Econ 101 Study guide for exam 1 ISU | questions and answers

Econ 101 Study guide for exam 1 ISU | questions and answers Economy - comes from the Greek word for "ones who manages a household" Economics - is the study of how society manages its scarce resources to produce valuable commodities and distribute them among different people. Scarcity - society has limited resources and therefore cannot produce all the goods and services people wish to have. How do people make decisions? - 1. People face trade offs. 2. The cost of something is what you give up to get it. 3. Rational people think at the margin. 4. People respond to incentives. 5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Governments can sometimes improve economic outcomes. 8. The standard of living depends on a country's production. 9. Prices rise when the government prints too much money. 10. Society faces a short-run tradeoff between inflation and unemployment. Efficiency - when society gets the most from its scarce resources Equality - when prosperity is distributed uniformly among society's members Trade off - To achieve greater equality Opportunity Cost - whatever must be given up to obtain it What do rational people do? - systematically and purposefully do the best they can to achieve their objectives. Marginal changes - incremental adjustments to an existing plan Incentive - something that induces a person to act Market - a group of buyers and sellers Market economy - allocates resources through the decentralized decisions of many households and firms as they interact in markets Market Failure - when the market fails to allocate society's resources efficiently Externalities - when the production or consumption of a good affects bystanders Market Power - a single buyer or seller has substantial influence on market price productivity - the amount of goods and services produced per unit of labor inflation - increases in the general level of prices Economist - observe, devise theories, collect data, analyze data Circular Flow Diagram - a visual model of the economy that shows how dollars flow through markets among households and firms Production Possibilities Frontier (PPF) - a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. Firms - Produce and sell goods and services Hire and use factors of production Households - Buy and consume goods and services Own and sell factors of production Markets for goods and services - Firms sell Households buy Markets for factors of production - Households sell Firms buy Factors of production - Inputs used to produce goods and services Land, labor, and capital Points of the PPF - Possible and efficient Points under the PPF - Possible but not efficient Points above the PPF - Not possible Shape of the PPF - Can be bowed or a straight line Positive Statements - are statements that attempt to describe the world as it is. Negative Statements - are statements about how the world sho