Econ 2013 Study Guide For Exam 2 Chapter 1 Economics is the study of how we make choices under scarcity o Scarcity means there is only so much of a good to go around so as a consumer we cannot have all of everything that we want This is where choice comes in we as consumers must make choices by picking things we value highly over things we don t value as high Rationing is this idea on a larger scale Because an economy has limited resources goods and services to provide price is used to get these respective items to those value them most o Leads to competitive behavior because there is a limited amount of resources whoever uses them most effectively has the most to gain Producers compete to try and maximize efficiency Know the difference between the different kinds of resources that we use to produce economic goods o A resource is an input used to produce a good o Three types Human knowledge strength and skill of human beings Physical tools machines and buildings and Natural land oceans and rivers Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make trade offs when choosing 2 3 4 5 between options The highest valued alternative given up when making a decision is the opportunity cost Example is Guns and butter Individuals are rational they make decisions that will allow them to get the most from their limited resources Keep in mind that what is rational for one is not rational for all Examples given in class were red wine vs spiced rum and Welfare vs education Incentives matter and choice can be influenced in a predictable way based on these incentives The macro style money game in class was used to demonstrate this Individuals make decisions at the margin margin represents the effect of change in a current situation ex Included olive garden and taco bell and a cost benefit analysis can be used to determine when the marginal benefits outweigh the marginal costs Example given was airport security vs lead clean up Information is costly but it helps us make better choices The amount of information necessary is dependent on how big or important a decision is Example given was buying a house verse buying a new notebook 6 Beware of secondary effects Economic actions generate direct and indirect effects These indirect effects are also called secondary effects and are not always easily and immediately observable Examples given were fuel efficiency regulations and trade restrictions 7 The value of good or service is subjective which means that voluntary trade creates value What one person values low another person may value much higher Economic progress is achieved by moving goods and services to those who value them most Eg How much would you pay for a pack of gum And orange bowl tickets 1 8 The test of a theory is its ability to predict In order for a theory to be valid it must be consistent with real world events Know the difference between positive and normative economic statements o Positive economic statements testable more concrete less conceptual o Normative economic statements not testable more conceptual less concrete Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus other things constant principle 2 The belief that good intentions equal desirable outcomes 3 The belief that association is causation 4 The fallacy of composition what is true for one is true for all Chapter 2 Voluntary trade creates value and leads to economic progress o Because the price of a good is subjective trade allows 2 people to get goods that they both value more highly making both parties better off Think about the candy game we did in class Also on a macroeconomic scale this channels goods and resources to those who value them most and in doing so can increase overall wealth with the same amount of a society s resources aka economic progress Know the characteristics and 4 incentives of private property rights o There is an incentive to use resources in ways that are considered beneficial to others The cost of ignoring the wishes of others falls on the owner Southpark cartman s amusement park Reselling textbook o People care for and manage what they own EG Communal refrigerator vs o Private owners have an incentive to conserve for the future eg Cows your own refrigerator outnumber elephants o Private owners have incentive to make sure their property does not damage your property Aka liability EG Keeping your dog on a leash Production Possibilities Curve PPC What is produced at each point and what is given up and gained from moving from one point to another o PPC outlines all possible combinations of total output that could be produced Assumes fixed amount of productive resources given amount of technical knowledge and full and efficient use of resources o Efficient point on the curve o Inefficient point inside the curve o Unattainable points outside the curve Know the four factors that shift the production possibilities curve o Change in an economy s resource base o Changes in technology o Change in rules under which the economy functions EG Trade barriers and business franchise tax in West Virginia o Changes in work habits Understand the law of comparative advantage 2 o The idea that total output is greatest when each person or group of people focuses on what they can produce at the lowest opportunity cost EG Should mike Tyson be his own bodyguard Know the 3 questions that every economy faces o What will be produced o How it will be produced o Who it will be produced for work better The difference between socialism and capitalism and know why capitalism tends to o Capitalism A system of economic organization where productive resources are privately owned and goods and resources are allocated through market prices o Socialism system of economic organization where ownership and control of the means of production rest with the state and resource allocation is determined by centralized planning o Difference reasons capitalism works Socialism suffers an information problem and capitalism operates like a business version of natural selection Chapter 3 Law of demand and why demand curves are downward sloping o Law of demand there is an inverse or negative relationship resulting in a downward sloping demand curve between the price of a good and the quantity that buyers are willing to purchase Know how to find and calculate consumer surplus o Consumer Surplus the difference between the maximum amount consumers would be willing to pay
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