Econ 2023 Study Guide For Exam 2…So FarChapter 1- Know that Economics is the study of how we make choices under scarcity- Understand the concept of scarcityo concept that there is less of a good freely available from nature than people would like….. Ex- time, money, carso Someone considered poor somewhere will not be considered poor in other countrieso Scarcity nessissitates rationing because there is not enough to all go around we have to figure out who gets which- Know the difference between the different kinds of resources that we use to produce economic goodsi) Human resources (human capital)(1) Speed, strength, educationii) Physical resources (physical capital)(1) Tools that are man made such as a chair, pencil, laptopiii) Natural resources(1) Land, riverso- Know the 8 guideposts to economic thinking:1. Resources are scarce, so decision makers must make tradeoffs (Know the concept of opportunity cost)2. Individuals are rational: They try to get the most from their limited resources3. Incentives matter4. Individuals make decisions at the margin5. Information helps us make better choices but is costly6. Beware of secondary effects 7. The value of a good or service is subjective8. 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:1. Violation of the ceteris paribus principle2. The belief that good intentions equal desirable outcomes- The Nirvana Fallacy: The logical error of comparing the actual situation withits idealized counterpart rather than the actual alternative.3. The belief that association is causation4. The fallacy of composition: belief that what is true for one might be true for allChapter 2- Understand how voluntary trade creates value and leads to economic progress (The Candy Game!)a) Because the value of goods is subjective voluntary trade creates value.b) When individuals engage in voluntary exchange, both parties are made better off1- Know what transaction costs are and understand the importance of middlemen1. the time, effort, and other resources needed to search out and complete an exchange2. Middle men reduce transaction costs- Know the characteristics and 4 incentives of private property rights.i) The right to exclusive use of the property……ex. Pen writing withii) Legal protection against invasion from other individualsiii) Right to sell, transfer, exchange, or mortgage the propertya) Incentive to use resources in ways that are considered beneficial to others(1) Ex. Empty lot – make money and help people at same timeii) Owners bear the cost of ignoring the wishes of others(1) Ex. Recommend house is in neutral colors cus buyers may not like that houseb) Private owners have an incentive to care for and manage what they owni) Ex. Rental car- don’t care about maintaining it because it is temporary (1) Ex. Berrys Bikes- let everyone use a communal bike systemc) Private owners have an incentive to conserve for the futurei) Ex. Popcorn at the moviesii) Tragedy of the commons(1) Lets say there is a pasture of land that can hold 100 cows but if there is more than 100 cows on the land then the grass will deplete too quickly. 5 people use land and each person gets 20 cows, might be 25 and before u know it the land is depleted. Communist way for solving the problem was to divide land up into quadrants.d) Private owners have an incentive to make sure their property does not damage your propertyi) Pull in Honda civic between bmw and Ferrari. Care about the higher priced cars because there is a risk u can damage it.(1) Ex. Keeping dog on leash- e) Property rights and development i) Lack of property rights=lack of economic progress-- Understand the concept of the Production Possibilities Curve (PPC): The PPC outlines all possible combinations of total output that could be produced, assuming a:1. fixed amount of productive resources2. given amount of technical knowledge3. full and efficient use of resources- 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 inward and outwardiv) A change in economys resource base(1) Investment- the purchase, construction, or development of resources(a) Investment requires us to give up consumption goodsv) Changes in technology(1) Technology- the knowledge available in an economy at any given time.2(a) Technology determines the amount of output we can generate with ourlimited resources.c) A change in rules under which the economy functionsi) Ex. Development of a system of patentsii) The jim crow lawsd) Changes in work habitsi) Working harder can shift curve outwardii) Working less can shift curve inward- Understand the law of comparative advantageiii) 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.(1) Ex. Should lebron james clean his own house- Know the 3 questions that every economy faces1. What will be produced?2. How will it be produced?3. For whom will it be produced?- Understand the difference between socialism and capitalism and know why capitalism tends to work better.iv) Socialism- a system of economic organization where-(1) Ownership and control of the means of production rest with the state(2) Resource allocation is determined by centralized planning(a) Collective decision making: the method of organization that relies on public sector decision making to resolve basic economic questionsv) Why capitalism tends to work when socialism does not:(1) Capitalism is similar to natural selection, it uses the idea of market efficiency(a) Socialism has no incentive for profit (2) Socialism suffers from an information problemChapter 3- Understand the law of demand and why demand curves are downward sloping.a. Inverse relationship (negative) between the price of a good and the quantity that buyers are willing to purchaseb. Ex. Deriving the Demand Curve- As price increases, quantity demand decreases. Price decreases, quantity demand increases.- Know that the height of the demand curve is the maximum price consumers are willing to pay for an
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