ECO2023 Holcombe Final Study Guide Chapter 1 Economics the study of how we make choices under scarcity Scarcity not having enough of a good that we would like Resources that we use to produce economic goods o Natural iron ore oceans rivers land o Human knowledge experience talent o Physical tools machinery factories Eight guideposts to economic thinking o Resources are scarce so decision makers must make tradeoffs o Individuals are rational and try to get the most from their limited sources o Incentives matter o Individuals make decisions at the margin o Information helps us make better decisions but is costly o Beware of secondary effects o The value of a good is subjective o The rest of a theory is its ability to predict The difference between positive and normative economics is that positive economics statements are testable and normative statements are not Four pitfalls to avoid in economic thinking o Violation of the ceteris paribus principle all other variables except those under immediate consideration are held constant o The belief that good intentions equal desirable outcomes o The belief that association is causation o The fallacy of composition when one infers that something is true of the whole from the fact that it is true of some part of the whole Nirvana Fallacy the logical error of comparing the actual situation with its idealized counterpart rather than the actual desire Chapter 2 Trade creates value o Trade is NOT a zero sum game both parties in voluntary exchange are made better off o Trade creates wealth by taking something that was NOT as valuable from one and giving to someone who values it more highly Transaction costs barrier to trade o For example the internet has greatly reduced transaction costs increased trade and value Middleman reduces costs of trade increases value o For example grocery stores vacation rental businesses the internet Incentives of Property Rights 1 Incentive to consider the desires of others and lose by NOT considering the rights of others basically using the property in a way that benefits society 2 Incentive to take care of your property and to protect the value 3 Incentive to conserve 4 Incentive to be careful with property Production possibilities curve PPC The choices in the production possibility table can be represented with a production possibility curve A production possibility curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs A production possibility curve is drawn from a production possibility table by plotting in a two dimensional table the points that each choice represents Note The fact that the PPC intersects the axes means that there are limits to what we can achieve given our resources The downward slope of the PPC represents the opportunity cost concept In the production possibilities table each production choice is associated with a certain amount of each good produced a point on the PPC Each production choice is also associated with an opportunity cost We measure this cost by calculating what we give up of one good to get more of the other Since every time we increase production of eggs by two we give up a bushel of rye the opportunity cost of producing 2 eggs is constant and equal to 1 bushel of rye In general along a production possibilities frontier that is a straight line the marginal opportunity cost is constant because the amount of one good we have to give up in order to get more of the other does not change The production possibilities curve demonstrates that o There is a limit to what society individual can achieve given the existing institutions technology and resources Every choice society individual makes has an opportunity cost to get more of one good we need to give up some of another good every choice has a tradeoff 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 Four factors that shift the production possibilities curve inward and outward 1 Increase number of resources 2 Increase technology i e Innovation entrepreneurship 3 More favorable laws incentives 4 Reduce leisure time increase work Comparative Advantage output will increase if nations or individuals specialize in the production of goods that they have a LOW opportunity cost and trade for good for which they have a HIGH opportunity cost It also suggests that 1 Curtailing US trade with other nations would make U S consumers worse off 2 Countries will tend to export the commodities for which they are low opportunity cost producers Three questions every economy faces 1 What goods and services should be produced 2 How should the goods and services be produced 3 Who should get the goods and services Socialism is a form of economy that works for equality among the members of society by pooling the resources of the people to be collectively controlled by the state or the public through communes or councils There is no market in a socialist economy and therefore there is no competition The quantity of products produced and distributed is regulated including the price that the consumer will pay for the products Capitalism on the other hand is an economic and political system that is based on the principle of individual rights It believes that it is inequality that will drive the people to be more innovative and productive Resources in a capitalistic society are privately owned by individuals or groups of individuals These individuals or groups of individuals freely trade in a market that has a level playing field The government stays in the background and allows the forces of supply and demand to freely operate with the guidance of laws and regulations Chapter 3 Law of demand there is an inverse relationship between price and quantity demanded of a good or service The height of the demand curve is the maximum price consumers are willing and able to pay for an additional unit Demand curves are downward sloping because of o Complementary goods o Excess supply o Substitution o The inverse relationship between income and consumption How to find and calculate consumer surplus o Step 1 Pick a market price for the consumer surplus calculation This can be the set price in a market or an example price that you want to test You need a given market price for this calculation o Step 2 Calculate the total units of the good purchased using
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