Econ 2013 Study Guide For Exam 1 Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity o Scarcity than people would like the concept that there is less of a good freely available from nature Not the same thing as poverty Example time money textbooks Scarcity necessitates rationing Rationing In a market economy price is used to ration goods allocating scarce goods to those who want them Scarcity leads to competitive behavior the act of selecting among alternatives o Choice Know the difference between the different kinds of resources that we use to produce economic goods o Resources an input used to produce economic goods Human resources human capital Physical resources physical capital Natural resources o Capital Human made resources used to produce other goods and services Know the 8 guideposts to economic thinking 1 Resources are scarce so tradeoffs must be made Know the concept of opportunity cost the highest valued alternative that must be sacrificed when choosing an option highest valued activity sacrificed in making a choice i Opportunity cost 2 Individuals are rational They try to get the most from their limited resources a Ex going to college monetary cost tuition books non monetary cost forgone earnings If the opportunity cost of college rises then one will be less likely to attend college a Greatest benefit at least possible cost b Ex red wine vs spiced rum welfare vs education 3 Incentives matter choice is influenced in a predictable way by changing incentives i As personal benefits costs from choosing an option increase other things constant a person will be more less likely to choose that option 4 Individuals make decisions at the margin a Ex economic lesson from my father prices i Marginal effect of change in current situation benefits and costs of one more Example Olive garden trip to taco bell marginal benefits outweigh the marginal costs one will undergo an action when the ii Cost benefit analysis a Ex walk or take bus Information helps us make better choices but is costly 5 i Ex New house vs new notebook 6 Beware of secondary effects economic actions generate both direct and indirect effects 7 The value of a good or service is subjective i Secondary effects may not be easily and immediately observable the indirect impact of an event or policy that a Ex fuel efficiency regulations trade restrictions i Because goods are subjective voluntary trade creates value a Ex how much would you buy for a pack of gum chick fil a bowl tickets ii 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 i If real world events are consistent with a theory then that theory is valid Know the difference between positive and normative economic statements statements are the scientific study of what is i Positive economic testable ii Normative economic be not testable Raising minimum wage increases unemployment statements are judgments about what ought to The government should raise minimum wage Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle Ceteris paribus Example buying eggs other things constant 2 The belief that good intentions equal desirable outcomes Examples Anti depressant medication C H taxi 3 The belief that association is causation Example superstitions sunspots and economic activity 4 The fallacy of composition belief that what is true for one might not be true for all Example standing at a football game when you get a raise vs when everyone gets a raise Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor forest Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms the trees Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game off o The value of goods is subjective o When individuals engage in voluntary exchange both parties are made better Channeling goods and resources to those who value them most increases the wealth created by a society s resources Transactions costs to search out negotiate and consummate an exchange the time effort and other resources needed They reduce our ability to produce gains from potential trades Middleman a person who buys and sells or arranges trades can reduce transaction costs the process by which some people become rich will make o Creation of wealth everybody richer Henry Ford Know the characteristics and 4 incentives of private property rights o Private Property rights involve The right to exclusive use of the property Legal protection against invasion from other people The right to sell transfer exchange or mortgage the property o 4 incentives of property rights Incentive to use resources in ways that are considered beneficial to others Example Cartmen s amusement park Private owners have an incentive to care for and manage what they own Example communal refrigerator vs your own refrigerator Private owners have an incentive to conserve for the future Example tragedy of the commons endangered species Private owners have an incentive to make sure their property does not damage your property o Lack of property rights lack of economic progress Understand the concept of the Production Possibilities Curve PPC Be able to read a production possibilities curve and identify efficient point on curve inefficient point inside of curve and unattainable points point outside of curve as well as what is produced at each point and what is given up and gained from moving from one point to another outlines all possible combinations of total o Production Possibility Curve PPC output that could be produced assuming a Fixed amount of productive resources Given amount of technical knowledge Full and efficient use of resources o PPC Points Efficient point on curve Unattainable point outside of curve Inefficient point inside of curve Know the four factors that shift the production possibilities curve 1 A change in the economy s resource base Investment the purchase construction or development of resources However investment requires us to give up consumption goods An equal amount of investment and consumption can greatly push the curve outward Long term benefits of investment include greater output 2 Changes in technology in the future Technology the knowledge
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