ECON 2306 Test #1 PREVIEW SHEET Ten Fundamental Principles of ECONOMICS 1. Scarcity is inescapable. 2. Risk is unavoidable. 3. All persons must make

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1 ECON 2306 Test #1 PREVIEW SHEET Ten Fundamental Principles of ECONOMICS 1. Scarcity is inescapable. 2. Risk is unavoidable. 3. All persons must make choices. 4. Incentives matter. 5. People generally act in their own selfinterest when choices are made. 6. There is often more than one way to produce things. 7. Voluntary exchange is mutually advantageous. 8. It is wealth, not poverty, which has causes. 9. Public policies usually have primary & secondary effects: some good and some bad. 10. In the long run, economic laws tend to prevail What is meant by scarcity? 2. What is meant by opportunity cost? 3. What is the formula for economics? 4. What is the Cobb-Douglas Production Function?

2 5. What is meant by capital-intensive production? labor-intensive production? 6. Who is the author of the Wealth of Nations? 7. When was the Wealth of Nations published? 8. What is meant by the invisible hand? 9. What is meant by unintended consequences? 10. What were the two most noble professions discussed in class? WHY were these considered to be the most noble? 11. Give an example for each of the Ten Fundamental Principles of Economics. 12. What is a definition of economics? 13. What is meant by allocation? production? 14. What is meant by normative economics? 15. What is meant by positive economics? 16. How does micro differ from macro? 17. What are the levels of micro? 18. What are the sectors of macro? 19. What is meant by aggregate? Which branch of economics uses this term? 20. What are the four factors of production?

3 21. What are the payments to the four factors of production? 22. What is the largest part of national income? smallest? 23. What are three questions all economic systems must answer? 24. What are the four types of economics systems? 25. In each of the economic systems, how are the three economic questions answered? 26. What is meant by a circular flow diagram? 27. What lessons can be learned from a circular flow diagram? 28. What are the six economic warnings? 29. What is meant by post hoc ergo propter hoc? 30. What is meant by time-series data? crosssectional data? 31. What is the fallacy of composition? 32. How does correlation differ from causation? 33. What is meant by shaving with Ockham s razor? 34. What is meant by the guns and butter metaphor?

4 35. Draw the graph for a production possibilities frontier (PPF). 36. What does the slope of a PPF represent? 37. What does the shape of a PPF represent? 38. What is meant by the law of increasing opportunity cost? Why does this happen? 39. What does it mean to be operating INSIDE, OUTSIDE, or ON the PPF? 40. How does allocative efficiency and productive efficiency relate to a PPF? 41. How do consumer goods and capital goods differ? 42. Over time, what happens if a nation devotes more of its production to capital goods? consumer goods? 43. What is the opposite of an economic good? 44. What is meant by a bad? 45. What is the definition of demand? (8 parts) 46. What is the definition of supply? (8 parts) 47. Graph a demand function. supply function. 48. Write out the demand function. supply function.

5 49. What are the non-price parameters of demand? 50. What are the non-price parameters of supply? 51. Using the demand function, demonstrate what happens when price changes & what happens when a non-price parameter changes. 52. Using the supply function, demonstrate what happens when price changes & what happens when a non-price parameter changes. 53. How does a movement along a curve differ from a shift? 54. What causes a movement along a curve (demand or supply curves)? 55. What causes a shift (demand or supply curves)? 56. List which direction each of the non-price parameters of demand shifts the demand curve. 57. Do the same (AS ABOVE #56) for the nonprice parameters of supply. 58. What is meant by shortage? surplus?

6 59. What happens in a market graph if a price is BELOW, ABOVE, and AT EQUILIBRIUM? 60. What are the three steps of comparative statics? 61. What is meant by a price floor? When is it effective? What is the effect? Give an example. 62. What is meant by a price ceiling? When is it effective? What is the effect? Give an example. 63. In terms of the equilibrium price and equilibrium quantity, what happens when supply and demand shift in the same direction? opposite directions? (4 cases) 64. What is meant by elasticity? 65. What is the general formula for elasticity? 66. What makes a good more (or less) elastic? 67. In terms of slope, what demand curves are more elastic than others? 68. In terms of slope, what supply curves are more elastic than others?

7 69. What is meant by elastic, inelastic, unit elastic, perfectly elastic, & perfectly inelastic? 70. How does elasticity vary along a demand curve? 71. How is Total Revenue affected by elasticity? 72. What is the mid-point formula for elasticity? 73. What is meant by income elasticity? Do we care about the sign or magnitude? How do we interpret the sign? 74. What is meant by cross-price elasticity? Do we care about the sign or magnitude? How do we interpret the sign? 75. In terms of an income elasticity, what is meant by a normal good? inferior good? a luxury (or superior) good? 76. In terms of cross-price elasticity, what is meant by a complement? a substitute? an unrelated good?