!1!Macroeconomics+(ECO2013)+Comprehensive!Final!Exam!Study!Guide!++~Chapter+1~+The+Economic+Approach+!1. What!is!economics?!a. Economic!is!the!study!of!how!we!make!choices!under!scarcity!b. Choice:!the!act!of!selecting!among!alternatives!c. Scarcity:!the!concept!that!there!is!more!of!a!good!freely!available!in!nature!than!people!would!like!i. Not!the!same!as!poverty,!scarcity!is!subjective!ii. Scarcity!necessitates!rationing!2. Resource:!an!input!that!can!be!used!to!produce!an!economic!good!a. Human!Resource!b. Physical!Resources!c. Natural!Resources!3. The!Economic!Way!of!Thinking!a. Resources!are!scarce!so!decision!makers!must!make!tradeLoffs!i. Opportunity!Cost:!the!highest!valued!alternative!that!must!be!sacrificed!when!making!a!decision!b. Individuals!are!rational!–!they!try!to!get!the!most!from!their!limited!resources!(ex.!The!greatest!benefit!from!the!least!possible!cost)!c. Incentives!matter!–!choice!is!influenced!in!a!predictable!way!by!changing!incentives!d. Individuals!make!decisions!at!the!margin!i. Marginal:!describes!the!effect!of!a!change!in!the!current!situation!ii. Cost!Benefit!Analysis:!one!will!undergo!an!action!when!the!marginal!benefits!exceed!the!marginal!cost!e. Information!helps!us!to!make!better!choices,!but!is!costly!f. Beware!of!secondary!effects!–!economic!actions!generate!both!direct!and!indirect!effects!i. Secondary!Effects:!the!indirect!impact!of!an!event!or!policy!that!may!not!be!easily!and!immediately!observable!Example+(of+item+D):+Olive+Garden!!All!you!can!eat!soup,!salad!and!breadsticks!($6.00)!LORL!Chicken!Parmesan,!soup,!salad!and!breadsticks!($15.00)!!Should!I!get!the!$15.00!meal?!!Marginal!Cost!(MC):!$9.00!Marginal!Benefit!(MB):!Chicken!Parmesan!!Cost!Benefit!Analysis!says!you!will!purchase!the!larger!meal!if!the!MBs!exceed!the!MCs.!!2!g. The!value!of!a!good!or!service!is!subjective!–!because!of!this,!voluntary!trade!creates!value!h. The!test!of!a!theory!is!it’s!ability!to!predict!4. Positive!vs.!Normative!Economics!a. Positive:!the!scientific!study!of!what!is!(testable)!b. Normative:!judgments!about!what!people!think!“out!to!be”!(not!testable)!5. The!Four!Pitfalls!of!Economic!Thinking!a. Violation!of!the!ceteris!paribus!principle!i. Ceteris!Paribus:!all!other!things! const ant!b. Good!intentions!do!not!lead!to!desirable!outcomes!c. Association!is!not!causation!d. The!Fallacy!of!Composition:!the!belief!that!what!is!good!for!one!might!be!good!for!everyone!6. Microeconomics!vs.!Macroeconomics!a. Microeconomics:!focuses!on!how!human!behavior!affects!the!conduct!of!affairs!within!individually!defined!units!as!households!or!firms!(the!individual!trees!in!the!forest)!b. Macroeconomics:!focuses!on!how!human!behavior!affects!outcomes!in!highly!aggregated!markets!(the!overview!of!the!entire!forest)!!~Chapter+2~+Tools+of+the+Economist+!1. How!Trade!Creates!Value!a. When!individuals!engage!in!voluntary!trade,!both!parties!are!made!better!off!b. Channeling!goods!and!resources!to!those!who!value!them!most!increases!the!wealth!created!by!a!society’s!resources!2. The!Importance!of!Property!Rights!a. Example!rights!that!all!property!owners!have:!i. The!right!to!exclusive!use!of!the!property!ii. Legal!protection!against!invasion!from!other!individuals!iii. The!right!to!sell,!transfer,!exchange!or!mortgage!the!property!b. Four!incentives!of!private!property!rights!i. The!incentive!to!use!resources!in!ways!that!are!considered!beneficial!to!others!(owners!bear!the!cost!of!ignoring!the!wishes!of!others)!ii. Private!owners!have!an!incentive!to!care!for!and!manage!what!they!own!iii. Private!owners!have!an!incentive!to!conserve!for!the!future!iv. Private!owners!have!the!incentive!to!make!sure!that!their!property!foes!not!damage!your!own!c. A!lack!of!property!rights!leads!to!a!lack!of!economic!progress!3. The!Production!Possibilities!Curve!(PPC)!!3!a. PPC:!outlines!all!the!possible!combinations!of!total!output!that!could!be!produced!assuming!(1)!a!fixed!amount!of!productive!resources,!(2)!a!given!amount!of!technical!knowledge!and!(3)!full!and!efficient!use!of!resources!! !4. Shifters!of!PPC!a. A!change!in!the!economy’s!resource!base!i. Investment:!the!purchase,!construction!or!development!of!resources!b. Changes!in!technology!i. Technology:!the!knowledge!available!to!an!economy!at!any!given!time!c. Change!in!the!rules!under!which!the!economy!functions!d. A!change!in!work!habits!5. The!Law!of!Comparative!Advantage!a. The!Law!of!Comparative!Advantage:!the!total!output!of!a!group!of!individuals,!an!entire!economy,!or!a!group!of!nations!when!the!output!of!each!good!is!produced!by!whoever!has!the!lowest!opportunity!cost!!Example:+Japan+vs.+U.S.A.:+Who+should+produce+what?+!The!Law!of!Comparative!Advantage!!!Country+Corn+Cars+U.S.A+50/day!10/day!Japan+20/day!5/day!!U.S.A.!should!produce!corn!&!Japan!should!produce!cars!–!both!have!the!lowest!opportunity!cost.!!4!6. Economic!Organization!a. Every!economic!faces!3!questions:!i. What!will!be!produces?!ii. How!will!it!be!produces?!iii. For!whom!will!it!be!produced?!b. Capitalism:!a!system!of!economic!organization!where:!i. Productive!resources!are!owned!privately!ii. Goods!and!resources!are!allocated!through!market!prices!iii. Market!Organization:!a!method!of!organization!in!which!private!parties!make!their!own!plans!and!decisions!with!the!guidance!of!market!prices!c. Socialism:!a!system!of!economic!organization!where:!i. Ownership!and!means!of!production!rest!with!the!state!(central!planning)!ii. Resource!allocation!is!determined!by!central!planning!iii. Collective!Decision!Making:!the!method!of!organization!that!relies!on!public!sector!decision!making!to!resolve!economic!questions!d. Why!capitalism!tends!to!work:!i. Capitalism!is!similar!to!natural!selection,!concept!of!market!efficiency!ii. Socialism!suffers!from!an!informative!person!!!!!!!!!!!!!!!!!Example:+Economic+Organization+Scale+Socialism!!Capitalism!!Socialism!!North!Korea!!U.S.A.!!Hong!Kong!Economic!Growth!!!!5!~Chapter+3~+Supply,+Demand+&+The+Market+Process+!1. The!Demand!Curve!a. The!Law!of!Demand:!there!is!an!inverse!(negative)!relationship!between!the!price!of!a!good!and!how!much!an!individual!will!purchase!(downward!sloping!demand!curve)!!b. Consumer!Surplus:!the!difference!between!the!maximum!amount!consumers!would!be!willing!to!pay!and!the!amount!they!actually!pay!2. Shifters!of!the!Demand!Curve!a. A!change!in!consumer!income!i.
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