Economics Chapter 1 Test Study Guide Mr. Baysdell Capital is any resource made by humans and used to create other goods and services. Frequently, capital consists of machinery, but there are other types of capital-like human capital and financial capital (money) An example of shortage is a limited amount of toys available because of the trucks carrying toys are on strike. Know the difference between scarcity and shortage!! Scarcity is always with us—we’ll never get enough “stuff” to satisfy our needs. Factors of Productions are used to make all goods and services. Land, labor, capital, and management are the 4 factors. An example of making a decision at the margin would be whether or not to hire a new employee—will that employee offer enough extra benefit to offset the cost of labor? To show alternative ways to use an economy’s resources, one should use a production possibilities graph. A production possibilities graph can examine the opportunity cost of a decision. An economy that uses its resources to make the most goods and services is called an efficient economy. The law of increasing costs means that when an economy increases the production of one item, the opportunity cost goes up. You can force an economy to make more military rifles, but when you shift resources over, you lose more consumer goods—because you have to retrain workers to produce rifles, etc. In the beginning, the workers may be skilled, ex-rifle factory workers…as you continue, workers will be less skilled and less able to adapt, resulting in less productivity. An example of guns or butter issue is if the government of a country must make a decision between spending money on a hospital or on border security. LBJ tried to spend on both his “Great Society” and the Vietnam War. It didn’t work. (huge budget deficits resulted) Production possibilities frontiers show the maximum amount that an economy can produce. It curves when they are charted on a graph because they show the increasing costs resulting in increasingly less output. Know that all goods and services are scarce because all resources are scarce (ex. having workers do two jobs because a company lacks workers). An opportunity cost of a decision is the most desirable alternative given up for the decision. Know what a physical capital is (ex. a factory building). Know what an entrepreneur is and what would make someone an entrepreneur. Be able to give an example of growth by technology. Financial capital is the money used to buy tools and equipment needed for production Know the difference between POSITIVE and NORMATIVE economics statements. Positive economic statements don’t state opinions—they just give facts. Normative statements states opinions as to what will happen when certain economic policies are employed. Economic interdependence explains how actions in one part of the world affect others. A strike in California can affect the price of computers in Europe. Understand Production Possibilities Curve/Frontier INSIDE OUT! PPCs demonstrate INCREASING OPPORTUNITY COSTS. As you move along a PPC, it gets steeper, which means that in order to have more of one good, incremental sacrifices of the other good MUST INCREASE. That’s why a PPC is bowed out or concave in nature. Macroecoomics vs. Microeconomics: Which one would study unemployment, inflation, and income? The basic questions of economics—What, how, and for whom to produce—exist in every economy, even a Communist economy. Economic rationality implies that individuals act in their own self-interest. Economists are often viewed as troublemakers because they tend to draw attention to the costs of various political choices, frustrating political consensus. Ceteris paribus is a necessary assumption used by economists because it simplifies analysis. Know the various fallacies of economics Causation does not imply correlation! Post hoc, ergo propter hoc: After this, therefore because of this Fallacy of Composition: Can’t always generalize specific cases The best test of an economic theory is its usefulness in predicting changes in the real world. The economic way of thinking stresses that as the benefits of an option increase, people will be more likely to choose that option. Economic growth can result from improvements in technology, capital investment, utilizing previously unemployed resources, and investment in human capital The central problem of every economic system is to get people to cooperate effectively using what is available to provide what people want. A PPC is only accurate if an economy’s resource base is held constant (Hence, it would be impossible to use a PPC to investigate the Japanese economy after 1931, when it invade resource-rich Manchuria) Know this formula: % Increase = GDP (B)- GDP (A) GDP (A) Listed below are terms that you should know and be able to describe: Efficiency Factors of production Goods Growth Labor Opportunity cost Production possibilities frontier Production possibilities curve/ Ceteris paribus Scarcity Services Shortage Specialization Trade-off Underutilization TINSTAAFL .