Calhoun Final Study Guide –ECO2013Chapter 1:1. Key Terms:a. Economic theory- a set of definitions, postulates, and principles assembled in a manner that makes clear the “cause and effect” relationshipsb. Opportunity cost- the highest valued alternative that must be sacrificed as a result of choosing an optionc. Economizing behavior- choosing the option that offers the greatest benefit at the least possible costd. Utility- the subjective benefit or satisfaction a person expects from a choice or course of actione. Marginal- term used to describe the effects of a change in the current situationf. Secondary effects- the indirect impact of an event or policy that may not be easily and immediately observableg. Scientific thinking- developing a theory from basic principles and testing it against events in the real worldh. Positive economies- the scientific study of “what is” among economic relationshipsi. Normative economies- judgments about what ought to be in economic mattersj. Ceteris paribus- “all other things remaining constant”k. Fallacy of composition- thinking that what is good for one is good for alll. Scarcity- less of good is available then are being demanded; requires that some wants go unfulfilled2. Main Points:a. 8 Points of economic thinkingi. There are always tradeoffsii. Individuals choose purposefullyiii. Incentives matter, more of an incentive more likely to do itiv. Think on the margin, not on total or average1. RULE: continue to engage in the activity until the expected marginal benefit cost is greater than the benefitv.More information leads to better decisions, but info is costlyvi. Many choices create secondary effectsvii. Value is subjective so only the consumer can truly determine its worthviii. Economic thinking= Scientific thinkingChapter 2:1. Key Terms:a. Transaction costs- the time, effort, and other resources needed to search out, negotiate, and complete an exchangeb. Middlemen- people who buy and sell goods or services or arrange tradesc. Property rights- the rights to use, control, and obtain the benefits from a good or resourcesd. Private-property rights- property rights that are exclusively held by an owner and protected against invasion by otherse. Production Possibilities curve- a curve that outlines all possible combinations of total output that can be produced assuming a fixed amount of productive resources, a given amount of technical knowledge, and full and efficient use of those resourcesi.f. Investment- the purchase, construction, or development of resources, including physical assets and human assetsg. Invention- the creation of a new product or processh. Innovation- the successful introduction and adoption of a new product or processi. Creative destruction- the replacement of old products and production methods by innovative new ones that consumers judge to be superiorj. Division of labor- a method that breaks down the production of a product into a series of specific tasks, each performed by a different workerk. Law of comparative advantage- a principle that states that individuals, firms, regions or nations can gain by specializing in the production of goods that they produce cheaply and exchanging them for goods and services they can’t produce cheaplyl. Market organization- a method of organization in which private parties make their own plans and decisions with the guidance of unregulated market pricesm. Collective decision-making- the method of organization that relies on public-sector decision-making to resolve basic economic questions2. Main Points:a. Mutual gain is a result from voluntary trade, in which both parties gainb. Production Possibility Curvei. If the points is1. On the line= efficient2. Inside curve= inefficient3. Outside curve= impossibleii. If the curve…1. Shifts inward= producing less2. Shifts outward= producing morec. Incentives created by private propertyi. Proper careii. Conserve for the futureiii. Use resources in ways others valueiv. Mitigate possible harm to othersChapter 3:1. Key Terms:a. Law of demand- a principle that states there is an inverse relationship between the price of a good and the quantity of it buyers willing to purchaseb. Substitutes- products that serve similar purposesc. Consumer surplus- the difference between the maximum price of consumers are willing to pay and the price they actually payd. Complements- products that are usually consumed jointlye. Opportunity cost of production- the total economic cost of producing a good or servicef. Loss- a deficit of sales revenue relative to the opportunity cost of productiong. Law of supply- a principle that states there is a direct relationship between the price of a good and the quantity of it producers are willing to supplyh. Producer surplus- the difference between the price that suppliers actually receive and the minimum price they would be willing to accepti. Market- an abstract concept encompassing the forces of supply and demand and the interaction of buyers and sellers with the potential for exchange to occurj. Equilibrium- a state in which the conflicting forces of supply and demand are in balancek. Economic efficiency- a situation in which all of the potential gains from a trade have been realizedl. Invisible hand principle- the tendency of market prices to direct individuals pursuing their own interests engage in activities promoting the economic wellbeing of society2. Main Points:a. There is an inverse relationship in the law of demand between price of the good and the quantity people are willing to purchasei. Demand vs. Quantity Demanded (* ‘something else’ change can include, but is not limited to, quality, income, need vs. want, substitutions, etc…)1. Demand- movement of whole curve, caused by change in ‘something else’2. Quantity Demanded- movement along demand curve, caused by change in priceb. There is a direct relationship between the price of a good and the amount a company is willing to supplyi. Supply vs. Quantity Supplied (* ‘something else’ change can include, but is not limited to, resource prices, technology, nature, polotics, taxes, etc…)1. Supply- movement of whole curve, caused by ‘something else’2. Quantity Supplied- movement along curve, caused by change in costc. SAMPLE PROBLEMS (Answers on Last Page)i. What happens when there is a...1. Increase in demand?2. Decrease in demand?3. Increase in supply?4. Decrease in supply?ii. What happens when… (*all of these changes are equal in
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