Basic+Economic+Concepts

Fabi Praça, Lui De Armas, Ben Lash Amelia Grant-Alfieri, Annika Wreder I. Scarcity, opportunity costs, PPC II. Characteristics of private property III. Supply and Demand IV. Private and Public Sectors  1. Scarcity: limited human and natural resources
 * Land – rent
 * Labor – wages
 * Capital – interest
 * Capital goods: go into production of consumer goods
 * Entrepreneurial ability – profit (innovator, risk taker)

2. Production Possibilities Curve- creates different output possibilities for two types of product, usually shows a trade-off between consumer and capital good (assume full employment, fixed resources, and fixed technology and a change in any of these will shift curve). Government then chooses through Marginal Analysis.

3. Opportunity Cost: forgo getting one thing to get more of another 4. Law of Supply: direct relationship between P and Q 5. Law of Demand: inverse relationship between P and Q, more willing and able to pay if lower price
 * Marginal Benefit: added benefit of producing additional unit of output
 * Marginal Cost: added cost of producing additional unit of output
 * compare Marginal Benefits and Marginal Costs, MB > MC until MB = MC
 * Determinants of Supply = shift curve
 * 1) resource prices
 * 2) <span style="font-family: Arial,Helvetica,sans-serif;">technology
 * 3) <span style="font-family: Arial,Helvetica,sans-serif;">taxes and subsidies
 * 4) <span style="font-family: Arial,Helvetica,sans-serif;">prices of other goods
 * 5) <span style="font-family: Arial,Helvetica,sans-serif;">producer expectations
 * 6) <span style="font-family: Arial,Helvetica,sans-serif;">number of sellers in market
 * <span style="font-family: Arial,Helvetica,sans-serif;">Determinants of Demand = shift curve
 * 1) <span style="font-family: Arial,Helvetica,sans-serif;">consumer tastes and preferences
 * 2) <span style="font-family: Arial,Helvetica,sans-serif;">number of buyers in market
 * 3) <span style="font-family: Arial,Helvetica,sans-serif;">consumer income (superior/normal good: more expensive / inferior good: cheaper)
 * 4) <span style="font-family: Arial,Helvetica,sans-serif;">price of related goods (substitute and complementary goods)
 * 5) <span style="font-family: Arial,Helvetica,sans-serif;">consumer expectations

<span style="font-family: Arial,Helvetica,sans-serif;"> 6. Private Property: investment, incentive to maintain, capital systems 7. Private Sector: households and businesses 8. Public Sector: Federal, State, and local government 9. Private Goods: rivalry and excludability 10. Public Goods: non-rivalry and non-excludability, free rider problem
 * unequal distribution of income
 * Consumption (C): durable goods, non-durable goods, services
 * Role of Gov: promote efficiency, correct market failures, legal structure, maintain competition (antitrust), redistribute income (transfer payments, market intervention, taxation, reallocating resources (negative and positive externalities)

__Multiple Choice Questions__

Use this graph for questions 1-3

1. Which point on this Production Possibilities Curve would illustrate an economy with fertile farm land left underused in the production of corn? a. A b. B c. C d. D

2. What accounts for increased opportunity cost when moving from point A to B? a. decreasing profits b. resources not completely transferrable for production of different good c. increased government taxation of Product X d. no specialization between countries

3. Assume Product Y is a capital good and Product X is a consumer good. Which point would create the ability for future growth? a. A b. B c. C d. D

4. Which of the following explains why consumers consume more when the prices go down? a. substitution effect b. income effect c. consumer effect d. wealth effect

5. Which best explains the income effect? a. prices go down therefore consumers consume more, demand goes up b. supply goes up therefore consumers consume more, demand goes up c. income goes up and consumers consume more, demand goes up d. taxes go down and consumers consume more, demand goes up

6. If the supply curve shifts left and the demand curve shifts right what happens to price and quantity ? a. price goes up and output is indeterminable b. price goes up and output goes down c. price goes down and output is indeterminable d. price goes down and output goes up

7. Which of the following would not shift demand for free doctor clinics ? a. increase in price of vaccines b. expecting spread of H1N1 c. number of cancer patients increases d. income decreases

8. Which of the following would not affect supply of ketchup? a. price of tomatoes (used to make ketchup) increases b. price of frenchfries increases c. tomato farming becomes less profitable and therefore leave the market d. tomato crops are destroyed by cold weather

You are trading marbles for jacks with a friend. The marbles and jacks have the same value.

9. When would you stop trading? a. transaction 2 b. transaction 3 c. transaction 4 d. transaction 5
 * # of transactions || # of marbles || # of jacks ||
 * 1 || 1 || 5 ||
 * 2 || 2 || 4 ||
 * 3 || 3 || 3 ||
 * 4 || 4 || 2 ||
 * 5 || 5 || 1 ||

10. Government redistributes income in all of the following ways except? a. welfare and food stamps b. minimum wage c. subsidies d. progressive taxes

Answer Key 1. c 2. b 3. a 4. d 5. c 6. a 7. a 8. b 9. b 10. c

__Free Response Question__

In a market producing cars....

a. A price ceiling is set b. The price of rubber and metal decreases
 * 1) Draw and label a graph depicting this situation.
 * 2) What is the relationship of supply and demand? What is this called?
 * 3) How would you correct this problem to return to equilibrium?
 * 1) Draw and label a graph depicting this situation.
 * 2) In the short-run, what is the effect on supply and demand? Explain.
 * 3) In the long-run what is the effect on supply and demand? Explain.
 * 4) Draw and label these changes on the graph from part b1.
 * 5) What is the overall effect on Price and Quantity?

