government should not interfere with business activities Define deregulation. What industries have been deregulated recently? Deregulation is the relaxation or removal of government regulations on business activities. Savings and Loans Institutions and savings banks were recently deregulated. List the 3 roles of money. Medium Store of exchange of value Common standard for measuring relative worth of goods and service. What is another term for a market clearing price? Equilibrium price What is the major difference between perfect composition and monopolistic competition? A monopolistic market and a perfectly competitive market are two market structures that have several key distinctions, such as market share, price control and barriers to entry. In a monopoly, there is only one firm that dictates the price and supply levels of goods and services and has total market control. Contrary to a monopolistic market, a perfectly competitive market is comprised of many firms, where no one firm has market control. On a production possibilities curve, what would show inefficient use of resources? Any point inside the PPF line