Joab Corey Final Exam Study guideChapter 1•Know that Economics is the study of how we make choices under scarcity.•Understand the concept of scarcity.Scarcity: The concept that there is less of a good freely available from nature than people would like.Ex: Time, money, cars, etc. •Know the difference between the different kinds of resources that we use to produce economic goods.- Human resources (human capital)Ex: human labor such as cashiers and bartenders. - Physical resources (physical capital)Ex: buildings, machinery. - Natural resourcesEx: trees for lumber mills, natural springs for bottled water businesses, etc. •Know the 8 guideposts to economic thinking:1. Resources are scarce, so decision makers must make tradeoffs (Know the concept of opportunity cost).- Opportunity cost: The highest valued alternative that must be sacrificed when choosing an option.Ex: an hour of your time, how you spend your next $15. 2. Individuals are rational: They try to get the most from their limited resources.Obtaining the “greatest benefit at the least possible cost.” Ex: Getting SLAMMED after this test with a $10 12 pack of beer, or a $15 bottle of liquor. Note: What is rational for one person may not be rational for everyone.Ex: While some people find it rational to spend the $15 for liquor, others may see that as irrational since they would rather drink the cheaper beer and still get just as fucked up. 3. Incentives matterChoice is influenced in a predictable way by changing incentives.Ex: An incentive to wearing a helmet while driving a motorcycle is possibly preventing death.Ex: An incentive to studying this study guide is getting an A on the test. 4. Individuals make decisions at the margin.Marginal: Describes the effect of a change in the current situation.Ex: paying an additional 50 cents to supersize your meal. Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs.Ex: is the extra 50 cents for a supersize worth it to you? Or not?5. Information helps us make better choices, but is costly.Ex: When buying a new car, one will go to as many dealerships as they deem necessary to find the best price for the car they want. Ex: On the other hand, when buying a new pencil, one will probably just go to Wal-Mart and buy a value pack of many pencils. 6. Beware of secondary effects.Economic actions generate both direct and indirect effects.Secondary effect: the indirect impact of an event or policy that may not be easily and immediately observable.Ex: If the government makes the taxes on yachts too high in hopes of generating more tax revenue, less people will buy yachts which might put yacht companies out of service. 7. The value of a good or service is subjective.Ex: People who buy their football tickets in advance value the ticket at that price; people who don’t have a ticket at game time find the value of a ticket much higher which is why they pay up to $100 more for a scalped ticket. Note: Moving goods and services to those who value them most is a primary source of economic progress. 8. The test of a theory is its ability to predict.- If real world events are consistent with a theory, then that theory is valid.Know the difference between positive and normative economic statements: positive economic statements are testable, normative economic statements are not.Positive economics: the scientific study of what is (testable)Normative economics: Judgments about what ought to be (not testable) Know the four pitfalls to avoid in economic thinking:Violation of the ceteris paribus principle.Ceteris Paribus: “other things constant”.The belief that good intentions equal desirable outcomes.The Nirvana Fallacy: The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative.Ex: Child resistant safety caps; the intention was to keep children away from prescription pills but adults started leaving the caps off because of the difficulty involved in taking off the caps which made it easier for children to access the dangerous pills. The belief that association is causation.Ex: Just because people file divorces on rainy days doesn’t mean that the rain causes the divorces. The fallacy of composition.Belief that what is true for one might be true for all.It is easier for one person to see by standing at a football game, but that is not true for all because if everyone stood up it would be the same as everyone sitting. Chapter 2Understand how voluntary trade creates value and leads to economic progress (The Candy Game!)Because the value of goods is subjective, voluntary trade creates value.When individuals engage in voluntary exchange, both parties are made better off.Helpful Hint: “One man’s trash is another man’s treasure”.By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources.Gains from specialization and division of labor.Gains from mass production methods.Gains from innovation. Know what transaction costs are and understand the importance of middlemen.Transaction costs: The time, effort, and other resources needed to search out and complete an exchange.Middleman: A person who buys and sells goods or services or arranges trades. A middleman reduces transaction costs. Ex: Publix; we can obtain all grocery items from one trip to Publix instead of going to each different farm where the products originate. Know the characteristics and 4 incentives of private property rights.Private property rights involve:The right to exclusive use of the property.Legal protection against invasion from other individuals.The rights to sell, transfer, exchange, or mortgage the property.Lack of property rights = lack of economic progress.4 Incentives:A) Incentive to use resources in ways that are considered beneficial to others.Ex: Empty lot; if you own an empty lot in the middle of FSU’s campus it would be most beneficial to the students to use it as an additional parking area. Consequently, you would gain the most from that decision.Owners bear the cost of ignoring the wishes of others.B) Private owners have an incentive to care for and manage what they own.Ex: The more someone cares for what they own, the more value their property will have at the time they sell it. C) Private owners have an incentive to conserve for the future.Ex: Popcorn at the movies; if you eat all of the popcorn at the
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