STUDY GUIDE for FINAL EXAM ECO2023 04 FALL 2011 Martha Evans Instructor CHAPTER 1 THE ECONOMIC APPROACH 1 What is the important driver of human behavior that has resulted in competition as well as determined social political cultural and even religious traditions across time Scarcity 2 How are poverty and scarcity different Can they both be eliminated Poverty can be eliminated but scarcity is a part of life 3 How were scarce goods rationed in primitive societies How are they rationed in market economies Which rationing method is superior and why Communism and the Market system 4 Eight Guideposts to Economic Thinking c a b The use of scarce resources to produce a good is always costly This statement is usually associated with the saying There s no such thing as a free lunch Why does obtaining more of a scarce good ALWAYS involve a cost Scarcity drives up the price of a good Individuals choose purposefully therefore they will economize What is meant by economizing buying a specific benefit at the lowest cost Incentives matter How do rational people respond to changes in costs relative to the benefits of their choices Less likely to choose Economic reasoning focuses on the impact of marginal changes What does the term marginal mean Cost per 1 more unit How is a marginal cost different from an average cost Total cost produced e Since information is scarce uncertainty is a fact of life Is it reasonable for people to exhaust all possible sources of information before making decisions Why or why not Obtaining the additional information isn t worth the money saved In addition to their initial impact economic events often generate secondary effects that may be felt only with the d f 1 g h passage of time What do we mean by secondary effects Hint I used increases in the minimum wage as an example of a decision that could have secondary effects Unintended consequences for good The value of a good is subjective and varies with individual preferences Think of utility or benefit in association with this statement What does this have to do with the creation of real economic value Tickets to a football game that you can don t want to go to have no value to you The test of an economic theory is its ability to predict and explain events in the real world Why is knowledge of human behavior with regard to scarcity so important These guideposts are important because they enable us to predict human behavior and thus outcomes to forecast and make the best decisions Encourage better productivity 5 Positive versus Normative Economic Thinking Which way of thinking is objective Subjective Which way of thinking is a better tool for analysis and decision making and thus to allocate scarce goods Be able to differentiate a positive from a normative statement Objective thinking is positive statements Normative statements are usually started with ought to be 6 Pitfalls to Avoid in Economic Thinking Ceteris Paribus Good Intentions versus Good Outcomes Fallacy of Composition and Association is Not Causation Match the following statements with the appropriate fallacies above a As your next President I plan to reduce drug use among college students by spending more money to apprehend drug pushers Note Studies have shown that it s more effective to spend money on drug abuse education than on apprehension of pushers Ceteris Paribus b Whenever there has been unusual sunspot activity the economy has been in a recession Therefore sunspot activity causes recessions Association causation c As your realtor I can t tell you how much it s worth to add a swimming pool to your home to increase its market value unless 2 we know what other factors increase the market value of homes Fallacy of composition d It s great that wages are rising in our community Our elected officials should push for national wage increases Good intentions Vs Bad outcomes 7 Opportunity Costs Which of the below would economists view as cost s for starting up a new business Accountants a Rent and building renovations Accounting Costs b Buying inventory raw materials and supplies Accounting Costs c Giving up and existing job to start the business Economic costs d Labor and benefits costs Accounting Costs e Interest on capital invested Accounting Costs CHAPTER 2 SOME TOOLS OF THE ECONOMIST 1 This chapter began with an emphasis on Opportunity Cost How should opportunity cost be considered in these examples What are the opportunity costs of these choices a b c When to attend college Lost wages for 4 years Whether or not to accept an offer to play professional sports Whether to build a civic center instead of a hospital Lost care Education Vs for sick and injured 2 How Trade Creates Value Be able to give an example such as the ticket 3 scalping She always uses a boat as an example question from the lecture notes Should ticket scalping be prohibited Why or why not No Creates more value for the ticket 3 Transactions Costs What are they and how do they affect the potential gains from trade Should an individual spend as much time as necessary to find the best deal on something he she wants to purchase 1 the time effort to sell the item 2 No reduces gains from trade 4 Middlemen Stockbrokers Realtors and Mutual Fund Managers Do these professionals increase or decrease the gains from trade How Why Increase gains from trade be reducing transaction costs 5 provide examples different test Opportunity Cost Application The book and lecture notes of how opportunity cost should be considered when evaluating two travel options Make certain you can perform a similar analysis for the the test What should we 6 Comparative Advantage Application produce Make 7 could be sure you can a identify which party has comparative advantage in a comparison of production possibilities and b whether or not output expanded with division of labor and specialization What price should be charged for each good if economies specialize and trade PG 50 in the textbook Property Rights Several Points to Know a What are they Rights to use controld and obtaing benefits from a resource good or service b What are the three ways that property rights create incentives 1 using to benefit others 2 Incetive to care 3 incentive to conserve Do people behave differently toward privately owned c property versus commonly owned property In what way Hint Think of the example of the possible differences between East and West Germany 4 in terms of property values care of the environment etc prior to the fall of the
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