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FSU ECO 2013 - Study Guide

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ECO20103 Study Guide Joab CoreyCHAPTER 1Choice: the act of selecting among alternativesScarcity: the concept that there is less of a good freely available from nature than people would likeEx: time, money, textbooksScarcity necessitates rationing:Rationing: allocating scarce goods to those who want them, used in a market economyLeads to competitive behaviorIn economics, competition is a good thingResource: an input used to produce an economic good; anything you use. Human resources (Capital): creativity, intelligence, knowledge, endurance, etc…Physical resource (capital): manmade tools or machines ex. Pens, building, deskNatural resources: oil, iron ore, coal, all is natural and they are never referred to as capitalCapital: something a human must produce or build to produce something elseExamples of human capital:-Albert Einstein used intelligence to create a lot of great things-Chuck Norris used his knowledge, strength, to create awesome movies, quotes, etc...The economic way of thinking:-CAREFUL! Things aren’t always what they appear!8 guideposts to economic thinking:1. Resources are scarce so decision makers must make tradeoffs (no such thing as free lunch). Just because lunch is free to you, does not mean it’s free to everyone else. -opportunity cost: highest valued alternative that must be sacrificed when choosing an optionEx.) An hour of your time in class leads to something you could no longer be doing. The highest value=sleepingEx.) Guns and butter, military vs. social spending, have to make the choice between them2. Individuals are rational: they try to get the most from their limited resources “greatest benefit at least possible cost”Ex.) Red wine vs. spiced rum – you get the one that benefits you the mostEx.) Welfare vs. educationNOTE: what is rational for one person may not be rational for everyone else3. Incentives Matter: choice is influenced in a predicable way by changing the incentivesEx.) Money Game (noise)Ex.) Lesson about bull fighting from his fatherEx.) Prices: when price goes up people willing to buy less, when price goes down willing to buy more4. Individuals make decisions at the margin: describes the affect of a change in the current situation Ex.) Olive Garden A.) All you can eat soup, salad and breadsticks - $6B.) Chicken parmesan and all you can eat SSB - $10a. Marginal Benefit – Chicken parmesanb. Marginal Cost- $4 Ex.) Taco Bell Tacos -$1 each Drink $0.50 eachA.) 2 tacos and 1 drink - $2.50B.) Extra value meal (3 tacos and 1 drink) - $3.00a. Marginal Benefit- 1 tacob. Marginal Cost- $0.50Cost benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costsEx.) Airport security vs. lead clean-up Costs: Benefits: A.) Airport Security: $50 Billion 100 lives savesB.) Lead clean-up $70 billion 120 livesMarginal Cost: $20 BillionMarginal Benefit: save 20 lives5. Information helps us make better choices, but its costly Ex.) A new house vs. a new notebook 6. Beware of secondary effects: economic actions generate both direct and indirect effectsSecondary Effects: the indirect impact of an event or policy that may not be easilyand immediately observableEx.) Fuel Efficiency RegulationsEx.) Trade Restrictions7. The value of a good or service is subjective a. Because all goods are subjective, voluntary trade creates valueEx.) How much would you pay for a pack of gum?Ex.)Orange Bowl Tickets-moving goods and services to those who value them the most is a primarysource of economic progress8. The test of a theory is its ability to predict a. If real world events are consistent with a theory, then that theory is validEx.) Elephant’s afraid of mice clip, test in a bunch of different waysPositive vs. Normative EconomicsPositive: the scientific study of what is a testable factEx.) Its 90 degrees in this room – you can test itNormative: judgments about what ought to be, not testableEx.) It’s hot in this room- what’s hot to me may not be hot to someone else4 Pitfalls to avoid in economic thinking1. Violation of ceteris paribus principle a. Ceteris paribus: all other things constantEx.) Buying eggs: “If the price of eggs goes up, people will buy less eggs.”  always think ceteris paribus. Usually this is true, except during Easter time because something else is changing2. Good intentions do not guarantee desirable incomes 3. Association is not causation Ex.) Superstitions – walk by a black cat then trip, the cat did not cause you to trip justassociationEx.) Sunspots and economic activity4. Fallacy of composition: the belief that what is true for one might not be true for all Ex.) When you get a raise vs. when everyone else gets a raiseCHAPTER 2Trade Creates Value:- Because the value of goods is subjective, voluntary trade creates value-when individuals engage in voluntary exchange, both parties are made better off-channeling goods and resources to those who value them the most increases the wealth created by a society’s resourcesCreation of wealth-the process by which some people may become rich will make everybody else richerEx.) Henry Ford- makes cars cheaper, more people can buy themImportance of property rights:-Private property rights involve 1. The right to the exclusive use of property2. Legal protection against invasion from other individuals3. The right to sell, transfer, exchange, or mortgage the propertyEx.) Joab’s childhood4 incentives of property rights:1. Incentive to use resources in ways that are considered beneficial to others2. Private owners have an incentive to care for and manage what they owna. Ex.) communal vs. private fridge3. Private owners have an incentive to conserve for the futurea. Ex.) Tragedy of the commonsb. Ex.) Endangered species4. Private owners have an incentive to make sure their property does not damage your property-property rights and development-lack of property rights= lack of economic progressProduction Possibilities Curve (PPC)-PPC- outlines all possible combinations of total output that could be produced assuming:1. fixed amount of resources (productive)2. Given amount of technical knowledge3. Full and efficient use of resourcesEx.)Point C is inefficientPoint E is unattainable4 Factors that shift the PPC1. A change in the economies resource base a. Investment- the purchase,


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