Econ 102 - Test 1 Questions and Answers Graded A

Econ 102 - Test 1 Questions and Answers Graded A What does economic activity revolve around? Production What drives economic activity? Spending Per Capita GDP Gross Domestic Product/Population Gross Domestic Product/Population is the same thing as Production/Population GDP shows what? Productivity, income, and/or standard of living Expenditures = Income Production = Income The study of how society chooses to allocate its scare production resources Economics Labor Mental and physical skills Capital Goods used to produce other goods/services (an oven to produce cake) Land Natural Resources Entrepreneurial Talent The assembling of resources to produce new or improved products and technologies Scarcity Lack of enough resources to satisfy all desired uses of those resources Factors of production Resource inputs used to produce goods and services (land, labor, capital, and entrepreneurship) Opportunity cost The most desired goods or services that are foregone to obtain something else (only measured in the most highly valued thing given up) Macroeconomics The study of the overall economy Microeconomics They study of the behavior of individual economic units Key economic questions 1. How much should you produce? 2. How much should you sell for? 3. How are you going to produce? Economy A particular system of organization for the production, distribution, and consumption of goods and services Centrally planned economy (Command Economy) Resources are allocated by a central planning agency of the government (i.e.: North Korea) Market economy Resources are allocated by way of individual buyers and sellers Mixed economy Resources are allocated by elements of a command economy and a market economy (i.e.: The US) Production Possibilities Curve (PPC) Maximum combination of goods and services we can produce with existing resources and technology. Shows potential output Qualities of a PPC 1. Production is limited to 2 types of goods and services 2. All resources have to be efficiently employed (max amount of output for a given amount of input - no unemployment or underemployment) 3. All resources are fixed 4. All technology is fixed Unemployment of resources When resources that could be used for production are not being used Underemployment of resources A job that is insufficient in some important way for a worker, relative to a standard, which results in the under-utilization of the worker (i.e.: a construction worker making cookies) Shift to the left in the PPC Economic recession/contraction Shift to the right in the PPC Economic growth/expansion (increase in output and an expansion of production possibilities) Purpose of a PPC 1. Shows points of efficient & inefficient production 2. Shows the outcome of product mix (combination of goods & services you get) 3. Shows opportunity cost 4. Shows economic growth & contraction Law of increasing opportunity cost The opportunity cost of producing a good or service starts to increase as more & more of that good or service is produced A. Capital goods: 48 - Consumer goods: 10 B. Capital goods: 20 - Consumer goods: 40 What is the opportunity cost of producing consumer goods between A and B? 28 units of capital goods Opportunity cost of producing consumer goods is expressed in units of what? Capital goods Average total cost = Total cost divided by quantity Average fixed cost = Total fixed cost divided by quantity Average variable cost = Total variable cost divided by quantity Profit divided by loss = Total revenue - total cost Total cost = P (unit cost) * Q (quantity) OR (total fixed cost + total variable cost) When incurring a major loss, the SHORT RUN solution is to ______________________________. Stop producing When incurring a major loss, the LONG RUN solution is to _____________________________. Exit the industry by getting rid of all inventory and assets At shutdown: Total revenue=? Total Variable Cost=? TR= Zero TVC= Zero so, Profit/Loss= -TFC Shutdown when __________. TR < TVC Law of Demand How consumers respond to change in price The Q demanded of a good/service varies _________ with price Inversely What causes changed in non-price activities? (hint: changes in non-price cause SHIFT on demand curve) 1. change in number of customers 2. changes in consumer income 3. change in consumer taste 4. change in price of a related good 5. change in customer expectations What causes movement along demand curve? Change in price What causes shift of demand curve? Change in non-price Market Free-wheeling exchange of goods and services, anything that brings together buyers and sellers Demand The quantity of a good or service consumers would be willing and able to buy at various prices Pent up demand Willing to buy, but not able to (during a recession) Price is always on the __________________ axis Vertical Quantity demanded is always on the _________________ axis Horizontal When the demand curve shifts to the right, the quantity demanded has _____________ Increased When the demand curve shifts to the left, the quantity demanded has _________________ Decreased The PPC illustrates what? The law of increasing opportunity costs (increasing quantities of any good can be obtained by only sacrificing increasing quantities of other goods) Human capital The knowledge and skills possessed by the workforce Capital Intensive Production processes that use a high ratio of capital to labor inputs