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Test One Study guide Chapter 1 Study Guide 1 Positive Economics The scientific study of what is among economic relationships 2 3 4 5 2 3 Normative Economics Judgments about what ought to be in economic matters Normative economics views cannot be proven false because they are based on value judgments Meaning and violation of ceteris paribus the Latin tem meaning other things constant that is used when the effect of one change is being described recognizing that if other things changed they also could affect the result Economists often describe the effects of one change knowing that in the real world other things might change and also exert an effect Guideposts to economic thinking 1 The use of scarce resources is costly so decision makers must make trade offs 2 Individuals choose purposefully they try to get the most from their limited resources 3 Incentives matter choice is influenced in a predictable way by changes in incentives 4 Individuals make decisions at the margin 5 Although information can help us make better choices it s acquisition is costly 6 Beware of the secondary effects economic actions often generate indirect as well as direct 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict effects Pitfalls to avoid 1 Violation of Ceteris Peribus condition can lead one to draw the wrong conclusion 2 Good intentions do not guarantee desirable outcomes 3 Association is not Causation 4 The fallacy of composition What s true for one may not be true for all No quiz questions for chapter one Chapter 2 Study Guide 1 Be able to define transaction costs time effort and other resources needed to search out negotiate and complete an exchange What is a middleman a person who buys and sells good or services or arranges trades A middleman reduces transaction costs Ex A car dealership Property Rights a b Define and give examples of property rights the right to use control and obtain the benefits from a good or resource Ex A house What does having effective property rights involve 1 Right to exclusive use of the property that is the owner has the sole possession control and use of the property including the right to exclude others 2 Legal protection against invasion from other individuals who would seek to use or abuse the property without the owners permission 3 The right to transfer sell exchange or mortgage the property a b c d c What are 4 incentives of property rights 1 Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others they own 2 Private owners have a strong incentive to care for and properly manage what 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 chanc that their property will cause damage to the property of others Production Possibilities curve a curve that outlines all possible combinations of total output 4 that could be produced assuming 1 fixed amount of productive resources 2 a given amount of technical knowledge 3 full and efficient use of those resources The slope of the curve indicates the amount of one product that must be given up to produce more of the other Unattainable points are the points that lie outside of the curve Inefficient points points that lay within the curve Efficient points points on the curve however points towards the center of the curve are more efficient 4 ways to shift the PPC outward 1 an increase in the economy s resource base would expand the ability to produce goods and services investment 2 Advancements in technology can expand the economy s production possibilities 3 An improvement in the rules under which the economy functions can also increase the output 4 By working harder and giving up current leisure we could increase our production of goods and services e How can we shift it inward By taking more leisure time and less time working Natural disasters Imposing trade barriers Division of Labor between specialization and the law of comparative advantage and economy will produce the greatest output of goods and services Entrepreneurship Entrepreneurs realize gains from discovery and innovation They create new technologies to make production more efficient Or create new goods Absolute Advantage A person company has an absolute advantage when they are better faster at producing goods in every situation Comparative Advantage A principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply at a low opportunity cost and exchanging them for goods they cannot produce cheaply at a high opportunity cost Be able to figure out who has a comparative advantage if I give you the numbers i e a look at example in class Market Organization a Socialism a system of economic organization in which 1 the ownership and control of the basic means 5 6 7 8 9 of production rest with the state and 2 resource allocation is determined by centralized planning rather than market forces These decisions can be made by either a single dictator or a group of experts b Capitalism an economic system in which productive resources are owned privately and goods and resources are allocated through market prices Chapter two questions 1 Because private owners are held responsible for damages their property causes to the property of others private owners have a strong incentive to take steps to reduce the chance that they will harm the property of others 2 Given freedom of movement for both goods and resources if Florida producers specialize in oranges and Georgia producers specialize in peaches it would be reasonable to conclude that Florida has a comparative advantage in producing oranges 3 The law of comparative advantage explains why specialization and exchange will make it possible for trading partners to expand their combined output 4 Which of the following most accurately states the economic significance of exchange Exchange creates value by moving goods from parties who value them less to parties who value them more 5 Which of the following is a private owner prohibited from doing using the property in a manner that invades or infringes on the property of another 6 A system of economic organization in which the ownership and control of productive capital assets rests with the state and in which resources are allocated through


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FSU ECO 2023 - Test 1

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