Principles of Economics Final Exam Study Guide
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The final exam for this course will consist of two parts. The first part is this study guide which will be
considered a project and count for half the grade. IT WILL BE GRADED FOR COMPLETENESS AND
ACCURACY. The other half of the final exam grade will be the test itself. WITHOUT COMPLETING
THIS STUDY GUIDE AND SUBMITTING IT YOU CANNOT PASS THE FINAL.
Chapter 1
Define economics. Why does scarcity matter?
STUDY OF CHOICES MADE TO SATISFY NEEDS AND WANTS
IF WE DIDN’T HAVE LIMITED RESOURCES, WE WOULDN’T NEED TO CHOOSE
Identify the three factors of production. Describe each and provide an example.
LAND—ANY NATURAL RESOURCES; CORN, WATER, TREES
LABOR—ANY HUMAN EFFORT; BUILDING A HOUSE
CAPITAL—STUFF MADE IN ORDER TO MAKE OTHER STUFF
PHYSICAL—TOOLS AND MACHINERY; HAMMER OR BULLDOZER
HUMAN—KNOWLEDGE & SKILLS; KNOWING HOW TO BAKE COOKIES
All decisions involve trade-offs and an opportunity cost. What is meant by those terms?
TRADE-OFF IS ANYTHING YOU DON’T CHOOSE…OPPORTUNITY COST IS ONLY THE BEST THING YOU DON’T
GET
What does a PPF show? Why would you want to use one?
DIFFERENT COMBINATIONS THAT CAN BE PRODUCED…YOU USE IT TO ANALYZE EFFICIENCY
Provide one example of each of the following: good, service, need, want.
GOOD—SOMETHING YOU BUY LIKE A HAMBURGER
SERVICE—SOMETHING YOU PAY TO HAVE DONE LIKE A HAIRCUT
NEED—SOMETHING NECESSARY FOR LIFE…WATER
WANT—SOMETHING DESIRED BUT NOT CRITICAL...IPOD
Chapter 2
Define economic system. What 3 questions does an economic system answer?
METHOD USED BY SOCIETY TO DECIDE WHAT TO DO WITH RESOURCES
WHAT TO MAKE? HOW TO MAKE IT? WHO GETS WHATS MADE?
Compare command and market economies. Who controls each?
COMMAND ARE CONTROLLED BY THE GOVERNMENT…MARKET ARE CONTROLLED BY PEOPLE
Why are all command economies doomed to failure?
THERE IS NO INCENTIVE TO WORK HARD
Define efficiency, entrepreneur, and consumer sovereignty.
EFFICIENCY—USING RESOURCES TO BEST OF THEIR ABILITY
ENTREPRENEUR—SOMEONE WHO CREATES SOMETHING NEW
CONSUMER SOVEREIGNTY—IDEA THAT CONSUMERS CONTROL A MARKET ECONOMY & DECIDE WHAT GETS
PRODUCED BASED ON WHAT THEY ARE WILLING TO BUY
Chapter 3
Compare the role of the government with the role of the people in a market economy.
GOV’TS JOB IS TO SET THE FOUNDATION FOR THE ECONOMY TO OPERATE AND HELP PROVIDE THINGS WE
WOULDN’T HAVE ON OUR OWN
PEOPLE RUN THE ECONOMY, ESSENTIALLY BY ACTING IN THEIR OWN SELF-INTEREST
What 2 ways can we best make our demands known to the government?
HOW WE VOTE & WHAT WE BUY
Principles of Economics Final Exam Study Guide
Define externality & provide an example of a positive and negative externality.
AN EXTERNALITY IS AN UNINTENDED SIDE EFFECT THAT IMPACTS SOMEONE NOT INVOLVED IN MAKING
THE DECISION
POSITIVE—HELPS SOMEONE ELSE…NEIGHBOR DECIDES TO PUT IN A NEW POOL
NEGATIVE—SOMEONE ELSE IS HURT…NEIGHBOR DECIDES TO BURN DIRTY DIAPERS
Explain what each of the following are: EPA, OSHA, FDA, free rider, microeconomics, macroeconomics, in-kind benefits, cash
transfers, safety net.
