ECON 2305 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.
------------------------------------------------------------1. 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?
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?
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?
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.
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?
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 are the three main variables of
macro?
65. What are the six main measures of these
three main variables?
66. What is meant by Fair’s Model? … Okun’s
Law? … the Phillips Curve? … the Full
Employment Act of 1946 ?
67. How does GDP differ from GNP?
68. How does nominal GDP differ from real
GDP? Use a simple two-good formula to
show the difference.
69. How does CPI differ from the GDP
deflator and how are the two similar?
70. What are the strengths and weaknesses of
CPI ? … GDP deflator?
71. What three formulas can be used to
demonstrate the algebraic relationships
among the GDP Deflator, Nominal GDP,
and Real GDP?
72. Give an example of an item contained in
GDP but excluded from GNP.
73. Give an example of an item contained in
GNP but excluded from GDP.
74. What is the difference between magnitude
and rate of change?
75. How can the inflation rate be calculated
using CPI?
76. What is CPI in the base year?
77. What is known when Nominal GDP
increases over time?
78. What is known when Real GDP increases
over time?
79. What is the formula for the unemployment
rate?
80. What does one need to do to be considered
part of the U.S. Labor Force?
81. What are the three types of
unemployment?
82. What is meant by cyclical, frictional,
structural, and seasonal unemployment?
Give examples of each.
83. What is meant by “underemployed”?
84. What is the meant by the natural rate of
unemployment (UN)?