ECO2023 Exam 1 Study Guide CHAPTER 1 THE ECONOMIC APPROACH What is economics Attempt to explain and predict the behavior of consumers firms and government Basic ingredients of any economic decision scarcity choice Scarce desire for good exceeds amount freely available Scarcity some wants remain unfulfilled issues of equity justice and fairness are a part of scarcity it s not fair she got that Mechanisms used to deal with scarcity 1 Force 2 Tradition inherited 3 Authority gov t and church 4 Market labor 5 Combinations of 1 4 8 Economic Guideposts 1 There s always tradeoffs What you give up is opportunity cost e g no such thing as a free t shirt 2 Individuals choose purposefully Get the most bang for your buck most benefits at the least cost Incentives matter 3 4 Think on the margin Marginal change or difference between two alternatives o Marginal benefit is additional benefit o Marginal cost is additional cost o Marginal utility is additional utility Utility benefit you get out of consuming something e g football Ex Would you walk 3 blocks to save 20 on a 100 product Ex Would you walk 3 blocks to save 20 on a 1 000 product 5 More info leads to better decision making but costly 6 Many choices create a secondary effect Usually comes later and is not visible Ex Smoked for years years later get lung cancer 7 Value subjective Value is determined by the purchaser Ex Ticket to the ballet some would pay anything others wouldn t pay anything because not interested 8 Economic thinking scientific thinking Use data they gather to explain and predict what will happen i Students who go to class get better grades Positive Economics scientific study what is Normative Economics judgments what ought to be ECO2023 Exam 1 Study Guide 4 Economic Pitfalls Errors 1 Violation of ceteris paribus other things constant isolate variables change one at a time 2 Good intentions don t always mean good outcomes 3 Association is not causation 4 Fallacy of Composition what s good for individual is good for group false a Making the assumption when it s false is the fallacy CHAPTER 2 SOME TOOLS OF THE ECONOMIST 2 opposing views of trade 1 One person gains other loses zero sum game 2 When people trade both parties gain wealth a Potential trades barter goods for goods b money goods for money c businesses buying resources consumers buying products d Transaction costs Monetary or nonmonetary barrier that lowers the benefits of trade time effort and other resources used to exchange i e surfing the web for airline tickets Voluntary trade when occurs both parties gain value o Creates wealth and promotes economic progress o Don t have to produce anything doesn t have to be a money exchange i e I ll cook dinner if you clean up Q Sam values his boat at 4 000 and Brenda values it at 9 000 If Brenda buys it from Sam for 7 000 which of the following is true A Brenda gains 2 000 and Sam gains 3 000 2 kinds of property rights 1 Common rights everyone owns it 2 Private rights only one person owns it 4th amendment Q When private property rights are clearly defined and enforced private owners will A Develop and direct their property toward uses that others value highly because the market will generally reward them for doing so Private property incentives Common rights people don t have as much incentive to take care of things 1 Give proper care 2 Conserve for future 3 Use resources in ways others value 4 Mitigate possible harm to others Court system says you re liable if it does cause harm ECO2023 Exam 1 Study Guide Q In the fictitious country of Econoland the government allows private ownership of chickens but not of bison If the demand for chicken and the demand for bison both permanently increase we would expect A population of chicken to rise and population of bison to fall Production possibilities curve all possible combinations of total output shows tradeoffs and choices PPC PP Frontier Shift out growth produce more Shift in shrink produce less outward shift o Technology advancement that increases amount of output for same amount of input Law of Comparative Advantage make good for which you have a low opportunity cost and trade for good which you have a high opportunity cost make something you re good at trade for something you re not Adam Smith Wealth of Nations effects of the division of labor Self sufficiency quickest and most absolute path to poverty do everything yourself build home build car etc Q Both individuals and nations will be able to produce a larger combined output if each productive activity is undertaken by A the low opportunity cost producer Q If Kim can either wash 10 cars or was 2 cars during a day and Vince can either wash 17 cars or wax 2 cars during a day then according to the law of comparative advantage A their total output can be expanded if Kim specializes in waxing and Vince in washing Importance of Comparative Advantage Low opportunity cost comparative advantage specialization division of labor voluntary trade increased wealth ECO2023 Exam 1 Study Guide Society s 3 Questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced CHAPTER 3 SUPPLY DEMAND AND THE MARKET PROCESS Law of Demand inverse relationship between price and quantity demanded Quantity demanded of units of a good you bought Price increases quantity demanded decreases Demand curve relationship between price of good and quantity consumers willing to buy at each price Other variables besides price determine what you buy 1 When price changes quantity demanded changes demand does NOT change a Movement along demand curve 2 When something else changes demand changes a Movement of the entire curve Typical something else changes Income Expectations of consumers Demographics Tastes and preferences Prices of related goods substitute and complements Q Demand for product has decreased they mean A Demand curve shifted left Decrease left increase right Increase in Demand Decrease in Demand Q When economists say the quantity demanded of a product has increased they mean A Price has decreased consumers buying more ECO2023 Exam 1 Study Guide Law of Supply positive relationship between price and quantity supplied Increase in price increase in quantity supplied Quantity supplied how many units of the good you made Other variables determine how much firms are willing to make 1 When price changes quantity supplied changes supply does NOT change a Movement along supply curve 2 When something else changes supply changes a
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