Econ 2013 Study Guide For Exam 2 Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity Know the difference between the different kinds of resources that we use to produce economic goods Know the 8 guideposts to economic thinking: Resources are scarce, so tradeoffs must be made (Know the concept of opportunity cost) Individuals are rational: They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Information helps us make better choices but is costly Beware of secondary effects The value of a good or service is subjective The test of a theory is its ability to predict Know the difference between positive and normative economic statements: positive economic statements are testable, normative economic statements are not. Know the four pitfalls to avoid in economic thinking: Violation of the ceteris paribus principle The belief that good intentions equal desirable outcomes The belief that association is causation The fallacy of composition Chapter 2 Understand how voluntary trade creates value and leads to economic progress (The Candy Game!) Know the characteristics and 4 incentives of private property rights. Understand the concept of the Production Possibilities Curve (PPC). Be able to read a production possibilities curve and identify efficient, inefficient, and unattainable points, as well as what is produced at each point and what is given up and gained from moving from one point to another. Know the four factors that shift the production possibilities curve Understand the law of comparative advantage Know the 3 questions that every economy faces Understand the difference between socialism and capitalism and know why capitalism tends to work better. Chapter 3 Understand the law of demand and why demand curves are downward sloping Know how to find and calculate consumer surplus1 Know the difference between a change in quantity demanded (a movement along the curve caused by a change in the price of the good in question) and a change in demand (a shift of the curve caused by anything other than the change in price of the good in question) Know the shifters of demand: Change in Consumer Income: Normal Goods: I↑ → DNormal ↑ Inferior Goods: I↑ → DInferior ↓ Change in the Number of Consumers: # Consumers↑ → D↑ Change in the Price of a Related Good: Substitutes: Psubstitute ↑ → D ↑ Compliments: Pcompliments ↑ → D↓ Change in Expectations Expected Price: Pfuture ↑ → D↑ Expected Income: Ifuture ↑ → D↑ Change in Consumer Tastes and Preferences: Tastes and Preferences↑ → D↑ Understand the law of supply and why supply curves are upward sloping Know how to find and calculate producer surplus Know the difference between a change in quantity supplied (a movement along the curve caused by a change in the price of the good in question) and a change in supply (a shift of the curve caused by anything other than the change in price of the good in question). Know the shifters of supply:• A change in resource price: Presource ↑→ S↓• A change in technology: Technology ↑ → S↑• A change in Nature or Politics: Depends on Change• A change in taxes: Taxes ↑ → S↓ Understand the concepts of elasticity of supply and elasticity of demand Know everything there is to know about market equilibrium: If there is excess supply, price will fall If there is excess demand, price will rise So in equilibrium, there is nor excess supply or excess demand• Gives you the equilibrium Price and Quantity Know how to do single and double shift questions where demand or supply (or both) shift and change equilibrium price and quantity. Understand the invisible hand principle. Chapter 6 Know how the government has grown over the years and have a general idea of where the government is spending taxpayer dollars. Know the definition of transfer payments2 Understand the theories related to the economics of voting: Rational Ignorance Effect: a rational individual has little or no incentive to acquire information needed to cast an informed vote. Median voter theory: The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates, and the preferences of the median voter will be represented. Know when the political process works well and the idea of user charges. Understand the ways in which the political process does not work well Special interest effect: An issue that generates substantial benefits for a small group by generating minimal costs to a large group. Done through:• Logrolling• Pork-barrel Legislation Shortsightedness Effect: politicians will favor programs that generate current visible benefits, even if long-term costs of the project outweighs the benefits. Rent seeking: Actions taken by individuals and groups in order to use the political process to take the wealth of others. Lack of profit motive: Unlike private firms, the public sector lacks the incentive to produce efficiently. Chapter 7 Know and understand the definition for Gross Domestic Product (GDP) Market value of goods and services produced within a country during a specific period (usually a year) Understand what transactions get included into GDP and what transactions are left out. ARE INCLUDED Final goods and services Goods and services produced; transfers are not included Goods and services produced within geographic borders of a country Goods produced in 2008 only count for 2008 NOT INCLUDED Financial transactions Intermediate goods• Goods purchased for resale or for use in producing another good or service♦ Double counting: don’t count intermediate goods b/c their value is contained within the final good Know the two approaches for finding GDP: Expenditure approach: Y = C + I + G + NX (understand what goes into each of these components and be able to calculate Investment, inventory investment, and Net Exports so that you can calculate GDP)3 Y=GDP C= consumption• Largest component of GDP• House hold spending on goods and services during the current period♦ Durable goods♦ Nondurable
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