STUDY GUIDE for FIRST EXAM ECO2023 04 FALL 2011 Martha Evans Instructor Note This study guide is intended to be used as a tool to help you prepare for the test It is an outline representing the topics that have been emphasized in the book and the slides for each section chapter It is NOT an exact representation of the way that questions will be phrased on the test A BRIEF HISTORY of the MARKET SYSTEM This is from lecture not in book 1 What are the three questions all groups of people must answer What will be produced How will it be produced For whom will it be produced 2 What are the three possible rationing mechanisms for scarce goods and what behavioral incentives are created by each Not sure if this is the correct answer but this was all I could find on the topic This is the only question I had an issue with Price rationing o the good is allocated to consumers who are willing to give up other things for that one item learning to spend your money wisely Government rationing Point Rationing o Regulates who receives what o Allots a certain amount of pointsto each commodity and allocated a certain number of points to each consumer o Teaches consumers to save money and learn to invest Karl Marx published Das Kapital in three volumes between 1861 1894 The Russian Revolution followed in 1917 after which time most of the modern world split into using one of two economic systems What are they and how do they answer the three questions from 1 differently The two economic systems were 3 Communism Socialism 1 CHAPTER 1 THE ECONOMIC APPROACH 1 What is the important driver of human behavior that has resulted in competition as well as determined social political cultural and even religious traditions across time Self interest 3 How are poverty and scarcity different Can they both be eliminated Absence of poverty implies some basic level of need has been met An absence of scarcity would imply that all of our desires for goods are fully satisfied thus we CAN eliminate poverty but CANNOT eliminate scarcity 3 How were scarce goods rationed in primitive societies How are they rationed in market economies Which rationing method is superior and why Primitive societies first come first serve Market Economies price as a rationing method Price superior method because people have a strong incentive to earn income so they will be able to pay the required price 4 Eight Guideposts to Economic Thinking a b The use of scarce resources to produce a good is always costly This statement is usually associated with the saying There s no such thing as a free lunch Why does obtaining more of a scarce good ALWAYS involve a cost Someone must give up something if we are to have more of a scarce good The highest valued alternative that must be sacrificed is the opportunity cost of that choice Individuals choose purposefully therefore they will economize What is meant by economizing Gaining a specific benefit at the least possible cost 2 CHAPTER 1 THE ECONOMIC APPROACH cont d c d Incentives matter How do rational people respond to changes in costs relative to the benefits of their choices As personal benefits or costs from choosing an option increase other things constant a person will be more or less likely to choose that option Economic reasoning focuses on the impact of marginal changes What does the term marginal mean How is a marginal cost different from an average cost Marginal used to describe the effects of a change in the current situation Marginal cost refers to the cost of one or more additional units while average cost refers to the total cost divided by the total number of units o Ex A manufacturers average cost of producing automobiles which would be the total cost of production divided by the total number of cars the manufacturer produces may be 25 000 but the marginal cost of producing an additional automobile or an additional 1 000 automobiles might be much lower say 10 000 per car e Since information is scarce uncertainty is a fact of life Is it reasonable for people to exhaust all possible sources of information before making decisions Why or why not No it s not reasonable for people to exhaust all possible sources of information before making decisions Although depending on how important their reason for research is will decide how much time they will research their decisions o Ex when you purchase a pair of jeans you might evaluate the quality and prices of jeans at several different stores At some point though you will decide that additional comparison shopping is simple not worth the trouble and you will make a choice based on the limited information you already have In addition to their initial impact economic events often generate secondary effects that may be felt only with the passage of time What do we mean by secondary effects Hint I used increases in the minimum wage as an example of a decision that could have secondary effects Secondary effects are unintended consequences that are quite different than intended consequences o Ex in an effort to reduce gasoline consumption the federal government mandate that automobiles be more f 3 h g fuel efficient Is this regulation a sound policy It may be but when evaluating the policy s overall impact one should not overlook its secondary effects To achieve the higher fuel efficiency auto manufacturers reduced the size and weight of vehicles As a result There are more highway deaths than would otherwise occur because these lighter cars do not offer as much protection for occupants The value of a good is subjective and varies with individual preferences Think of utility or benefit in association with this statement What does this have to do with the creation of real economic value Utility the benefit or satisfaction that an individual expects from the choice of a specific alternative Essentially the benefit expected from an individual from their specific choice is itself their economic value of a good The test of an economic theory is its ability to predict and explain events in the real world Why is knowledge of human behavior with regard to scarcity so important These guideposts are important because they enable us to predict human behavior and thus outcomes to forecast and make the best decisions Scarcity results in competition therefore if you don t have the knowledge needed to make the best decision then you will not be successful 5 Positive versus Normative Economic Thinking Which way of thinking is objective Subjective Which way of thinking is
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