Micro Final Exam Study Guide Calhoun Chp 1 The Economic Approach What is Economics About Choice The act of selecting among alternatives Resource and input used to produce economic goods Examples Land Scarcity Fundamental concept of economics that indicates that is less of a Capital Human made resources such as tools equipment and structures o good freely available from nature than people would like o o labor skills natural resources and capital o used to produce other goods and services Increase ability to produce in the future o differences in personal opinion o o who would like to have more of it o constraints such as scarcity o o Subjective An opinion based on personal preference and value judgments Economics is the study of how individuals make choices that are subject to Scarcity and choices are the two basic ingredients in any economic decision Objective fact based on observable phenomena not influenced by Rationing Allocating the limited supply of a good or resource among people Scarcity cannot be eliminated but poverty can The Economic Way of Thinking Eight Guideposts to Economic Thinking o 1 2 3 4 resources incentives The use of scarce resources is costly so trade offs must be made Individuals choose purposefully they try to get the most from their limited Incentives matter choice is influenced in a predictable way by changes in Individuals make decisions at the margin costly 5 6 7 Although information can help us make better choices its acquisition is Beware of the secondary effects Economic actions often generate indirect as well as direct effects The value of a good or service is subjective Opportunity cost The highest valued alternative that must be sacrificed as a Economizing behavior Choosing the option that offers the greatest benefit The test of a theory is its ability to predict 8 o result of choosing an option o at the least possible costs o or course of action o Marginal cost for a producer is the cost of producing and additional unit of a Marginal term to describe the effects of a change in the current situation Utility The subjective benefit or satisfaction a person expects from a choice Positive and Normative Economics Scientific thinking Developing a theory from basic principles and testing it Secondary effects The indirect impact of an event or policy that may not be product o easily and immediately observable o against events in the real world o relationships FACT o Cannot be proven false b c they are based on value judgments OPINION o the effect of one change is being described recognizing that if other things changed Ceteris paribus A Latin term meaning other things constant Used when Positive Economics The scientific study of what is among economic Normative Judgments about what ought to be in economic matters Pitfalls to Avoid in Economic Thinking they also could affect the result o draw the wrong conclusion 2 Good intentions do not guarantee desirable Four Pitfalls 1 Violation of the Ceteris Paribus condition can lead one to outcomes 3 Association is not causation 4 The fallacy of composition What s Fallacy of composition False view that what is true for one individual will true for one might not be true for all o also be true for the group o defined units such as individual households or business firms o Wealth of Nations by Adam Smith in 1776 He believed a market economy would The origin of economics as a science dates back to the publication of The Microeconomics Focuses on how human behavior affects within narrowly bring individual self interest and the public interest into harmony He discussed the Invisible Hand concept in his book Chp 2 Tools of the Economist Differences or changes in opportunity costs help explain human behavior By channeling goods and resources to those who value them most trade Opportunity cost is the value of the BEST forgone alternative Only one Trade Creates Value What Shall We Give Up Voluntary trade creates value for both parties o alternative o o o creates value and increases the wealth created by a society s resources o out negotiate and complete an exchange o trades o o good or service The Importance of Property Rights Middlemen reduce transaction costs Property rights The right to use control and obtain the benefits from a Middleman A person who buys and sells goods and services or arranges Transaction costs The time effort and other resources needed to search Private property can be transferred sold or mortgaged at the owner s Private property rights are held exclusively by an owner and protected Private property rights create incentive to protect and conserve resources o against invasion by others o discretion o and distribute them to people who value them most o Examples lakes parks and highways o resources in ways that are beneficial to others and they bear the opportunity cost of Private Property Right Incentives 1 Owners can gain by employing their Common property rights allow multiple people to claim ownership rights ignoring the wishes of others 2 Private owners have a strong incentive to care for and properly manage what they own 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 chance that their property will Production Possibilities Curve cause damage to the property of others o goods that can be produced from a set of fixed resources holding technology The Production Possibilities curve shows the maximum combinations of two The PPC is usually bowed out because of the law of increasing opportunity constant and assuming resources are used efficiently o cost o o technology 3 An improvement in the rules under which the economy functions 1 An increase in the economy s resource base 2 Advancements in Factors that could shift the PPC outward 4 Working harder and giving up current leisure o including physical assets such as plants and machinery and human assets such as Investment The purchase construction or development of resources better education Also referred to as capital formation Technology The technological knowledge available in an economy at any o given time The level of technology determines the output we can produce with our Innovation The successful introduction and adoption of a new product or Invention Creation of a new product or process often facilitated by the Entrepreneur A person who introduces new products or improved Creative destruction The replacement of old
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