ECO2023Exam 1 Study GuideCHAPTER 1 – THE ECONOMIC APPROACHWhat is economics? Attempt to explain and predict the behavior of consumers, firms and government.Basic ingredients of any economic decision = scarcity + choiceScarce – desire for good exceeds amount freely availableScarcity – some wants remain unfulfilled; issues of equity, justice and fairness are a part ofscarcity “it’s not fair she got that”Mechanisms used to deal with scarcity:1. Force2. Tradition – inherited3. Authority – gov’t and church4. Market – labor5. Combinations of 1-48 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 cost3. Incentives matter4. Think on the margin- Marginal – change or difference between two alternativeso Marginal benefit is additional benefito Marginal cost is additional costo Marginal utility is additional utilityUtility – 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 cancer7. Value = subjective- Value is determined by the purchaser- Ex: Ticket to the ballet – some would pay anything, others wouldn’t pay anything because not interested8. Economic thinking = scientific thinking- Use data they gather to explain and predict what will happeni. Students who go to class get better gradesPositive Economics – scientific study “what is”Normative Economics – judgments “what ought to be”ECO2023Exam 1 Study Guide4 Economic Pitfalls/Errors:1. Violation of ceteris paribus – “other things constant” – isolate variables, change one at a time2. Good intentions don’t always mean good outcomes3. Association is not causation4. Fallacy of Composition – what’s good for individual is good for group (false)a. Making the assumption when it’s false is the fallacyCHAPTER 2 – SOME TOOLS OF THE ECONOMIST2 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 resourcesd. consumers buying products- 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 valueo Creates wealth and promotes economic progresso Don’t have to produce anything, doesn’t have to be a money exchange i.e. I’ll cook dinner if you clean upQ: 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 it2. Private rights – only one person owns it (4th amendment)Q: When private property rights are clearly defined and enforced, private owners willA: 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 care2. Conserve for future3. Use resources in ways others value4. Mitigate possible harm to others (Court system says you’re liable if it does cause harm)ECO2023Exam 1 Study GuideQ: 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 expectA: population of chicken to rise and population of bison to fallProduction possibilities curve – all possible combinations of total output; shows tradeoffs and choices PPC = PP Frontier- Shift out = growth, produce more- Shift in = shrink, produce lesso Technology advancement that increases amount of output for same amount of input = outward shiftLaw 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 notAdam Smith – Wealth of Nations – effects of the division of laborSelf-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 byA: the low opportunity cost producerQ: 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 AdvantageLow opportunity cost comparative advantage specialization division of labor voluntary trade increased wealthECO2023Exam 1 Study GuideSociety’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 PROCESSLaw of Demand – inverse relationship between price and quantity demandedQuantity demanded - # of units of a good you boughtPrice increases, quantity demanded decreasesDemand curve – relationship between price of good and quantity consumers willing to buy at each priceOther variables (besides price) determine what you buy:1. When price changes, quantity demanded changes – demand does NOT changea. Movement along demand curve2. When something else changes, demand changesa. Movement of the entire curveTypical “something else” changes:- Income- Expectations- # of consumers- Demographics- Tastes and preferences- Prices of related goods (substitute and complements)Q: When economists say the quantity demanded of a product has increased, they mean:A: Price has decreased, consumers buying moreQ: Demand for product has decreased, they mean:A: Demand curve = shifted leftDecrease = left; increase = rightIncrease in Demand Decrease in DemandECO2023Exam 1 Study GuideLaw of Supply – positive relationship between price and
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