ECON 2100 1nd EditionFinal Exam Study Guide Chapters: 1 - 12Chapter 1 (September 28)Define economics. Economics is the science that studies human behavior individually and collectively. Choices in economics are necessary because resources are scarce. Define these three resources; land, labor, and capital. Land: earth and minerals, fish, water, and forest Labor: mental or physical effort that people provide Capitol: goods needed to make finished products (machines) or the education and training people acquire. Define marginalism.Marginalism, “thinking at the margin,” means that one must analyze the additional or incremental costs and benefits arising from a choice or decision. Incremental costs equal marginal cost, and incremental benefits equal marginal benefits. What is the economic decision rule? The economic decision rule states that if marginal benefit is greater than marginal cost, then one should pursue that activity. However, if marginal cost is greater than marginal benefit, one should not. What is opportunity cost? Opportunity cost is the value of the best next alternative that we give up. It implies there is a tradeoff in pursuing an activity or for undertaking an action. Opportunity cost can be explicit (out-of-pocket expenditures) or implicit (hidden expenses). Suppose you rent a car for $29.95. For the first 150 miles it’s free, and then for each mile after that it costs 15 cents. You plan to drive 200 miles. What is the marginal cost of driving the car? The marginal cost is $0 for the first 150 miles, and then after the 150 miles the marginal cost is $6.15.The government spends $4,170 on drug control to deter one person from using drugs. The cost a drug user imposes on society is $897. Should the government spend more money on drug control? The marginal cost is $4,170, and the marginal benefit is $879, therefore no. Suppose you earn 30,000 a year and are considering a job that will increase earnings by 300,000 per year, but it requires an MBA. The job also means that you will be spending 25,000attending business school for 2 years. You already have a bachelor’s degree (80,000). Which information is relevant whether to take the job? The cost of business school and increased earning by the new job. What is the role of incentives? Incentives are rewards and penalties that motivate behavior, i.e. Black Friday. What is the difference between microeconomics and macroeconomics? Microeconomics focuses on individual decision-making agents such as individual, household, industry, and macroeconomics looks at the economy in its entirety. Define positive statements and normative statements, and give examples of each. Positive statements describe the world as it is – value-free (what it is and how it works). i.e. “Today is Thursday.” Normative statements propose how the world should work – judgmental. i.e. “Eliminate Wednesday and Thursday so it can be Friday.” List some elements about building models. 1. They help economists focus on how the world works. 2. They must predict behavior to be useful. 3. They don’t perfectly reflect all aspects of the thing they describe. 4. They rely on a theory of how something works5. They require assumptionsDefine the post hoc fallacy. The post hoc fallacy is a pitfall that deals with correlation and causation. Just because two events happen to be correlated doesn’t mean one has cause the other to happen. i.e. cancer rises and cell phone user rises. What are freakonomics?Freakonomics: abortions and crimes are correlated. For example, in the Roe vs. Wade case, it was stated that more abortions is the reason for less crime. It’s unclear, however, that more abortions implies causation for less crime. Chapter 2 (September 04 - 09) What is a market? A market is groups of buyers and sellers of a good or service. A competitive market is so large that no one entity can influence the price (many buyers and sellers). Draw a diagram of the demand curve. What is Ceteris Paribus? Ceteris Paribus means “all else constant.” Which of the following does NOT cause a change in demand? Change in price, income increase, price of related goods, changes in tastes, number of buyers, or expectations. A change in price does not cause a change in demand, it causes a change in quantity demanded. Explain how income changes can lead to a change in demand. When consumer incomes increase, demand increases (shifts to the right) because consumers now have more spending money, spent on normal goods. When consumer incomes increase and demand decreases (shifts to the left), this is because consumers are not spending money onthe inferior goods because now they can afford the more expensive goods. Explain price of related goods and its effect on demand.Suppose a hot dog is a substitute good for a hamburger. When the substitute of the hotdog increases, the demand for the hamburger decrease. This would happen if the price of the hotdog becomes cheaper (and therefore more desirable for consumers) than the price of a hamburger. Now suppose a French fries are a compliment to burgers. When the price of burgersincreases, the demand for French fries decreases because they are both usually consumed together and therefore both become undesirable to consumers. Give an example for how a change in taste can lead to a shift in demand. In the summer, the market for ice cream would generally increase as opposed to the winter. Therefore, in the summer, this would show an increase in demand, shifting the curve to the right. What happens to demand when the number of buyers in the market decreases? Since there are less consumers in the market, the demand decreases (shifting it to the left). Give an example for how expectations can lead to a shift in demand. Suppose Apple realizes the popularity of iPhones is constantly increasing. It would be a smart move on their part to increase the price of iPhones to maximize the profits gained from the product. What kind of relationship does price and quantity have on the demand curve? Price and quantity have a negative relationship. Draw a diagram for supply.Give an example of a supply schedule. Price(Wage/hr.)Qty.(workers)$0.10 0$1.00 1$2.00 3$3.00 6$5.00 15$10.00 50List the 6 shift factors for supply and give an example of each. 1.) Changes in cost of inputs. Suppose a fishing firm needs more fuel for fishing boats (and fuel is expensive). The change in cost increases, which causes the change in supply to decrease because the