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FSU ECO 2023 - TEST 1 MATERIAL

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TEST 1MATERIAL:Chapter 1: The Economic Approach- Scarcity: less of a good freely available than what people would likeo NOT the same as poverty- Scarcity leads to Tradeoffs which result in us having to make Choices- Mechanisms used to deal with scarcity:o Forceo Tradition o Authority (government, church, etc.)o Market- Scarcity requires that some wants remain unfulfilledo Makes rationing a necessity. Rationing: Allocating a limited supply of a good or resource among people whowould like to have more of it.- Rationing can be done through price, government factors (social status, political standing), or can be done on a first-come-first-serve basis.- Resource: An input used to produce economic goods. 3 types:o Human, Physical, Natural8 Guideposts to Economic Thinking:1. There are Always Trade Offs a. Opportunity Cost: The highest valued alternative that must be sacrificed as a result of choosing an option.a.i. NOT the sum of all alternatives, Just the cost of the next best thing.2. Individuals Choose Purposefully a. Economizing Behavior: Choosing the option that offers the greatest benefit at the least possible cost. a.i. Economizing Behavior = Rational Behavior b. Utility: The subjective benefit or satisfaction a person expects from choice or course of action. b.i. Often influences what an individual chooses.3. Incentives Matter a. As incentives go up, an individual will be more likely to do something, and vice versa b. Changes in personal costs and benefits will exert a predictable influence on the choices ofpeople4. Individuals Make Decisions on the Margin a. Marginal: Term used to describe the effects of a change in the current situationa.i. Ex: Marginal cost is the cost of producing one additional unit.b. I.e. >A producer’s Marginal Cost is the cost of producing one additional unit of a product5. More Info leads to Better Decisions, but Info is Costly to Get 6. Many Choices Create Secondary Effects a. Secondary Effects: indirect impact of an event or policy that may not be easily and/or immediately observablea.i. Often unintended and overlooked7. Value is Subjective a. Value is determined by the purchaser, therefore may be different from person to person8. Economic Thinking = Scientific Thinking a. Scientific Thinking: Developing a theory from basic principles and testing it against events in the real world- Positive Economics- Scientific study of “what is” in economic relationships. (FACTS)o Ex: “If the price of gasoline rises, people will buy less gasoline.” Can be statistically researched and proved.- Normative Economics – Judgments about “what ought to be” in economic subjects. (OPINIONS)o Ex: Political party preferences in individuals Pitfalls to Avoid in Economic Thinking:1. DON’T violate “Ceteris Paribus” a. Other things constant. 2. Good intentions DO NOT guarantee good or desirable outcomes3. Association IS NOT causation4. The Fallacy of Composition = what’s good for an individual may not be good for the group.Chapter 2: Some Tools of the Economist- Opportunity costs cannot be objectively measured because they depend on how the decision-maker values their options. Trade Creates Value o 2 important aspects of Voluntary Exchange:1. When individuals engage in voluntary exchange, both parties are made better off.2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources. - Transaction Costs: cost of the time, effort, and other resources used to search out, negotiate, and conclude an exchange. o Transaction costs decrease the benefit of voluntary exchange because the cost of information, transportation, and other elements of transaction costs will sometimes be so great that potential gains from trade will be unrealized.Property Rights- Private Property Rights: Property rights that are exclusively held by an owner and protected against invasion by others. - Private property rights involve 3 things:1. The right to exclusive use of the property 2. Legal protection against invasion by others without the owner’s permission3. The right to transfer, sell, exchange, or mortgage- Private property rights change behavior in 4 key ways:1. Private owners can gain by employing their resources in ways that are beneficial to others, and they can bear the opportunity cost of ignoring the wishes of others.2. Private owners have a strong incentive to care for and properly manage what they own.3. Private owners have an incentive to conserve for the future- particularly if the property is expected to increase in value.4. Private owners have an incentive to lower the chance that their property will cause damage to the property of others. Production Possibilities Curve- PPC: Shows the maximum amount of any two products that can be produced from a fixed set of resources, and the possible trade-offs in production between them.- The slope indicates the amount of one product that must be given up to produce more of anotherPoints INSIDE the curve are Inefficient (wasted resources)Points OUTSIDE the curve are UnattainablePoints ON the curve are efficient- 4 Factors can potentially shift the PPC outward: 1. An increase in economy’s resourcesa. Expands ability to produce goods and servicesb. Investment: The purchase, construction, or development of resources 2. Advancement in technologya. Invention: creation of new products or processesb. Innovation: practical and effective adoption of new technologiesb.i. Entrepreneur: Individual who introduces new products or improved technologies and decides which projects to undertake.c. Creative Destruction: new products and methods continually replacing old ones3. Improvement in rules within the economy4. Working harder and giving up current leisurea. Expands ability to produce goods and servicesGains from Trade- Division of Labor: method that breaks down production into a series of specific tasks, each performed by a different worker- Law of Comparative Advantage: Individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce cheaply (or at a low opportunity cost) and exchanging them for goods they cannot produce at a low opportunity cost. o In other words, if everyone specializes in a specific product and then just trades with eachother, the most wealth will be created- Self-sufficiency is NOT good.- Aside from Specialization and Division of Labor, economic progress can be


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