Econ 2013 Study Guide For Final ExamChapter 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- The law of Demand: inverse relationship between price and quantity. Downward sloping.- Consumer Surplus: The difference between the maximum amount consumerswould 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 Inferiorgoods). 2) Change in number of consumers 3) Change in the price of a relatedgood (Substitutes v Compliments) 4) Change in expectations (Expected price or income) 5) Change in consumer tastes/preferences.-Normal goods: Steak2-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 willingto accept and the price they will actually receive. Area above the supply curvebut 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
View Full Document