EPA—ENVIRONMENTAL PROTECTION AGENCY…REGULATES THE ENVIRONMENT
OSHA—OCCUPATIONAL SAFETY & HEALTH ADMINISTRATION…REGULATES WORKPLACE CONDITIONS
FDA—FOOD & DRUG ADMINISTRATION…REGULATES FOOD & MEDICINE THAT IS LEGAL
FREE RIDER—SOMEONE WHO WOULDN’T WILLINGLY PAY BUT STILL BENEFITS
MICRO—STUDY OF SMALL THINGS IN ECONOMY LIKE INDIVIDUALS & BUSINESSES
MACRO—STUDY OF ECONOMY AS A WHOLE
IN-KIND BENEFITS—GOV’T ASSISTANCE IN THE FORM OF GOODS & SERVICES
CASH TRANSFERS—GOV’T ASSISTANCE IN THE FORM OF CASH
SAFETY NET—TERM GIVEN TO GOV’T ASSISTANCE IN GENERAL
Chapter 4
Summarize the law of demand. Draw a picture of it.
AS A CONSUMER YOU BUY MORE WHEN THE PRICE IS LOW (DOWNWARD SLOPING LINE)
Give an example of each of the following: normal good, inferior good, substitute, complement.
NORMAL—THINGS YOU WANT TO BUY…IPODS, DVDS, CLOTHING
INFERIOR GOODS—THINGS YOU DON’T BUY BUT MAY HAVE TO…RAMAN NOODLES, SPAM, CHEAP STUFF
SUBSTITUTE—USED IN PLACE OF SOMETHING ELSE…PEPSI FOR COKE
COMPLEMENT—USED ALONG WITH SOMETHING ELSE…HAMBURGER & FRIES
Define elasticity of demand. Give an example of an inelastic & elastic good.
MEASURES HOW CONSUMERS RESPOND TO A CHANGE IN PRICE
INELASTIC—THINGS WE MUST STILL BUY…MEDICINE & GAS
ELASTIC—THINGS WE CAN STOP BUYING…CANDY & DVDS
Chapter 5
Summarize the law of supply. Draw a picture of it.
AS A PRODUCER YOU SELL MORE WHEN THE PRICE IS HIGH (UPWARD SLOPING LINE)
Explain the difference between fixed and variable costs. Provide an example of each.
FIXED COSTS—THINGS YOU BUY ONLY ONCE & REUSE…PITCHER, HAMMER, OVEN
VARIABLE COST—THINGS YOU CONTINUE TO BUY TO INCREASE PRODUCTION…LEMONS, GAS
How do subsidies and excise taxes each affect the supply curve?
SUBSIDIES ARE MEANT TO DECREASE PRICES (SHIFT SUPPLY CURVE RIGHT)
EXCISE TAXES ARE MEANT TO INCREASE PRICES (SHIFT SUPPLY CURVE LEFT)
Chapter 6
What is meant by the point of equilibrium? Label it on a graph.
POINT WHERE SUPPLY AND DEMAND ARE EQUAL (OCCURS AT INTERSECTION OF SUPPLY & DEMAND)
What happens when the price is too high? Too low? When will you see excess demand (shortage)? Excess supply (surplus)?
EXCESS SUPPLY—PRODUCERS LOWER PRICE TO REACH EQUILIBRIUM
EXCESS DEMAND—PRODUCERS RAISE PRICE TO REACH EQUILIBRIUM
Why would the government use a price ceiling or price floor? Give an example of each.
PRICE CEILINGS KEEP THE PRICE LOWER…ALLOW CONSUMERS TO BUY IT (RENT CONTROL, MILK)
PRICE FLOORS RAISE THE PRICE…REDUCE AMOUNT WE BUY & PROTECT PRODUCER (MIN. WAGE)
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Principles of Economics Final Exam Study Guide
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Chapter 7
What is market power? Do you want to have more or less of it as a producer?
ABILITY TO CHANGE PRICES…PRODUCERS WANT TO HAVE MORE OF IT SINCE IT LETS THEM MAKE MORE
MONEY
Analyze the following in terms of market power, number of firms, and examples: perfect competitor, monopolistic competitor,
oligopoly, monopoly.
PC—TONS OF SELLERS SELLING IDENTICAL PRODUCTS…NO MARKET POWER…TONS OF
SELLERS…COMMODITIES
MC—TONS OF SELLERS SELLING SIMILAR PRODUCTS…A LITTLE MARKET POWER…TONS OF
SELLERS…SNACK FOOD, CLOTHING
OLIGOPOLY—A FEW LARGE SELLERS DOMINATING A MARKET…A LOT OF MARKET POWER…A FEW
SELLERS…VIDEO GAMES, COMPUTERS
MONOPOOLY—ONLY ONE SELLER FOR A PRODUCT…ALL THE MARKET POWER…ILLEGAL BUT CAN HAVE
LOCAL ONES LIKE DONEHOWERS & WEST COASTS
As consumers do we prefer to see price wars or price fixing? Why?
