MICRO ECONOMICS FINAL EXAM REVIEW Scarcity o There is less of a good freely available from nature than people would like Example Time o Having to make choices between desires selecting among alternatives o Ability to produce unlimited goods and services is limited because resources are scarce o Can never be eliminated people will always face choices o Causes Rationing To determine who will receive the good Through Government depends on political status and power First come First served fastest at getting in line willing to spend the longest time waiting in line Market Economy price to those who are willing and able to pay the prevailing market price to get the good if you have to pay for something it is scarce o Leads to competition depending how goods are rationed Influences people to engage in higher income generating activities which is a benefit to the economy Scarcity VS Poverty o Scarcity is OBJECTIVE o Poverty is SUBJECTIVE A fact based on observable phenomena not influenced by person opinion An opinion based on personal preferences and value judgments People see poor defined differently Ex people in Africa VS people in US Resources o Human resources Knowledge skill strength o Physical resources Capital human made resources Tools machines buildings o Natural resources Land mineral deposits oceans rivers The 8 guideposts to economic thinking o The use of scarce resources is costly so trade offs must be made Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option If I didn t have a date tonight I would save 10 and spend the evening playing tennis The opportunity cost of this date is the other things that could be purchased with the 10 and the forgone value of a night of tennis Based on opportunity cost concept Women who hold professional degrees will be the highest percentage of women who will work full time in the labor force o Individuals choose purposefully They try to get the most from their limited resources Economizing behavior choosing the option that offers the greatest benefits at the least possible cost the desires or preferences of individuals are revealed by the choices they make Utility the benefit or satisfaction that an individual expects to receive from the choice of a specific alternative Utility is SUBJECTIVE o Incentives Matter MOST IMPORTANT GUIDEPOST IN ECONOMIC THINKING basic postulate of all economics Consumers buy fewer potatoes when the price of potatoes increases A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election Farmers produce less corn because corn prices have declined o Individuals make decisions at the margin When making a choice between 2 alternatives focus on the differences in the costs and benefits between the 2 Marginal decision making the cost of 1 additional unit of good When deciding whether to purchase a second car they would compare the additional benefits of the second car with the additional costs of the second car An airline ticket from Seattle to Miami costs 525 A bus ticket is 325 Traveling by plane takes 5 hours traveling by bus takes 25 hours An individual will gain by choosing air travel if and only if each hour of their time is valued at more than 10 per hour Choices aren t ALL OR NOTHING You won t decide between eating food and wearing clothes you do a little of each o Although information can help us make better choices its acquisition is costly Time needed to gather info is scarce so at some point you decide the additional comparison shopping is not worth the benefit and you decide between you already have info about o Beware of the secondary effects Economic actions often generate indirect as well as direct affects Failure to recognize secondary effects most common economic error Secondary effect the indirect impact of an event or policy that may not be easily and immediately observable Effects are unintended and overlooked Ex drinking 12 beers immediate effect feeling buzzed secondary effect hangover Secondary effects are common in trade restrictions Restricts the sale of foreign goods employment is shifted around o The value of a good or service is subjective Preferences differ People moving goods toward those who value them most and combing resources into goods that individuals value more highly is a primary source of economic progress o The test of a theory is its ability to predict Scientific Thinking developing a theory from basic principles and testing it against events in the real world Good Theories consistent and help explain real world events Rejected Theories inconsistent and are invalid with the real world Economic Theory A set of definitions and principles that make clear the cause and effect relationships Economic Organization What How and For Who will goods be produced o Market Organization Private ownerships voluntary contracts market prices are unregulated Aka Capitalism productive resources are owned privately and goods and resources are bought sold through market prices No single individual guides the economy o Government Organization Political Planning Collective decision making method of organization that relies on public sector decision making voting The government through political process makes decisions for buyers and sellers Uses taxes subsidies and regulations Aka Socialism the ownership and control of production is with the state and buying selling resources in determined by centralized planning NOT market forces o Difference between the market system with its exit option allows for a wider variety of products and creates constant competition among suppliers whereas the central planning system responds primarily to the votes of the majority Normative Statement judgments about what ought to be in economic matters o Based on value judgments o Cannot be proven true or false by scientific testing can t be tested at all Positive statement The scientific study of what is o Can analyze the facts to determine if the statement is correct o BUT just because it is a positive statement does not mean it is correct it just means that it is testable Fallacy of Composition the false belief that what is true for one individual will be true for the whole group Good intentions do not guarantee desirable outcomes Marginal cost be able to find in word problem o Ralph wants to buy some milk and a box of cereal If Ralph buys 4 gallons of milk for 3 per gallon
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