Econ 2013 Study Guide UNIT 2 27 03 2012 02 23 00 Chapter 1 Economics is the study of how we make choices under scarcity o Scarcity The concept that there is less of a good then available from nature that people would like Ex Time money textbooks not to be confused with poverty Resources used to produce economic goods o Human human capital o Physical physical capital o Natural resources Capital manmade resources used to produce other goods and services The 8 guideposts to economic thinking 1 Resources are scarce so tradeoffs must be made i Opportunity Cost must be sacrificed when choosing an option highest valued alternative that 1 Ex An hour of your time to be in class The highest valued alternative would be Sleep 2 Individuals are rational They try to get the most from their limited resources Great benefits at the least possible cost i Ex What is the highest grade I can get with the least amount of work ii Remember what is rational for one person may not be rational for everyone i Ex Macro money game as the incentive grew so did 3 Incentives matter yelling ii Ex 2 Economic lesson from bull fighting father if bulls were injured they would be killed were not given to the workers because the owner didn t want bulls to intentionally get hurt 4 Individuals make decisions at the margin a Marginal Change in current situation describes the effect i Ex Olive Garden AYCE S S BS 6 vs Chicken parm AYCE 10 1 For option 2 Marginal Benefit chicken parm Marginal Cost 4 is chicken parm worth 4 to you o b Cost benefit analysis one will undergo an action when the marginal benefits outweigh the costs 5 Information helps us make better choices but is costly a Ex New house vs New notebook i One takes a lot of work and research while the other is a one store small decision 6 Beware of secondary effects a Secondary Effect that may not be easily immediately observable the indirect impact of an event of policy i Ex Fuel effieciency regulations made cars smaller and lighter which created more fatal accidents 7 The value of a good or service is subjective 2 a Voluntary trade creates value b Moving goods and services to those who VALUE THEM is a PRIMARY source of economic progress 8 The test of a theory is its ability to predict a Ex Elephants trained circus vs wild Know the difference between positive and normative economic statements o positive economic statements are testable o normative economic statements are not Normative Think Not N N The four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle o Ceteris paribus other things held constant Ex Buying eggs price increases people will buy less Yet around Easter this is untrue you must keep everything else constant 2 The belief that good intentions equal desirable outcomes o Ex Suicide warning on antidepressant meds 3 The belief that association is causation a Ex Superstitions 4 The fallacy of composition a Belief that what is true for one might not be true for all 3 Chapter 2 Understand how voluntary trade creates value and leads to economic progress Channeling goods and resources to those who value them most increases the wealth created by a society s resources Know the characteristics and 4 incentives of private property rights The right to exclusive use of property Legal protection against invasion from other individuals The right to sell transfer exchange or mortgage the property o 4 incentives to use resources in ways that are considered beneficial private owners can care for manage what they own conserve for the future to make sure their property does not change yours o Lack of property rights lack of economic progress Understand the concept of the Production Possibilities Curve PPC o PPC outlines all the possible combinations of total outputs that could be produced assuming Fixed amount of productive resources Given amount of technical knowledge Full efficient use of resources 4 Inefficient points Efficient points Unattainable points How much is produced at certain point What is given up when moving from one point to another Know the four factors that shift the production possibilities curve o A change in economy s Resource base o Changes in Technology o Change in Rules under which the economy functions o Change in Work habits Ex Working harder can shift curve outward or working less can shift curve inward Ready To Rage Wednesday The law of comparative advantage 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 Whoever does it cheaper Know the 3 questions that every economy faces 1 What are we gonna produce 2 How will it be produced 3 How much to produce Capitalism productive resources are owned privately goods and resources are allocated through market prices o Market Organization private parties make their own plans decisions with the guidance of market prces 5 Ex Candy game People traded candy based on what THEY WANT private property Socialism ownership control of the means of production rest with the state resource allocation is determined by centralized planning such as collective decision making o Collective decision making relies on public sector decision making to resolve economic problems Ex Candy Game T A s Joad passed out candy based on what THEY THOUGHT the class would want o Capitalism works better then socialism because Capitalism is similar to natural selection it uses the idea of market efficiency Socialism suffers from an INFORMATION problem Understand the law of demand and why demand curves are Chapter 3 downward sloping o There is an inverse negative relationship between the price the quantity that buyers are willing to purchase Therefore results in downward slope Think Demand always Down D D Know how to calculate consumer surplus and be able to find it using a graph o Consumer Surplus The difference between the max amount a consumer would pay the amount that they ACTUALLY pay The area below the demand curve but above the price Remember Area 1 2 BH when calculating go all the way to the max value then subtract Know the difference o change in quantity demanded a movement along the curve caused by a change in the price of the good With Quantity always Think PRICE 6 o change in demand a shift of the curve caused by anything other than the change in price of the good in question Know the shifters of demand o Change in Consumer Income b Normal Goods I DNormal c
View Full Document
Unlocking...