WE LIKE TO SEE PRICE WARS SINCE IT MEANS PRODUCERS ARE FIGHTING FOR OUR BUSINESS BY LOWERING
PRICES
How can producers legally price discriminate? Why would they want to?
BY CREATING DIFFERENT CATEGORIES OF GOODS LIKE MOVIE TICKETS & AIR TRAVEL...THE ABILITY TO DO
SO ALLOWS THEM TO MAKE MORE MONEY
Chapter 8
Compare the different types of businesses: sole proprietorship, partnership, corporation.
SOLE PROPRIETORSHIP—ONLY ONE OWNER…EASIEST TO START & LEAST REGULATED
PARTNERSHIP—TWO OR MORE…STILL EASY TO START W/ LITTLE REGULATION BUT SHARE PROFITS &
RESPONSIBLITIES
CORPORATION—OWNERS AND BUSINESS SEPARATE…MOST DIFFICULT TO START & MOST REGULATED
(TYPICALLY THE BIGGEST BUSINESSES IN THE US)
Identify 3 examples of fringe benefits.
ANYTHING YOU RECEIVE FOR WORKING THAT IS NOT PART OF YOUR PAYCHECK, SUCH AS VACATION TIME,
FREE FOOD, OR A COMPANY CAR
Define & provide 3 examples of a business franchise.
BUSINESSES THAT YOU PAY TO USE THEIR NAME FOR YOUR ACTUAL BUILDING…MOST FAST FOOD PLACES
INCLUDING MCDONALDS, WENDY’S, AND TACO BELL
Chapter 9
Which song was better, “Seize the Day” or “King of New York”?
Chapter 10
Identify & describe the 3 uses of money.
MEDIUM OF EXCHANGE—BUY & SELL STUFF
UNIT OF ACCOUNT—COMPARE VALUES
STORE OF VALUE—SAVE FOR LATER
Identify & describe the 3 sources of value for money.
COMMODITY—OBJECT ITSELF IS VALUABLE…LIKE GOLD OR COWS
REPRESENTATIVE—CAN BE REDEEMED FOR SOMETHING ELSE…SILVER CERTIFICATE, IOU
FIAT—OUR MONEY TODAY…HAS VALUE ONLY BECAUSE THE GOV’T SAID SO
How can banks “create” money?
WHEN YOU DEPOSIT MONEY THERE THEY KEEP SOME IN THEIR POSSESSION BUT THEN LOAN THE REST OUT
TO OTHER CUSTOMERS…WHEN THEY DO THIS THE MONEY IS EVENTUALLY DEPOSITED INTO ANOTHER
BANK AND THE PROCESS REPEATS…THE END RESULT IS MULTIPLE PEOPLE THINKING THEY HAVE THE SAME
PHYSICAL CURRENCY, ALLOWING THE BANK TO “CREATE” MORE MONEY THAN ACTUALLY EXISTS
Principles of Economics Final Exam Study Guide
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Compare/contrast credit and debit cards.
CREDIT CARDS ARE USED AS MINI LOANS THAT YOU PAY BACK MONTHLY WITH INTEREST
DEBIT CARDS DRAW THE MONEY STRAIGHT FROM YOUR CHECKING ACCOUNT
Chapter 11
Define risk, return, and liquidity.
RISK—CHANCE OF LOSING MONEY
RETURN—PROFIT
LIQUIDITY—EASE OF SPENDING
What is diversification? Which type of investment incorporates diversification?
SPREADING MONEY AROUND TO REDUCE RISK…ONLY MUTUAL FUNDS DO THIS
Which investment would have the highest risk? Highest liquidity?
STOCKS…BANK ACCOUNTS
Chapter 12
Define GDP. Why do we use it?
GROSS DOMESTIC PRODUCT—TOTAL VALUE OF STUFF PRODUCED IN A COUNTRY
WE USE IT TO ANALYZE HOW OUR ECONOMY AS A WHOLE IS DOING
How is real GDP different from nominal GDP?
