Chapter 1 Scarcity less of a good available the npeople would like Resource input used to produce economic good Rationing allocating limited number of supply among people Economics is the study of how people make decisions because of scarcity How are scarcity and choice related Choice is the consequence of scarcity being one must select among alternatives How are scarcity and poverty different Scarcity is an objective concept describing a factual situation whereas poverty is subjective the personal opinion of someone meeting a level of income Opportunity cost highest valued alternative that must be sacrificed Economizing behavior choosing option with highest benefit and lowest cost Utility benefit expected from choice Marginal difference in cost and benefits between alternatives Secondary effects the after effects indirect impact of an event Ex Drinking beers may make you happy until the secondary effect of barfing up last nights dinner Eight GUIDEPOST 1 The use of scarce resources is costly so decision makers must make tradeoffs ex Staying in to study for finals instead of going to the strip 2 Individuals choose purposefully try to get the most from limited resources Ex Only having five dollars so you go to Wal Mart and look for best deal 3 Incentives matter Ex More likely to get in front of class nd dance if offered extra credit 4 Individuals make decisions at margin Ex Value meal includes fries and drink but if you were to buy just a drink and burger you would spend more and get less 5 Info is costly Ex Takes time to look up and compare prices before making purchase and time is scarce resource 6 Secondary effects watch out for them Ex Taking aspirin taste gross but the secondary effect is no headache 7 Value of a good is subjective Ex one mans trash is another mans treasure 8 Economic thinking is scientific Ex Economist using data to get statistics Positive economics What is Normative economics What ought to be positive can be tested whereas normative can be neither confirmed nor denied Ceteris Paribus other things constant Fallacy of composition what is good for individual may not be bst for group Four common economic mistakes 1 Violating ceteris Paribus isolate variables 2 Good intentions do not always result in good outcomes 3 Association in not causation 4 Fallacy of composition Chapter 2 Transaction costs any cost you may incur in transaction shipping time etc What are two important aspects of voluntary exchange 1 both parties are made better off 2 Trade creates Value and increases wealth Private property rights Exclusively held by the owner Property rights change behavior in four key ways 1 By employing their resources in ways beneficial to others 2 Strong incentive to care for the property 3 Conserve for the future 4 Incentive to lower chance that property will cause any damage Production possibilities curve Shows max amount of any two products that can be produced with a fixed set of resources Investment Purchase construction of resources that will epand economy s resources Creative destruction getting rid of old products to replace with better ones Ex Casette tapes to CDs to MP3s Four factors that could potentially shift PPC outward 1 Increases in Economy s resource base 2 Advances in technology 3 Improvements in rules under which economy functions 4 Working harder giving up leisure Law of comparative advantage Everyone gains when you produce good that you can produce cheaply and exchange for goods that are expensive to produce In addition to specialization and division of labor how else is economic progress achieved 1 Mass production 2 Innovation Market organization private parties make plans and decisions with unregulated prices Capitalism Economic system using market organization minimal government involvement Socialism Government owns means of production and decides which goods are produced Society s three basic questions 1 what will be produced 2 how will it be produced 3 For whom will it be produced Chapter 3 Law of demand inverse relationship between price of good and quantity buyers are willing to purchase Substitutes products that serve same purpose Complements products consumed jointly WHAT IS THE DIFFERENCE BETWEEN DEMAND AND Q DEMANDED Price change Change in quantity demanded shift along curve Change in onsumer income or price of related goods change in demand shift of curve Factors that cause a change in demand 1 Change of income 2 Change in number of consumers 3 Change in price of related goods 4 Change in expectation 5 Demographic changes 6 Change in consumer taste or preferences Opportunity cost of production sum of producers cost of each resource Law of supply Positive relationship between price and amount of good suppliers will produce Factors that cause a change in supply 1 Change in resource price 2 Change in technology 3 Elements of nature political disruption 4 change in tax Market Concept with forces of supply and demand Equilibrium Balance between supply and demand Economic efficiency All potential gains have been realized How market responds to changes in supply and demand Rise in Demand Right shift of D Price and quantity go up fall in Demand left shift of D Price and Quantity go down Rise in supply Right shift of S Price goes down quantity goes up Fall of supply left shift of S Price goes up Quantity goes down Simultaneous shift D and S rise Quantity Rises and Price can rise or fall D falls and S rises Quantity can rise or fall and Price falls D and S fall Quantity falls and price can rise or fall D rises and S falls Quantity can fall or rise and price rises Functions of Market prices 1 Prices communicate info to decision makers 2 Prices coordinate actions of market participants 3 Prices motivate economic players Chapter 4 When the price of a resource changes then the price for the goods and services produces with that resource will change in the same direction When the damnd for a product chances then the demand for the resources used in making that product change in the same direction Deadweight LOSS DWL loss of gains from trade Price ceiling Puts an upper limit on price generates a SHORTAGE and deadweight loss ex Rent control Price floor Puts a lower limit on price generates a surplus and deadweight loss ex Minimum wage What are common secondary effects of rent controls 1 shortages and black markets 2 Future supply of rental houses will decline 3 Quality of rental will deteriorate 4 Nonprice methods of rationing will appear 5 Innificent
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