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ECON-STUDY GUIDEChapter 2
LO1: Describe the impact of choice on opportunity
• Resources are scarce; human wants unlimited
• Must choose because cannot satisfy all wants
• Opportunity cost: value of the best alternative given up
o Opportunity cost of producing more of a particular good rises as output
increasesMarginal cost of production increases as output increases
o Cost of giving something up in order to do something else
LO2: Explain how comparative advantage, specialization, and exchange
affect economic outcomes(output)
o Comparative advantage vs. absolute advantage
Absolute: making something using fewer resources
Comparative: specializing in task for which you have lower
opportunity cost
Better to specialize even if you have absolute advantage in both
tasks
o Specialization increases efficiency by:
Taking advantage of individual preferences and natural abilities
Allowing each worker to develop expertise and experience at a
particular task
Reducing the need to shift between different tasks
Allowing introduction of laborsaving machinery
o Exchange: each individual specializes, then exchanges the product for
money, which in turn is exchanged for goods and services
LO3: Outline how economics function as production systems
o Production possibilities frontier: identifies possible combinations of the
two types of goods that can be produced when all available resources
are employed efficiently
Points inside PPF: inefficient
Points outside PPF: unattainable
Shape reflects law of increasing opportunity cost—each
additional increment of one good requires the economy to
, sacrifice successively larger and larger increments of the other
good
• Bowed out shape
• As economy moves down the curve, curve becomes
steeper and reflects the higher opportunity cost of capital
goods in terms of lost consumer goods
Shift:
• Changes in resource availability
o Increase in size or skills of labor force and
availability of other resources shifts PPF outward
• Increases in the capital stock
o More capital an economy produces during one
period, more output can be produced next
period(shifts PPF outward he next period)
• Technological change
o Technological advance shifts curve outward
• Improvements of rules of the game(formal and informal
institutions that support economy)
o Greater political stability=shifts PPF outward
What we learn from PPF
• Efficiency
• Scarcity
• Need for choice
Describe different economic systems and the decision-making rules that
define them
o Three Questions Every Economic System Must Answer:
What, How, For Whom goods and services are to be produced
o Pure capitalism-directed by market forces
o Pure command system-directed by central plans of gov’t
, o Mixed system-directed by a mix of two in most cases
Chapter 3:
LO1: Explain the role of the household in an economic system
o Maximize utility(satisfaction from consumption)
o In market economy, supply resources and demand goods and services
from firms
o Household production still exists:
Perform domestic chores that don’t require skills or special
resources
Avoids taxes
Reduces transaction costs(no estimates, hiring contractor,etc.)
Technological advances
LO2: Identify the different types of firms and describe their role in the
economy
o Goal: maximize profit
o For-profit
Sole proprietorship, partnership, corporation
o Not-for-profit
Social purpose
o Cooperatives
Minimizing costs
LO3: Outline the ways governments affect their economies
o Improve society’s overall welfare
o Establishes and enforces rules of game
o Promotes competition
o Regulates natural monopolies
, Monopoly: sole supplier in market
Natural monopoly: cheaper for one firm to serve the market
than for two or more firms to do so
o Provides public goods
Nonrival-amount consumed by one person is available for others
to consume
Nonexclusive-benefits all in community regardless of who pays
for it and who doesn’t
o Dealing with externalities
o More equally distributing income
o Pursuing full employment, price stability, and economic growth
Outline the international influences on an economy
o International trade
Occurs because opportunity cost of producing specific goods
differs across countries
Merchandise trade balance: value of exported goods – value of
imported goods
Balance of payments; record of all economic transactions
between its residents and residents of the rest of the world
o Exchange rates
The price of one currency in terms of another
o Trade restrictions
Chapter 4
LO1: Explain how the law of demand affects market activity
o Demand: the quantity consumers are both willing and able to buy as
each possible price during a given time period
o Law of demand: price and quantity demanded are inversely related
Higher the price, smaller quantity demanded
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