1 FINAL EXAM ECO2013 SPR 2013 CHAPTERS 1 14 NOT INCLUDING 4 AND 5 3 5 QUESTIONS PER CHAPTER 51 TOTAL MC QUESTIONS Chapter 1 like Economics is the study of how we make choices under scarcity Scarcity There is less of a good freely available from nature than people would Ex Time money cars etc Resource an input used to produce an economic good Human resources human capital Ex Human labor such as cashiers and bartenders Albert Einstein uses his mind knowledge Chuck Norris movies jokes Physical Resources physical capital Ex Buildings machinery pen chair HCB Natural Resources water business Ex gas land gold trees for lumber mills natural springs for bottled 8 Guideposts to Economic thinking 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch Opportunity Cost the highest valued alternative that must be sacrificed when choosing an option Ex an hour of your time guns and butter how you spend your next 15 2 Individuals are rational they try to get the most from their limited resources Obtaining the greatest benefit at the least possible cost Ex Welfare vs Education Ex Getting drunk after this test with a 10 12 pack of beer or a 15 bottle of liquor While some people find it rational to spend the 15 for liquor others may see that as irrational since they would rather drink the cheaper beer and still get just as fucked up What is rational for one person may not be rational for everyone 3 Incentives matter 2 Choice is influenced in a predictable way by changing incentives Ex Money game tennis ball and yelling Prices Ex An incentive to wearing a helmet while driving a motorcycle is possibly preventing death Ex An incentive to studying this study guide is getting an A on the test 4 Individuals make decisions at the margin Marginal Describes the effect of a change in the current situation Ex Paying an extra 50 cents to supersize your meal Ex Olive Garden A All you can eat soup salad and breadsticks 6 B Chicken Parm all you can eat soup salad and breadsticks 10 MB CHICKEN PARM VS MC 4 Ex Taco Bell Tacos 1 EACH Drink 50 EACH A 2 tacos and a drink 2 50 B Extra value meal 3 tacos and a drink 3 MB 1 TACO MC 50 Cost Benefit analysis One will undergo an action when the Marginal Benefit outweighs the Marginal Cost Ex Is the extra 50 cents for a supersize worth it to you Or not 5 Information helps us make better choices but it is costly Ex New house vs new notebook bigger decision more information you gather Beware of Secondary Effects 6 Economic actions generate both direct and indirect effects Secondary Effects The indirect impact of an event or policy that may not be easily and immediately observable Ex If the government makes the taxes on yachts too high in hopes of generating more tax revenue less people will buy yachts which might put yacht companies out of service The value of a good or service is subjective Ex People who buy their football tickets in advance value the ticket at that price people who do not have a ticket at game time find the value of a ticket much higher which is why they pay up to 100 more for a scalped ticket 7 3 8 1 2 3 4 all Moving goods and services to those who value them most is a primary source of economic progress The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid Positive vs Normative Economics Positive The science study of what is testable Normative Judgements of what ought to be not testable 4 Pitfalls to avoid in Economic thinking Violation of the ceteris paribus principal Ceteris Paribus other things constant Ex Buying eggs If the price of eggs goes up people will buy less eggs ceteris paribus The belief that good intentions equal desirable outcomes Ex Suicide warnings on anti depressant medication The belief that association is causation Ex Superstitions Just because people file divorces on rainy days does not mean that rain causes the divorces The Fallacy of Composition Belief that what is true for one might not be true for Ex When you get a raise vs when everyone gets a raise Ex It is easier for one person to see by standing at a football game but that is not true for all because if everyone stood up it would be the same as everyone sitting Chapter 2 off Voluntary trade creates value and leads to economic progress the candy game The value of a good is subjective so voluntary trade creates value When individuals engage in voluntary exchange both parties are made better One mans trash is another mans treasure By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources Creation of wealth The process by which some people become rich will make everyone richer Property Rights The right to exclusive use of the property 4 Legal protection against invasion from other individuals The right to sell transfer exchange or mortgage the property Lack of Property Rights Lack of Economic Progress 4 Incentives 1 Use the resources in ways that benefit others Ex Empty Lot if you own an empty lot in the middle of FSU campus it would be the most beneficial to the students to use it as an additional parking area Consequently you would gain the most from that decision 2 Care for and manage what they own Ex Office refrigerator vs privately own refrigerator The more someone cares for what they own the more value their property will have at the time they sell it 3 Private owners have an incentive to conserve for the future Ex Reason vows outnumber elephants especially if it is going to increase in value Ex Popcorn at the movies if you eat all of the popcorn at the beginning of the movie then you will have non left for the rest of the movie 4 Private owners have an incentive to make sure their property does not damage your property Ex Keeping your dog on leash you are responsible Ex Cut tree leaning on neighbors lawn so it does not fall PPC outlines all possible combinations of Production Possibilities Curve PPC total output that could be produced assuming a Fixed amount of productive resources Given amount of technical knowledge Full and efficient use of resources Inefficient point inside the curve Efficient Unattainable point on the curve point outside of the curve PPC is bowed outwards because of the concept of increasing opportunity cost 4 factors the shift the PPC 1 Change in the economies resource base 2 Changes in technology the knowledge available in an economy at any given time 5 Determines
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