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Econ 102 Final Exam Outline:The Nature of Economics:Scarcity- people want more than is freely available from nature- We ration to give out fairly- Scarcity is an object concept- We want more than we can have, which leads to competition- Time, Money, and even Donuts are scarce- Air is not scarce- Scarcity necessitates rationing- If everyone was rich, scarcity would still existPoverty- living below a certain standard, it’s a subjective concept3 Basic Economic Questions-1. WHAT and HOW much will be produced?2. HOW will items be produced?3. FOR WHO will items be produced?Central Planning VS Market System:Central Planning- - Centralized- 1 person makes decisions- Means of produced are owned by the government- Difficult to obtain information that would be capture by pricesMarket System-- Decentralized- potentially millions of people making decisions- Individuals and families own their means of production- Prices serve as signals that provide informationMicro VS. Macro:Micro--Deals with individuals, firms, industriesMacro--Deals with aggregates describing the economy as a whole- industries, countries, world** Incentives Matter **Direct and Indirect Incentives-Direct- usually easy to recognizeIndirect- Secondary change in behavior (unintended consequence)Ceteris Paribus- all else is equal, change only one thing at a timeEx: Women earning less money than men for doing the same job. ** the same job, experience, hours per week, education and skills should be the same, the wage is different **Rationality Assumption-- You don’t make yourself worse off on purpose- Only one way to be rational- Economics focuses on outcomes rather than thought process** 3 Rationality assumptions-1. Interested only in satisfaction2. Choices always align with long-term interests3. Can consider every choicePositive VS. Normative Economics-Positive-- Statements about what is- Can be tested and proven/disprovenNormative-- Statements about what should be- Are matters of opinion** Economics is the study of how people make choices **** The way that a society uses to allocate resources to satisfy human wants is called an economic system **** Economists assume people behave rationally, which means that people DO NOT intentionally make decisions that make themselves worse off **Scarcity and the World of Tradeoffs-Scarcity is NOT a shortage and is NOT poverty5 Types of Resources-1. Land (location, climate, water, vegetation)2. Labor (humans who work)3. Physical Capital (buildings, equipment, machines, improvements to land)4. Human Capital (training and education of workers, college)5. Entrepreneurship (performed by humans)Wants VS Needs-** Economists concerned with WANTS **Opportunity Cost- highest-valued, next best alternative that must be sacrificed to obtain something or to satisfy a want (what you give up).Production Possibilities Curve- PPC or PPF- shows the combination of output for 2 goods in a country/firm/industry at a given time, can change over time, can use to see opp. Cost of production, concave shape** Give up one thing to make more of the other **** To shift the PPC OUT-- Increase in economy’s resource base- Advancement in technology- Improvement in the rules governing the economy- Giving up current leisure and working harder- Giving up current consumption and investing moreLaw of increasing Additional Cost- more specialization -> more bowed curveProductive efficiency- max outputs given inputs or minimize costs given outputI, Pencil-Spontaneous Order- the result of human action, not design- Markets are a decentralized system- they evolve rather than get created- Ex- language happens because people end up speaking it, Cigarettes can be used as money in jail Foundations of Economic Thinking-Foundation 1- Tradeoffs-** There is ALWAYS an opportunity cost (the next best thing).Foundation 2-Individuals Choose purposefully-** They try to get the most from their LIMITED resources **Foundation 3- Incentives Matter-** Positive and Negative incentives, direct and indirect effects, people react predictably to changes in incentives **Foundation 4- Individuals make decisions at the Margin-** Margin=additional, compare MC to MB, if MB>MC DO SOMETHING **Foundation 5- Information is costly but helps make better decisions** People are not fully informed before making decisions **Foundation 6- Secondary Effects-** There may be effects that were not meant to occur **Foundation 7- Value is subjective-** Everyone has their own subjective value for items, value depends on the situation**Foundation 8- the test of a theory is its ability to predict-** Bad predictions are a result of bad theories, simplification not necessarily a bad thing **Foundation 9- hold all else equal** When making comparisons, only change one thing at a time **Foundation 10- good intentions do not guarantee good outcomes-** Economists care about RESULTS, Not the THOUGHT PROCESS ** Ex- bootleggers and the Baptists- both supported prohibition but for different reasons (good & bad reasons).Foundation 11-Association, Correlation is NOT causation** When 2 things are correlated, one does not always cause the other **Foundation 12- what is good for the individual is not always good for the group** Ex- standing up at football game -> good for you because you can see better but when everyone stands, what is the point of standing anymore? **Demand and Supply-Demand Schedule- shows how much (Q) consumers are willing and able to purchaseat a given priceLaw of Demand-- INVERSE relationship between price of a good and quantity that consumers are willing to purchase (one increases, other decreases)- Due to substitutes- products that serve similar productsMoney price- $$$$Relative price- how much of something else you have to give up (opp. Cost)Demand curves- show how much people are WILLING and ABLE to pay for a good ata given Quantity** Willing to pay = marginal benefit ** Demand curve shows how much people benefit from consumption ****- Price depends on benefitDemand- curves downwardSlide of Demand curve- PRICEShift of Demand curve- NOT PRICE CHANGEShift caused by-1. Change in consumer income2. Change in consumer expectations3. Change in the number of consumers in market4. Demographic changes5. Change in price of related good6. Change in consumer taste/preferences**** CHANGE IN PRICE = only changes QUANTITY DEMANDED, not DEMAND ****Supply- Curves upwardProfit- TR – TCTotal Revenue- minimum value (worth more to a person than what they pay)Total cost- value of


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