Microeconomics- Exam 1 ReviewThe Exam-Covers chapters 1-3. 34 multiple choiceHow to study-Go through class notes-Study old extra credit and online quizzes/activities (understand how to answer the question).-Do the questions in your coursebook (at least multiple choice)CHAPTER 1Know the definition of scarcity.Scarcity- the concept that there is less of a good freely available from nature than people would like.There are three things that you MUST know about scarcity:1.) Not the same thing as poverty2.) Scarcity necessitates ration (you can rationate based on who has the most power, etc)3.) Scarcity leads to competition8 GUIDEPOSTS TO ECONOMIC THINKING: 1. Resources are scarce (no such thing as free lunch). Ex: concept of opportunity cost (highest alternative)2. Individuals are rational (getting greatest benefit at least possible cost)Example: What is the LEAST I can do to make an A in this class?3. Incentives matter (ex: the money game). When benefit increases, more people are more likely to take position in it.4. Individuals make decisions at the margin. Marginal: effect of change in current situation (outweigh the benefits and costs of one more).Ex: Drive or fly? Ex: Supersize your extra value meal?*cost benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs!*-When we are deciding whether to stay at a medium drink, or upgrade to a large size for 50 cents more, we are making a marginal analysis. Therefore, it is sufficient to say we use marginal analysis in our everyday lives.5. Information helps us make better choices, but is costly.Example: Some things we value info on more than the other. A good example would be a new car vs. a new pencil. Surely, we don’t care much to seek out information towards finding which pencil is best (it’s useless) yet when seeking information on a new car we want to buy, the info on the car is HIGHLY important.6. Beware of secondary effects: economic actions generate both direct and indirect effects. (Ex: placing high tax on yachts, lowers amount of yachts bought, affects rich yacht owners, etc)*7. The value of a good or service is subjective. (What one may value may not be as important to somebody else).Example: One may value hats more than you, so he may be willing to spend more on hats.8. The test of a theory is its ability to predict.Know the difference between a normative economic statement and a positive economic statement.Ex: Positive statement: A pencil costs 37 cents. (Testable statement, but isn’t ALWAYS true)Ex: Normative statement: That pencil is WAY too expensive. (A statement that is opinion-based and you cannot test).Know the 4 pitfalls to avoid in economic thinking1. Violation of ceteris paribus principle.Ceteris paribus: other things constant2. Good intentions do not guarantee desirable outcomesEx: endangered species act/ safety caps on medicine (preventing harm from children, but some places left caps off)Ex: nirvana fallacy (comparing actual situation with what you hope would be true) and child labor/sweatshops. (if the children weren’t in sweatshops, they would actually end up in worse conditions)3. Association is not causation. Example: There is a myth that your initials relate to your I.Q, or one day you may feel that you did “bad on your test because of the weather outside.”4. Fallacy of composition: belief that what is true for one is true for allEx: Standing at a football game. Just because you can see it doesn’t mean everyone can.CHAPTER 2 -Know how trade creates value (candy trade. Candy got shuffled around to people who valued the candy piece itself more than the person trading it did).- Know that middlemen support trade by reducing transaction costs.-Understand the process of wealth creation through voluntary transactions.Know the 4 incentives of private property rights1. Use the resource in ways that benefit others. (Ex: empty lotmaking it into a parking lot for students to benefit them).2. Care for and manage what they own. (Ex: driving rental care vs. driving own car. Obviously, you would take care of your own car more).3. Private owners have an incentive to conserve for the future. (Ex: Tragedy of the commons- if nobody owns it, nobody has the incentive to control it.4. Private owners have an incentive to make sure their property does not damage your property. (Ex: keeping your dog on a leash).What is the Production Possibilities Curve?Identify: inefficient (point inside of curve), efficient (point on curve), unattainable (point outside of curve). Know shifters of PPC curve:1. Change in the economy’s resource base2. Changes in technologyTechnology: the knowledge available in an economy at any given time.3. A change in the rules under which the economy functions. (rules shrinking growth go inward, rules expanding growth go outward).4. A change in work habits.Know the Law of Comparative Advantage and how it works:The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost. Example: If you were to ask who should clean Lebron Jame’s house…him or a maid? In this scenario, the maid should because she has a lower opportunity cost. Lebron James could spend time doing other things, such as playing basketball and doing interviews.Ex: The wage you are trying to guess should always be equivalent to amount of hours….So if one person’s typing speed is 120 at $50 per HOUR, another’s wage may be $25 with a speed of 40 in 3 hours.3 questions every economy answers:1. What will be produced?2. How will it be produced?3. For whom will it be produced?*Know the difference between capitalism and socialism, and why capitalism works.* (important)Capitalists- decide how much to make, what to make, etc. Socialists- decide for EVERYONE how much to make (towards whole population) CHAPTER 3 Law of demandConsumer surplus: difference between max amount consumers would be willing to pay and the amount they actually pay.Consumer surplus is the area BELOW the demand curve but above the price. (be able to find on graph, and also know how to calculate). * 1/2Bh*Know the difference between change in demand and quantity demandedChange in quantity demanded: caused by a change in the current price of the good. (shifts along the curve)Change in demand: caused by a change in anything else that affects demand (shifts the demand curve)Shifters of Demand:1. A
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