Tips on getting an A 1 Recopy these notes in word Mr Corey recommended this study strategy to us at the beginning of the year I did this myself last semester and it definitely works if you do this without distractions I highly recommend doing this Don t get intimidated by how many pages there are Just focus and start copying If you focus it won t take as long as you might think It s just copying after all 2 Review the online quizzes we ve done so far 3 Review the activities we ve done so far Chapters 1 2 3 and 6 Economics is the study of how we make choices under scarcity 1 Choice is the act of selecting among alternatives 2 Scarcity is the concept that there is less of good freely available from nature than people would like Ex of scarcity time money cars etc Scarcity does not equal poverty Scarcity necessitates rationing A Rationing is the allocating of scarce goods to those who want them B C Scarcity leads to competitive behavior In a market economy price is used to ration goods Resources are an input used to produce an economic good The 3 types of resources are 1 Human resources human capital 2 Physical resources physical capital 3 Natural resources Economic Way of Thinking things are not always as they appear Capital is Human made resources used to produce goods and services 1 Resources are scarce so decision makers must make trade offs 2 Individuals are rational they try to get the most out of their limited resources 3 Incentives matter choices are influenced predictably by changing the incentives 4 Individuals make decisions at the margin Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but is costly 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effect indirect effect that might not be easily and immediately observable 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Positive economics is the scientific study of what is testable Normative economics are judgments about what ought to be 4 pitfalls to avoid in economic thinking 1 Violation of other things constant ceteris paribus principle 2 The belief that good intentions guarantee desirable outcomes The nirvana fallacy is the act of comparing the actual situation with its idealized counterpart rather than the actual alternative 3 The belief that association is causation 4 Believing that what is true for one is true for all Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms the trees Macroeconomics focuses on how human behavior affects outcomes in huge areas like markets or nations the forest Tools of the Economist Coercion is when someone devotes resources to force you into doing something by making you worse off I you don t comply Voluntary trade creates value as with the candy game since the value of goods is subjective 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 increases the value created by society s resources How trade leads to economic progress 1 Gains from specialization and division of labor 2 Gains from mass production method 3 Gains from innovation Creation of wealth is the process by which when some people become rich it will make everybody richer as long as it s through voluntary trade Transactions Costs are time effort and other resources needed to set up and complete a trade exchange A middleman is a person who buys and sells goods or services and arranges trades They reduce transaction costs The importance of property rights Private property rights include 1 The right to exclusive use of said property 2 Protections against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property The 4 incentives of property rights are Incentive to use resources in ways that are beneficial to others 1 2 Private owners have more incentive to care for and manage what they own 3 Private owners have incentive to conserve for the future 4 Private owners have incentive to make sure their property doesn t damage your property A direct correlation has been shown between property rights and economic resources The Production Possibilities Curve or PPC outlines all possible combinations of total output that could be produced assuming 1 Fixed amount of productive resources 2 Given amount of technical knowledge 3 Full and efficient use of resources The slope of the curve in the PPC indicates the amount of one good that must be given up to produce more of another good A PPC is bowed outward because of the concept of increasing opportunity cost 4 factors that affect the PPC are 1 A change in the economic resource base Investment in the purchase construction or development of resources 2 Changes in technology 3 Changes in work habits 4 A change in the rules under which the economy functions The Law of Comparative Advantage States that the total output of a group of individuals will be greatest when the output of each good is produced by whoever has the lowest opportunity cost Every economy faces 3 questions 1 What will be produced 2 How will it be produced 3 Who is it being produced for Socialism is a system of organization where 1 Ownership and control of the means of production rest with the state 2 Resource allocation is determined by centralized planning Collective decision making is the method of organization that relies on public sector decision making Capitalism is a system of organization where 1 Productive resources are owned privately 2 Goods and resources are allocated through prices Market organization is when private parties make their own plans and decisions with the guidance of market prices Capitalism tends to work because it uses the idea of market efficiency It s similar to natural selection Socialism tends to suffer from an information problem since a small group of people would have trouble knowing what a large group of people wants and what their individual needs are However these individuals are aware of their own needs The Law of Demand states that there is an inverse relationship between the price of a good and the quantity that they are willing to purchase The height of the demand curve is the maximum price consumers are willing to pay for one more unit When consumers have more of a good they
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