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Macroeconomics Test 1 Study GuideChapter 1Scarcity – Objective. Any good with a price. You can’t get enough in nature, you can’t get what you want.Free Good – Opposite of scarce. Resources – Anything used to produce other goods and services. Natural, human, or physicalLand – Actual place and “ingredients” needed to make goodLabor – Time and work invested in goodCapital – Money or wealth needed to start process of making goodEntrepreneurship – Actually selling the goodPoverty – Subjective. Personal opinion of whether someone meets an arbitrarily defined level of income. Rationing – Allocating a limited supply of a good or resource among people who would like to have more of it.Best way to ration is using price. It allows those to give up the most for the good.Leads to a competitive behavior.Economic Way of Thinking – a set of postulates and principles which makes clear the “cause-and-effect” manner of economics1. There is always a tradeoffa. We call it Opportunity Costb. The one most highly valued alternative that you give up when you do one thing rather than the other2. People choose purposefully, therefore economicallya. If the cost is the same, you choose the one that they like the besti. Known as “Utility”b. Lowest Costc. Highest Utility3. Incentives mattera. Choice is influence in a predictable manner because of incentivesb. Motivation is the key4. Economic thinking is marginal thinkinga. People make decision at the marginb. Take things day by dayc. People choose right before buying what they wantd. We don’t buy in total amounts5. Information is a costly gooda. We pick and choose what we want to learnb. We remain Rational Ignorancei. If the cost of getting info is greater than the benefit of information6. Remember the secondary effectsa. The indirect impact of an event or policy. They are most often unintended andoverlooked b. Increases in the money supply that give people more income but eventually result in higher inflation7. The value of a good or service is subjectivea. What is something worth?b. Whatever someone is willing to pay8. The test of a theory is its ability to predicta. Economics is a science, thus can be predictedPositive Economics – attempts to determine “what is.” It involves potentially verifiable or refutable propositionsSimply must be testableNormative Economics – attempts to determine “what ought to be.” Cannot be proven false because they are value judgmentsWhat is desired?Pitfalls to Avoid in Economic ThinkingViolating the ceteris paribus conditionC.P. – All things equalA good is not only affecting by one thingGood intentions do not guarantee good outcomesSecondary effects are the main resultsEven though it’s meant for good, it actually does harmStatistical MurderAssociation is not causationCasual relationship exists simply because of the presence of statistical association cannot be considered automatically trueThe exists more reasoning than just statisticsThe fallacy of compositionWhat is true for the individual is not necessarily true for the entire groupThis can be misleading when applied to the entire economyChapter 2Tools of the Economist1. Opportunity Cost – The choice do one thing is choice to not do something else. Subjective because depends on values of decision maker.a. Time and Moneyb. What could have been used to fund one thing, instead goes somewhere else, most of the time it goes to the wrong place2. Trade Creates Value – One man’s garbage is another man’s treasure. Value of something depends on who is using ita. Voluntary exchangei. There is benefit being createdii. Trade is not a zero-sum game; both parties are better made offiii. Trades creates valueb. Transaction Costs – Barrier to tradei. Any cost that results from buying something1. The time, effort, and other resources needed to search out, negotiate, and complete an exchangeii. We spend less time exchangingiii. Middleman reduces transaction costs1. Reduces transaction costs3. Property Rightsa. Assumes free tradeb. Three elementsi. Right to exclusive use to your propertyii. Legal protection against other’s using your property without permissioniii. Right to transfer, sell, exchange, or mortgage propertyc. You can use property as long as you don’t infringe on anyone’s property rightsd. Good things that result from property rightsi. Property owners have the incentive to consider the desires of others and lose by not considering the rights of others (if not….increases OC)ii. Strong incentive to use property in a way that benefits societyiii. Incentive to take care of your property to protect the valueiv. Tragedy of the commons1. People don’t care about property if it’s not theirsv. Incentive to conserve, be careful with property, and improve property4. Production Possibilities Curve (PPC) – Consumer (Y-Axis) vs. Investment (X-Axis)a. Linear – Equally well suited, Curved – Not equally well suitedb. Everything that can be produced in an economyi. Amount of resourcesii. Always a trade offiii. You can’t get something for nothingc. Shifting PPCi. Outward means a greater amount of goods – reduce leisure time1. Increase Technology, Innovation, Entrepreneurship, Investmentii. Inward means a less amount of goodsd. Inefficiency Pointi. You could produce more with resources without trade off5. Comparative Advantagea. In the production of a good or service, the producer who produces at the lowest OC has the comparative advantageb. We want to TRADE at a HIGH OCc. We want to GET at a LOW OCd. Absolute Advantage – the ability of a party to produce more of a good or service than competitors, using the same amount of resourcese. Specialization – Being good at one thing, in order to produce the most of the goodor serviceExample:OC→ChickenSA→ 1:4→ 1:4N → 2:2→ 1:1The one with the smallerratio has the comparativeadvantageOC→CornSA→ 4:1→1: 1/4N→ 2:2→1:1Chapter 3Demand – a schedule of all the various quantities of a good or service that consumers are willing and able to buy, at various pricesLaw of Demand – inverse relationship between price and quantity demandedLaw of Diminishing Marginal Utility – as you get more units your marginal benefit (price) decreases Height of Demand – shows how much buyers in the market value each unit of the goodConsumer surplus – difference between what you’re willing to pay and what you actually payDemand Elasticity – the degree of responsiveness of


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FSU ECO 2013 - Test 1 Study Guide

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