Econ Study Guide Exam 1CHAPTER 1Objectives:1. Know the difference between micro and macro economics2. Evaluate the role that rational self-interest plays in economic analysis3. Distinguish between positive and normative economic statements4. Explain why economics is a scienceEconomics-is part of the social sciences, and, as such, seeks explanations of real events; it is the study of how people allocate their limited resources in an attempt tosatisfy their unlimited wants; is the study of how people make choices- It is a way of thinking; it is concerned with how people make decisions when faced with scarcity Resources-things that have value and, more specifically, are used to produce goods and services that satisfy people’s wantsWants-all of the items that people would purchase if they had unlimited incomeEconomics is divided into two types of analysis: Micro and Macro Economics1. Microeconomics -is the part of economic analysis that studies decision-making undertaken by individuals (or households) and by firms. It is like looking through a microscope to focus on the small parts of our economya. Example-concerned with effects of changes in gas price relative to that of other energy sources; it examines the effects of new taxes on a specific product or industry2. Macroeconomics -is the part of economic analysis that studies the behavior ofthe economy as a whole. It deals with economy wide phenomena such as changes in unemployment, in the general price level, and in national incomea. Example-issues involving the rate of inflation, the amount of economy wide unemployment, the yearly growth in the output of goods and services in the nation; aka aggregates—total amounts or quantitiesEconomic System-a society’s institutional mechanism for determining the way in which scarce resources are used to satisfy human desires 3 Basic Economic Questions for every nation1. What and how much will be produced?2. How will items be produced?3. For whom will items be produced?2 Opposing Answers1. Centralized Command and Control (aka central planning)a. One person or government makes decisions regarding the 3 Q’sb. Means of production owned by govc. Difficult to obtain info that would be captured by prices2. Price System (aka Market system)1a. Decentralized decision-making, meaning under a pure price system, individuals and families own all of the scarce resources used in productionb. Individuals and families own means of productionc. Prices serve as signals that provide infoMixed Economic Systems-incorporation of both centralized command and control and a decentralized price system- A continuum of options for mixing- Some countries more CCC (China, N. Korea) and others more Price (S. Korea)- Countries can change how much CCC vs. how much Price system over time (USA: autos, banks)Economics as a Science- Economics uses the scientific method using models that simplify the real world- Economists seek to predict what people will do when faced with certain incentives- Simplification is necessary. Think about maps. The test of a model is its ability to predict.- Models must be based on a set of assumptions – tells when model is applicable-Incentives matter—they influence behavior in predictable wayso Direct incentives-easy to recognizeo Indirect incentives-secondary change in behavior (unintended consequences)Ceteris Paribus-“all else equal;” the assumption that nothing changes except the factor or factors being studied- •Ex: How much of a particular product a family buys is how expensive that product is relative to other productso In addition to relative prices, other factors influence decisions when purchasing somethingo Some deal with income, tastes, custom and religious beliefRationality Assumption-assumption that people do not intentionally make decisionsthat would leave them worse off- So many ways to be irrational; only one to be rational.- Studying rationality gives baseline- Economics focused on outcomes rather than thought process.o 3 rationality assumptions:1. Interested only in own satisfaction2. Choices always align with long-term interests3. Can consider every choice- Bounded Rationality:2o People are nearly but not fully rationalo Sometimes break from the 3 rationality assumptionso People use rules of thumb instead of considering all choicesPositive Vs. Normative Economics- Positive-analysis that is strictly limited to making either purely descriptive statements or scientific predictiono Statements about “what is”o Can be tested proven/disproveno Ex: if gas prices fall, people will buy more gas- Normative-analysis involving value judgments about economic policies; relates to whether outcomes are good or bado Statements about “what should be”o Are matters of opiniono Ex: gas prices are too lowCHAPTER 2Objectives:1. Understand scarcity2. Know why economics considers “wants” but not “needs”3. Discuss why obtaining increasing increments of any particular good typically entails giving up more and more units of other goods4. Explain why society faces a trade-off between consumption goods and capitalgoods5. Distinguish between absolute and comparative advantageScarcity—not a shortage, not poverty- It is a fact of life. Physicists didn’t invent gravity; economists didn’t invent scarcity- Resources are the inputs used in production of the things we want- Scarce resources are used to produce products that can be used in consumption5 Types of Resources1. Landnatural resourcea. Locationb. Original fertility and mineral depositsc. Topographyd. Climatee. Waterf. Vegetation g. Basically, “natural” stuff AKA “gifts of nature”2. LaborProductive contributions of humans who work33. Physical Capital–Manufactured resources like buildings, equipment, machines, and improvements to the land used for production4. Human CapitalAccumulated training and education of workersa. Learning by doing: apprenticeship or practiceb. Formal education: College, certificate programs5. Entrepreneurship–Performed by humansa. Subdivision of laborb. Raises capital, organizes, manages, assembles factors of production, makes business decisions, takes risks, and experimentsWants Vs. Needs- Economists are concerned with wants- Every individual has competing wants but cannot satisfy all of them, given limited resourcesScarcity, Choice, and Opportunity Cost- Valuing Forgone Alternatives is individual specific—whether you study for a test another hour or sleep