Review for Mac Exam 1

1.

Spring 2013

Definition of efficiency a. the property of society getting the most it can from its scare resources 2. What is opportunity cost? a. whatever must be given up to obtain some item 3. Be able to analyze a problem in which the actor is employing marginal thinking (I know this is a bit vague, just be able to know what a sunk cost is and how it effects your decision making process.) a. 4. Know the invisible hand a. a term coined by Adam Smith that describes a natural phenomenon that guides free markets and capitalism through competition for scarce resources 5. A price is made up of what two things? 6. What is the, perhaps, most important right for governments to protect? 7. What is an externality? a. the impact of one person's actions on the well-being of a bystander 8. Why do economists make assumptions? 9. Know the circular flow diagram 10. Know the specifics about the production possibilities curve (or frontier) 11. Difference between positive and normative statements a. Positive: generates ideas that are free of value judgments and which can be tested for accuracy b. Normative: focuses of value judgments 12. What are some of the problems with price ceilings and floors? a. Price ceiling: legal maximum on the price of a good or service b. Price floor: legal minimum on the price of a good or service 13. Why are market participants in a competitive market price takers? 14. Know the difference between and change or shift in demand or supply, and a change in quantity demanded or supplied a. A change in quantity demand is moving along an existing demand curve b. A change in quanity supplied is a movement along the curve c. change in demand is a shift of the demand curve to the left or right 15. Know the determinants that shift the demand and supply curves 16. Know the definition for a normal, inferior, substitute, complementary good a. Normal goods: buy more when income goes UP b. Inferior goods: buy more when income goes DOWN c. Substitute goods: something you can replace without another d. Complementary goods: something that goes together with another good 17. Be able to say what happens to price and quantity if both curves move together 18. What is an equilibrium price and quantity? 19. What adjusts to end shortages or surpluses? 20. What is the role of price in a market economy? 21. Be able to identify a binding price ceiling and floor 22. Do the above allow the invisible hand to freely work? 23. What are some of the effects of imposing price ceilings and floors

24. What might be a better equity fix instead of imposing price ceilings and floors? 25. What happens to buyers, sellers and the size of a market when a tax in placed on it? 26. Do buyers or sellers ever have to pay the full tax amount? 27. What determines how much tax each participant pays? 28. What is a world price? 29. What is a domestic price? 30. If the domestic price is less than the world price what does this imply? Should the nation import or export? 31. Be able to compute consumer, producer and total surplus with trade and without trade. 32. Who gains/loses from exporting? From importing? 33. Does trade result in gains for the participants or not? 34. What is the motivation for trade? Comparative or absolute advantage? What are these things? 35. What are some of the reasons for domestic trade protection? Are they valid? 36. Be able to compute consumer, producer, and total surplus with trade and a tariff. Good luck studying! If you need further clarification, send me an email. Remember its just not enough to be able to spit out a definition. You must be able to use the concept