Mid Term review
• Economic growth is the sustained expansion of production possibilities.
• Demand is the relationship between the quantity demanded and the price of a
good when all other influences on buying plans remain the same.
• Normal good is a good for which the demand increases if income increases and
demand decreases if income decreases.
• Comparative advantage is the ability of a person to perform an activity or
produce a good or service at a lower opportunity cost than someone else
• Scarcity is the condition that arises because wants exceeds the ability of
resources to satisfy them.
• All economic questions and problems arise because human wants exceed the
resources available to satisfy them.
• Economics: The social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with scarcity,
the influences on those choices, and the arrangements that coordinate them.
• Microeconomics: The study of the choices that individuals and businesses make
and the way these choices interact and are influenced by governments.
• Macroeconomics: The study of the aggregate (or total) effects on the national
economy and the global economy of the choices that individuals, businesses,
and governments make.
• Rational Choice: is a choice that uses the available resources to best achieve the
objective of the person making the choice
• Cost is what you must give up.
• Benefit is what you gain. measured by what you are willing to give up to get it.
• Opportunity cost is the best thing that you must give up to get something—the
highest-valued alternative forgone.
• Marginal cost is the opportunity cost of a one-unit increase in an activity.
• The magnitude of the slope of the PPF measures the Opportunity cost.
• Consumption goods and services are goods and services that are bought by
individuals and used to provide personal enjoyment and contribute to a person’s
standard of living.
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• Examples of services: Laundromat, health care, counseling, landscaping,
insurance, banking, and transportation.
• Difference between
Consumption goods
Capital goods
Are goods and services that are
bought by individuals and used to
provide personal enjoyment and
contribute to a person’s standard of
living. Examples are movies and
laundromat services.
Are goods that are bought by
businesses to increase their
productive resources. Examples are
cranes and trucks
• Human capital is the knowledge and skill that people obtain from education,
on-the-job training, and work experience.
• Increasing human capital by education, on-the-job training, and work
experience.
• Entrepreneurship is the human resource that organizes labor, land, and capital.
• Households pay taxes directly for governments and receive transfers directly
from governments.
• Firms pay taxes directly for governments and receive transfers directly from
governments.
• Government
 Buy goods and services from firms thru Goods market.
 Expenditures: Goods and services, welfare benefits..
 Collecting: Sales, Property, income taxes.
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• A, B, C and X Points are attainable outputs
combination as they lie inside the PPF or on
the frontier.
• Y Point is an unattainable output
combination as it lies outside the PPF.
• A, B, C Points are efficient output
combinations as they lay on the frontier.
• X Point is an inefficient output combination
as it lies inside the PPF.
• Production possibilities frontier The boundary between the combinations of
goods and services that can be produced and the combinations that cannot be
produced, given the available factors of production and the state of technology.
• The PPF is a valuable tool for illustrating the effects of scarcity and its
consequences.
• When output point inside the PPF moves upward from H to D or from H to E,
there is a free lunch, and getting something without giving up something else.
• When output points move on the frontier from E to D or from D to C, we face a
tradeoff and giving up one thing to get something else.
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 The figure shows the production possibilities frontier for a country. The
opportunity cost of a gallon of milk between combination point A and B is
A. zero because at point A zero milk is being
produced.
B. 4 gallons of ice cream for a gallon of milk.
C. 1 gallons of ice cream for a gallon of milk.
D.3 gallons of ice cream for a gallon of milk.
E. 1/3 gallons of ice cream for a gallon of milk.
 The figure above shows the production possibilities frontier for a country. If
the economy is operating at point B, then the opportunity cost of another
million gallons of milk is
A. zero because after producing another million gallons of milk then zero
gallons of ice cream are produced.
B. 3 gallons of ice cream for a gallon of milk.
C. 4 gallons of ice cream for a gallon of milk.
D. 1 gallons of ice cream for a gallon of milk.
E. 1/3 gallons of ice cream for a gallon of milk.
 Which of the following is the best definition of economic growth?
A) The opportunity cost of consumption.
B) The sustained expansion of production possibilities.
C) Increased development of land and entrepreneurship.
D) The opportunity cost of capital.
E) The investment in capital and consumption goods by an economy.
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 Mac can bake more cookies than Monica per hour. It must be true that
A) Mac has an absolute advantage in baking cookies.
B) Mac cannot benefit by trade between the two of them.
C) Monica has an absolute advantage in cookie baking.
D) Monica has a comparative advantage in baking cookies.
E) Mac has a comparative advantage in baking cookies.
 Mary's production in 1 day is: 24 Dresses, 16 Jackets
 Mark's production in 1 day is: 8 Dresses, 12 Jackets
What is the opportunity cost for Mary of jacket production?
What is the opportunity cost for Mark of jacket production?
 Mary's opportunity cost of producing 1 dress =
 Mark's opportunity cost of producing 1 dress =
16 jackets
24 dresses
12 jackets
8 dresses
 Mary's opportunity cost of producing 1 jackets =
 Mark's opportunity cost of producing 1 jackets =
Graphing Two Variables
Hours Worked per Week
0
10
20
30
There is a positive relationship between work
hours and income, so the income curve is
positively sloped.
Slope =
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
=
𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑟𝑟𝑟𝑟𝑟𝑟
Slope=
200−120
20−10
=
80
10
=8
5
=
𝟐𝟐
𝟑𝟑
= 𝟏𝟏
24 dresses
16 jackets
8 dresses
12 jackets
jackets / dress
𝟏𝟏
𝟐𝟐
= 𝟏𝟏
=
𝟐𝟐
𝟑𝟑
jackets / dress
𝟏𝟏
𝟐𝟐
dress / jackets
dress / jackets
Income per Week
40
120
200
280
Point on the Graph
A
B
C
D
Graphing Two Variables
Number of CDs Purchased
0
10
20
30
Number of Songs Downloaded
360
240
120
0
Point on the Graph
A
B
C
D
There is a negative relationship between the number
of CDs and downloaded songs, so the curve is
negatively sloped.
Slope =
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
Slope=
120−240
20−10
=
−120
10
=
= -12
Markets
A market is any arrangement that brings buyers and sellers together and enables
them to get information and do business with each other.
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