NOMINAL IS JUST BASED ON PRICES RIGHT NOW…REAL ELIMINATES THE EFFECTS OF INFLATION TO
MEASURE CHANGES IN QUANTITY ONLY
Can we stop the business cycle? What then is our goal?
NO, WE ARE JUST TRYING TO KEEP IT STABLE & GROWING
What is meant by capital deepening?
GETTING MORE CAPITAL…INCREASING HUMAN & PHYSICAL CAPITAL TO INCREASE PRODUCTIVITY
Chapter 13
Define each of the following: inflation, unemployment, poverty, poverty threshold.
INFLATION—GENERAL RISE IN PRICES
UNEMPLOYMENT—PEOPLE WITHOUT JOBS WHO WOULD LIKE ONE
POVERTY—BEING UNABLE TO PROVIDE FOR BASIC NEEDS
POVERTY THRESHOLD—MINIMUM INCOME NEEDED AS IDENTIFIED BY GOV’T TO PROVIDE FOR BASIC NEEDS
Chapter 14
What is fiscal policy? What can the government do to control the economy?
FED GOV’TS CONTROL OF THE ECONOMY THROUGH TAXES & SPENDING
GOV’T CAN INCREASE OR DECREASE TAXES/SPENDING TO MAKE ECONOMY GO UP OR DOWN
How is mandatory spending different from discretionary? Give an example of each.
MANDATORY IS SOMETHING THEY MUST PAY FOR LIKE SAFETY NETS
DISCRETIONARY IS OPTIONAL LIKE PAYING FOR THE MILITARY
How do we decide which government pays for public goods? List what each one is most likely to pay for.
WHO GETS TO USE IT THE MOST PAYS FOR IT
Chapter 15
How is the budget deficit different from the national debt? Which is bigger?
BUDGET DEFICIT IS MEASURED OVER ONE YEAR…NATIONAL DEBT IS BIGGER AND MEASURES FOR ALL OF
HISTORY
How big is our national debt today?
~$13 TRILLION
Principles of Economics Final Exam Study Guide
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Chapter 16
What is monetary policy?
FED RESERVE (NATIONAL BANK) CONTROL OF THE ECONOMY THROUGH THE MONEY SUPPLY
Explain what the Federal Reserve is. Who is the head of it?
ITS KINDA LIKE A NATIONAL MOMMY B ANK…IT IS RESPONSIBLE FOR PRINTING MONEY, IT IS THE GOV’T’S
BANK…IT HELPS OUT ALL THE OTHER BANKS…BEN BERNANKE
Define the three ways the Federal Reserve can influence the money supply.
REQUIRED RESERVE RATIO—CHANGING THE AMOUNT OF MO NEY BANKS MUST HOLD CAN INFLUENCE HOW
MUCH CAN BE “CREATED” BY THE LOANING PROCESS
OPEN MARKET OPERATIONS—FED RESERVE SELLING BONDS EITHER TAKES MONEY OUT OF THE ECONOMY
OR INJECTS MORE MONEY INTO IT
DISCOUNT RATE==BY CHANGING THE RATE IT CHARGES OTHER BANKS, THE FED RESERVE CAN INFLUENCE
THE NATIONAL INTEREST RATE WE PAY AS CUSTOMERS
If we have more money the economy tends to go ___, while if we have less money the economy tends to go ___.
UP; DOWN
Chapter 17
Why do we trade?
TO GET STUFF WE DON’T HAVE, THEY CAN MAKE IT CHEAPER, & TO BE FRIENDS
Compare absolute and comparative advantage.
ABSOLUTE JUST MEANS YOU CAN PHYSICALLY MAKE MORE
COMPARATIVE MEANS YOU CAN PRODUCE AT A LESSER COST (WILL DECIDE WHAT YOU SHOULD MAKE)
How do trade barriers and free trade agreements differ? Who likes each?
TRADE BARRIERS PREVENT TRADE & HELP PRODUCERS WHILE RAISING PRICES FOR CONSUMERS
FREE TRADE AGREEMENTS ENCOURAGE TRADE & HELP CONSUMERS WHILE INCREASING COMPETITION FOR
PRODUCERS
How can exchange rates affect us today?
SINCE WE TRADE SO MUCH WITH OTHER COUNTRIES, THE EXCHANGE RATE WILL DETERMINE HOW MUCH
WE HAVE TO PAY FOR THEIR PRODUCTS
Chapter 18
Summarize the difference between LDCs and developed countries.
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