Calhoun Final Study Guide ECO2013 Chapter 1 1 Key Terms a Economic theory a set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships b Opportunity cost the highest valued alternative that must be sacrificed as a result of choosing an option c Economizing behavior choosing the option that offers the greatest benefit at the least possible cost course of action d Utility the subjective benefit or satisfaction a person expects from a choice or e Marginal term used to describe the effects of a change in the current situation f Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable g Scientific thinking developing a theory from basic principles and testing it against events in the real world h Positive economies the scientific study of what is among economic relationships i Normative economies judgments about what ought to be in economic matters j Ceteris paribus all other things remaining constant k Fallacy of composition thinking that what is good for one is good for all l Scarcity less of good is available then are being demanded requires that some wants go unfulfilled 2 Main Points a 8 Points of economic thinking i There are always tradeoffs Individuals choose purposefully ii iii iv Incentives matter more of an incentive more likely to do it Think on the margin not on total or average 1 RULE continue to engage in the activity until the expected marginal benefit cost is greater than the benefit v More information leads to better decisions but info is costly vi Many choices create secondary effects vii Value is subjective so only the consumer can truly determine its worth viii Economic thinking Scientific thinking Chapter 2 1 Key Terms a Transaction costs the time effort and other resources needed to search out negotiate and complete an exchange b Middlemen people who buy and sell goods or services or arrange trades c Property rights the rights to use control and obtain the benefits from a good or resources d Private property rights property rights that are exclusively held by an owner and protected against invasion by others e Production Possibilities curve a curve that outlines all possible combinations of total output that can be produced assuming a fixed amount of productive resources a given amount of technical knowledge and full and efficient use of those resources i f g h Investment the purchase construction or development of resources including physical assets and human assets Invention the creation of a new product or process Innovation the successful introduction and adoption of a new product or process i Creative destruction the replacement of old products and production methods by innovative new ones that consumers judge to be superior j Division of labor a method that breaks down the production of a product into a series of specific tasks each performed by a different worker k Law of comparative advantage a principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply and exchanging them for goods and services they can t produce cheaply l Market organization a method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices m Collective decision making the method of organization that relies on public sector decision making to resolve basic economic questions 2 Main Points a Mutual gain is a result from voluntary trade in which both parties gain b Production Possibility Curve i If the points is 1 On the line efficient 2 Inside curve inefficient 3 Outside curve impossible ii If the curve 1 Shifts inward producing less 2 Shifts outward producing more c Incentives created by private property i Proper care ii Conserve for the future iii Use resources in ways others value iv Mitigate possible harm to others Chapter 3 1 Key Terms a Law of demand a principle that states there is an inverse relationship between the price of a good and the quantity of it buyers willing to purchase b Substitutes products that serve similar purposes c Consumer surplus the difference between the maximum price of consumers are willing to pay and the price they actually pay d Complements products that are usually consumed jointly e Opportunity cost of production the total economic cost of producing a good or service f Loss a deficit of sales revenue relative to the opportunity cost of production g Law of supply a principle that states there is a direct relationship between the price of a good and the quantity of it producers are willing to supply 2 Main Points h Producer surplus the difference between the price that suppliers actually receive and the minimum price they would be willing to accept i Market an abstract concept encompassing the forces of supply and demand and the interaction of buyers and sellers with the potential for exchange to occur j Equilibrium a state in which the conflicting forces of supply and demand are in balance k Economic efficiency a situation in which all of the potential gains from a trade have been realized l Invisible hand principle the tendency of market prices to direct individuals pursuing their own interests engage in activities promoting the economic wellbeing of society a There is an inverse relationship in the law of demand between price of the good and the quantity people are willing to purchase i Demand vs Quantity Demanded something else change can include but is not limited to quality income need vs want substitutions etc 1 Demand movement of whole curve caused by change in something else by change in price 2 Quantity Demanded movement along demand curve caused b There is a direct relationship between the price of a good and the amount a company is willing to supply i Supply vs Quantity Supplied something else change can include but is not limited to resource prices technology nature polotics taxes etc 1 Supply movement of whole curve caused by something else 2 Quantity Supplied movement along curve caused by change in cost c SAMPLE PROBLEMS Answers on Last Page i What happens when there is a 1 Increase in demand 2 Decrease in demand 3 Increase in supply 4 Decrease in supply Chapter 6 1 Key Terms ii What happens when all of these changes are equal in the answers but the amount one increases and the other decreases can vary which can lead to different answers make sure to practice differing the size of
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