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FSU ECO 2023 - Study Guide For Exam 1

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Econ 2023 Study Guide For Exam 1Chapter 1- Know that Economics is the study of how we make choices under scarcity:-Choice: The act of selecting among alternatives-Scarcity: The concept that there is less of a good freely available that nature would like (notenough to go around). - Understand the concept of scarcity:-Scarcity: The concept that there is less of a good freely available that nature would like (notenough to go around). EX) TIME, MONEY, WATER, OIL, TREESA) Scarcity necessitates rationing (allocating scarce goods to those who want them- price isused to ration goods), B) Scarcity is NOT THE SAME as povertyC) Makes people act in a competitive behavior.Example used in class (Appleville) : People will go for the apples on the ground first because they are the easiest to obtain at a price of 5 cents. Once those are gone people will go for the ones on the first branch (10 cents). Later to the second branch (20 cents) and etc. Later on when this apple tree is gone we will switch to an alternative use and depend on oranges… there are always alternatives to our resources.- Know the difference between the different kinds of resources that we use to produce economic goods-Resources: an input used to produce an economic goodA) Human Resources intelligenceB) Physical Resources Manmade toolsC) Natural Resources iron, coal, natural gas-Capital: Human- made resources used to produce other goods and services1Example used in class: Michael Phelps has his amazing swimming ability while Bill Gates has his intelligence.- Know the 8 guideposts to economic thinking:1. Resources are scarce, so tradeoffs must be made (no such thing as a free lunch)-Opportunity cost: the highest valued alternative that must be sacrificed when choosingan optionEXAMPLE: How you spend your time (studying vs sleeping) or how you spend your money (saving vs spending)2. Individuals are rational: They try to get the most from their limited resources“Greatest benefit at least possible cost” Red Wine vs Rum (rum is cheaper and will get you drunk faster least possible cost for greatest benefit).Note** What’s rational for one person may not be rational for everyone.3. Incentives matter: choice is influenced in a predictable way by changing incentive.EX) Money game when he threw the tennis ball around and people were screaming as the price went up4. Individuals make decisions at the marginMarginal: Describes the effect of a change in the current situationEX1) Panderosa BuffetA) All you can eat sidebar : $7.50 Marginal Benefit: SteakB) Steak dinner w/ sidebar: $9.00 Marginal cost: $1.50EX2) Drive or FlyDrive: 8 hrs $100 Marginal Benefit 6 hrs vs Marginal Cost: $300Fly: 2 hrs $400 300/6= $50 an hour Time > $50 an hour to fly Time < $50 an hour to drive Cost Benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs (depends how worth it is to spend that amount of $$$) 5. Information helps us make better choices but is costlyEX) New car or new pencil? Take more time and consideration for the car6. 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 easily and immediately observableExample: Yacht tax In 1991 the government imposed a huge luxury tax on yachtsThe idea: take tax money from rich people, what ended up happening is that Viking Yacht Company fired 1500 of its 1560 employees (96%) The secondary effect was that is hurt the low/middle class employees insteadof the rich people. 7. The value of a good or service is subjectiveBecause goods are subjective, voluntary trade creates value FSU vs Pitts game… if a Wisconsin fan goes he doesn’t see a value so he’ll probably sell it to someone who values it more.**Moving goods and services to those who value them most is a primary source of economic progress**8. The test of a theory is its ability to predict2-If real world events are consistent with a theory, then that theory is valid The theory that red cars get stopped more when indeed they do not. - Know the difference between positive and normative economic statements: - Positive economic statements are testable- Normative economic statements are not.Examples:A) It’s 98 degrees  PositiveB) It’s too hot outside  NormativeC) The US Economy is $16 million in debt PositiveD) The Government spends too much money Normative- Know the four pitfalls to avoid in economic thinking:1. Violation of the ceteris paribus principleCeteris paribus: other things constantEX) Buying roses: “If the price increases, we tend to buy less roses” except with on Valentines day where the ceteris paribus comes in2. The belief that good intentions equal desirable outcomes.- It could be well intended but it can also result in horrible outcomes.Example: Endangered species act can’t build anything within 50 feet of this woodpecker tree. Thee effect was that more people starting cutting down the trees where the woodpecker lived and more woodpeckers were killed.** Nirvana Fallacy** Logical error or comparing the actual situation with its idealized counter part rather than an actual alternative.Example: Child Labor and sweatshops, comparing US Children is not the same as comparing foreign children where they actually need those jobs in companies such as Nike.3. The belief that association is causation  just because they are associated together does not mean one caused the other. EX) Superstitions football player with lucky underwear 4. The fallacy of composition: belief that what is true for one might not be true for all EX) Standing at a football game, when someone else stands to see if they can see the game better (what’s true for one might not be necessarily true for everyone).Chapter 2- Understand how voluntary trade creates value and leads to economic progress (The CandyGame!)-Both parties are made better off, channeling goods/resources to those who value them most increases the wealth created by a society’s resources- Know what transaction costs are and understand the importance of middlemeno Transaction costs: time, effort, and other resources needed to search out and complete an exchange. o Middleman: Person who buys/sells goods or services or arranges tades in such a wayto reduce transaction costs Ex) Grocery stores and real estate agents 3- Know the characteristics and 4 incentives of private


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