Econ 2023 Study Guide For Exam 1 Chapter 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 not enough to go around Understand the concept of scarcity Scarcity The concept that there is less of a good freely available that nature would like not enough to go around EX TIME MONEY WATER OIL TREES A Scarcity necessitates rationing allocating scarce goods to those who want them price is used to ration goods B Scarcity is NOT THE SAME as poverty C 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 good A Human Resources intelligence B Physical Resources Manmade tools C Natural Resources iron coal natural gas Capital Human made resources used to produce other goods and services 1 Example 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 choosing an option 2 3 4 EXAMPLE How you spend your time studying vs sleeping or how you spend your money saving vs spending 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 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 up Individuals make decisions at the margin Marginal Describes the effect of a change in the current situation EX1 Panderosa Buffet A All you can eat sidebar 7 50 B Steak dinner w sidebar 9 00 EX2 Drive or Fly Drive 8 hrs 100 Fly 2 hrs 400 Time 50 an hour to fly Time 50 an hour to drive Marginal Benefit 6 hrs vs Marginal Cost 300 300 6 50 an hour Marginal Benefit Steak Marginal cost 1 50 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 Information helps us make better choices but is costly EX New car or new pencil Take more time and consideration for the car 5 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable Example Yacht tax In 1991 the government imposed a huge luxury tax on yachts The 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 instead of the rich people 7 The value of a good or service is subjective Because 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 predict 2 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 It s 98 degrees Positive It s too hot outside Normative Examples A B C The US Economy is 16 million in debt Positive D The Government spends too much money Normative Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle Ceteris paribus other things constant EX Buying roses If the price increases we tend to buy less roses except with on Valentines day where the ceteris paribus comes in 2 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 Candy Game 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 middlemen o 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 way to reduce transaction costs Ex Grocery stores and real estate agents 3 Know the characteristics and 4 incentives of private property rights Importance of property rights 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property 4 incentives of property rights 1 Incentive
View Full Document
Unlocking...