EXAM 2 REVIEW Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity o concept that there is less of a good freely available from nature than people would like Ex time money cars o Someone considered poor somewhere will not be considered poor in other countries o Scarcity nessissitates rationing because there is not enough to all go around we have to figure out who gets which Know the difference between the different kinds of resources that we use to produce economic goods i Human resources human capital 1 Speed strength education ii Physical resources physical capital 1 Tools that are man made such as a chair pencil laptop iii Natural resources 1 Land rivers o Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs Know the concept of opportunity cost Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Information helps us make better choices but is costly 2 3 4 5 6 Beware of secondary effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle 2 The belief that good intentions equal desirable outcomes The Nirvana Fallacy The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative 3 The belief that association is causation 4 The fallacy of composition belief that what is true for one might be true for all Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game a Because the value of goods is subjective voluntary trade creates value b When individuals engage in voluntary exchange both parties are made better off Know what transaction costs are and understand the importance of middlemen 1 1 the time effort and other resources needed to search out and complete an exchange 2 Middle men reduce transaction costs Know the characteristics and 4 incentives of private property rights i The right to exclusive use of the property ex Pen writing with ii Legal protection against invasion from other individuals iii Right to sell transfer exchange or mortgage the property Incentive to use resources in ways that are considered beneficial to others 1 Ex Empty lot make money and help people at same time ii Owners bear the cost of ignoring the wishes of others a 1 Ex Recommend house is in neutral colors cus buyers may not like that house b Private owners have an incentive to care for and manage what they own i Ex Rental car don t care about maintaining it because it is temporary 1 Ex Berrys Bikes let everyone use a communal bike system c Private owners have an incentive to conserve for the future i Ex Popcorn at the movies ii Tragedy of the commons 1 Lets say there is a pasture of land that can hold 100 cows but if there is more than 100 cows on the land then the grass will deplete too quickly 5 people use land and each person gets 20 cows might be 25 and before u know it the land is depleted Communist way for solving the problem was to divide land up into quadrants d Private owners have an incentive to make sure their property does not damage your property i Pull in Honda civic between bmw and Ferrari Care about the higher priced cars because there is a risk u can damage it 1 Ex Keeping dog on leash e Property rights and development i Lack of property rights lack of economic progress Understand the concept of the Production Possibilities Curve PPC The PPC outlines all possible combinations of total output that could be produced assuming a 1 fixed amount of productive resources 2 given amount of technical knowledge 3 full and efficient use of resources Be able to read a production possibilities curve and identify efficient inefficient and unattainable points as well as what is produced at each point and what is given up and gained from moving from one point to another Know the four factors that shift the production possibilities curve inward and outward iv A change in economys resource base 1 Investment the purchase construction or development of resources a Investment requires us to give up consumption goods v Changes in technology 1 Technology the knowledge available in an economy at any given time 2 a Technology determines the amount of output we can generate with our limited resources c A change in rules under which the economy functions i Ex Development of a system of patents ii The jim crow laws d Changes in work habits i Working harder can shift curve outward ii Working less can shift curve inward Understand the law of comparative advantage iii The total output of a group of individuals an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost 1 Ex Should lebron james clean his own house Know the 3 questions that every economy faces 1 What will be produced 2 How will it be produced 3 For whom will it be produced capitalism tends to work better Understand the difference between socialism and capitalism and know why iv Socialism a system of economic organization where 1 Ownership and control of the means of production rest with the state 2 Resource allocation is determined by centralized planning a Collective decision making the method of organization that relies on public sector decision making to resolve basic economic questions v Why capitalism tends to work when socialism does not 1 Capitalism is similar to natural selection it uses the idea of market efficiency a Socialism has no incentive for profit 2 Socialism suffers from an information problem Chapter 3 Understand the law of demand and why demand curves are downward sloping Inverse relationship negative between the price of a good and the quantity that buyers are willing to purchase a b Ex Deriving the Demand Curve As price increases quantity demand decreases Price decreases quantity demand increases Know that the height of the demand curve is the maximum price consumers are willing to pay for an additional unit Know how to find and calculate consumer surplus 2 the difference between the maximum amount consumers would be willing to pay and the amount that they actually
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