Econ 2013 Study Guide For Final Exam Chapter 1 Scarcity The concept that there is less of a good freely available from nature than people would like 8 guide posts 1 Resources are scarce no such thing as a free lunch The concept of opportunity cost 2 Individuals are rational most benefit at the least cost 3 Incentives matter 4 Individuals make decisions at the margin Marginal effect of change in current situation benefits and costs of one more Ex drive or fly supersizing Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Info helps us make better choices but is costly 6 Beware of secondary effects economic actions generate both direct and indirect effects 7 The value of a good service is subjective 8 The test of a theory is its ability to predict Opportunity Cost highest valued alternative that must be sacrificed when choosing an option Ex How you spend next 15 Normative v Positive economic statement Normative judgments about what ought to be not testable Ex It s too hot outside Positive scientific study of what is testable Ex It s 90 degrees outside 4 pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principle other things constant 2 Good intensions do not guarantee desirable outcomes Ex Endangered species act Nirvana Fallacy and Child Labor Sweatshops safety caps 3 Association is not causation 4 Fallacy of composition belief that what is true for one is true for all Ex standing at a football game Chapter 2 Know how Trade creates value Because value of a good is subjective voluntary trade creates value Middlemen support trade by reducing transaction costs Know the process of wealth creation through voluntary transactions By trading goods resources to those who value them most 1 4 incentives of private property rights 1 Use the resource in ways that benefit others Ex Empty lot 2 Care and manage what they own Ex driving rental car v driving own 3 Incentive to conserve for the future Ex Tragedy of the commons 4 Incentive to make sure their property does not damage your property Ex Keeping your dog on a leash What is the PPC Production Possibilities Curve bowed outward because of the concept of increasing opportunity cost Points on the PPC inefficient inside the curve efficient on the curve unattainable outside of the curve Shifters of the PPC 1 Change in economy s resource base 2 Changes in technology 3 A change in rules 4 Change in work habits Law of Comparative Advantage The total output of a group of individuals an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost Absolute Advantage ability for someone or a group to do something more efficiently than another 3 questions every economy answers 1 What will be produced 2 How will it be produced 3 For whom will it be produced Capitalism v Socialism and why Capitalism works Capitalism A system where resources are owned privately Similar to natural selection Socialism Ownership and means of production is in the government s hands Suffers from an info Problem the gov t don t know what the people want Chapter 3 Downward sloping The law of Demand inverse relationship between price and quantity Consumer Surplus The difference between the maximum amount consumers would be willing to pay and the amount they actually pay The area below the demand cure but above the price Change in quantity demanded caused by a change in the current price of the good shift along the curve Change in demand caused by a change in anything else that effects demand shifts the demand curve Shifters of demand 1 Change in consumer income Normal Goods v Inferior goods 2 Change in number of consumers 3 Change in the price of a related good Substitutes v Compliments 4 Change in expectations Expected price or income 5 Change in consumer tastes preferences Normal goods Steak 2 Inferior goods Ramen Noodles Substitutes Beef and Chicken Price of Steak goes up Demand for Chicken goes up Compliments Peanut butter and Jelly Price of Peanut butter goes down Demand for jelly goes up Law of Supply direct relationship between price and quantity upward sloping Producer Surplus The difference between the min price suppliers are willing to accept and the price they will actually receive Area above the supply curve but below price Shifters of supply 1 Change in resource price 2 Change in technology 3 Changes in nature and politics 4 Changes in taxes Elastic Change in quantity is sensitive to a change in price flatter curve Inelastic Change in quantity is not sensitive to change in price steep curve Market equilibrium occurs where Dq Sq No excess supply or demand Consumer and producer surplus is maximized Gives you efficient price and quantity Demand changes Price moves in same direction Quantity moves in same direction Supply changes Price moves in opposite direction Quantity moves in same direction Invisible Hand Principle The tendency for people while pursuing their own interests to promote the economic well being of society achieved through market prices Chapter 6 Know how the government has grown over the years and have a general idea of where the federal and state government is spending your taxpayer dollars Size and growth indicated by gov t expenditures as a percentage of U S GDP Gov t spending tax money 1 Federal Medicare social security national defense 2 State education administrative expenses public welfare and health police and fine protection Transfer Payments transfers of income from some individuals to others These people do not do anything for it Ex social security unemployment benefits welfare Understand the theories related to the economics of voting 1 Rational Ignorance Effect a rational individual has little or no incentive to acquire information needed to cast an informed vote marginal benefit of voting the chance that your vote is the deciding vote multiplied by how much you care that a certain candidate wins 3 marginal cost of voting the cost of informing yourself registering to vote and actually voting 2 Median voter theory The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates and the preferences of the median voter will be represented Ex ice cream stand on the beach Know when the political process works well and the idea of user charges The political process works when voters pay in proportion to the benefits
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