MICRO ECONOMICS FINAL EXAM REVIEWScarcity-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 scarceo 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- A fact based on observable phenomena, not influenced by person opiniono Poverty is SUBJECTIVE- 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, buildingso 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 thatcould 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 forceo 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. Travelingby plane takes 5 hours, traveling by bus takes 25 hours. An individual will gain bychoosing 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 eacho 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 additionalcomparison shopping is not worth the benefit and you decide between you already have info abouto 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 aroundo 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 progresso 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-worldEconomic Theory- A set of definitions and principles that make clear the “cause and effect” relationshipsEconomic 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 economyo 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 allPositive statement- The scientific study of “what is” o Can analyze the facts to determine if the statement is correcto BUT just because it is a positive statement does not mean it is correct, it just means that it is testableFallacy of Composition-
View Full Document
Unlocking...