__Article__

http://www.nytimes.com/2010/05/02/business/02syrup.html?ref=business&pagewanted=print

This article includes determinants of supply and demand. The media has used studies that show the negative health effects of Hight Fructose Corn Syrup to influence consumer preferences. These new consumer preferences decrease demand for products that use high fructose corn syrup by shifting demand curve to the left. To combat this decrease in demand, companies have substituted real sugar for HFCS and now can claim that they use no HFCS. Through this action, they hope to increase demand. But at the same time, sugar is more expensive that HFCS and resource costs go up. This shifts the supply curve to the left and they must now produce less. Many companies have decided not to increase the price of their good but absorb the extra costs. These measures taken have actually not had success in changing consumers' sentiments and there have been no increase in sales. Producers continue to manipulate the consumer through false advertising claims, and controversial studies send mixed signals to consumers, who are now more likely to overconsume unhealthy products.

__Claims against HFCS - people combating HFCS__: - High Fructose Corn Syrup (HFCS) has toxic metal mercury - multiple people and sites such as facebook and the media have mocked companies' efforts to prove science is on their side - some studies show a link between obesity and HFCS = affect public's perception/preferences - about 53% of Americans are concerned with HFCS - some studies show sugar is just as bad as HFCS, but consumers are not believing it

__Companies defending HFCS - their efforts to maintain business:__ - replace HFCS with real sugar in products such as Hunt's ketchup - new claims that products don't have HFCS - Corn Refiners have almost no chance of changing consumers' sentiments - Corn Refiners are trying to correct claims because the consumers are not correctly informed - studies that HFCS doesn't cause weight gain - mercury detected in food was not from HFCS - changed name of HFCS to just "corn syrup" to deceive customers into thinking products are safe and natural when actually nothing is different - ConAgra: focus on consumer preference, even though sugar costs more than HFCS, Hunts price will not increase because company will absorb costs. - No increase in sales - Sugar costs more than HFCS - sales of HFCS were low because of decreased demand for the resource/input, HFCS

Amelia Grant-Alfieri and Annika Wreder

1. There are 2 different kinds of Economics apart from Macro and Micro:


 * 1) Positive Economics -- A realistic view at the economy using real facts and data
 * 2) Normative Economics -- A view of how economics should be, includes ideas like Universal Healthcare. Oh wait, that is real...

2. Assume the following with the Production Possibilities Model:


 * Full Employment
 * Fixed Resources
 * Fixed Technology
 * Consumer and Capital Goods

3. Law of Increasing Opportunity Costs
 * Due to limited resources, the PPC is not a straight line because as you increase the amount of consumer goods, you lose more and more capital goods.

4. There are 2 different kinds of Economic Systems;
 * Command System -- Economy with a high degree of central planning and little private ownership of property (U.S.S.R.)
 * Capitalist System -- Economy that lets the market to allocate resources
 * Private Property
 * Free Enterprise
 * Freedom of Choice
 * Self Interest
 * Competition
 * Awesomeness

5. How do Market Systems serve as a coordinating mechanism? >>
 * Markets know what the people want!
 * Flexible
 * Fluid
 * Direct Interaction!
 * Private Property encourages people to invest!
 * People can buy property and reap the rewards
 * Competition motivates people to be more efficient and regulate prices

6. Advanced Market Systems invest in:
 * Technology and Capital Goods
 * Specialization
 * Active, but LIMITED, government
 * Money! (It's the medium)

7. 3 Things Affect the Law of Demand
 * Diminishing Marginal Utility
 * Every time you get another slice of pizza it satisfies you less
 * Income Effect
 * Price drops make your income spread further (Buy more stuff!)
 * Substitution Effect
 * As the price drops of a certain product, people want to substitute it for a different product

Multiple Choice Questions

a) Taxes and Subsidies b) Producer Expectations c) Resource Prices d) Number of Buyers in the Market
 * 1) Which of these is NOT a Determinant of Supply?

2. Which of the following would cause the demand for paint (a substitute good for crayons) to go down? a) Income taxes nation-wide are lowered b) Crayons decrease their spectrum of colors c) Pre-School is no longer in session d) Price of Crayons go down

Answer Key:

1. D 2. D Luis de Armas

Everyone cleary already got most of the topics covered, but I'm going to add my notes here in case anybody needs a different look at some of these same concepts. -Fabi P. __Scarcity__ The basic principle of economics is that resources are limited. There is an infinite demand for a finite amount of supplies. therefore problems arise and economics is the study of these ups and downs of the market. A good example of scarcity is the toilet paper crisis in Cuba. http://www.myfoxchicago.com/dpp/news/dpgo_Toilet_Paper_Crisis_Cuba_fc_20090812_2918809 This scarcity leads to opportunity costs __Opportunity Costs__ There is always a trade-off between resources. If you buy product A, you must give up some of product B

__Production Possibilities Model (PPC)__ The production possibilities model (yes it has already been referred to) assumes that the economy is operating at full employment. This is not 0% unemployment but the natural rate of unemployment (4-6%)

One big economic concept is the concept of //Ceteris Paribus// It literally means "other things equal" It assumes that all other variables besides the variables being compared are held equal.

Everything else seems to be covered in pretty good detail. A good website for REview of some of these concepts is [] my personal favorite way of reviewing is with this video that was produced by some of our very own RE students: media type="youtube" key="8nL6MUGRMJ8" height="405" width="500"