Microeconomics Exam 1 Review The Exam Covers chapters 1 3 34 multiple choice How to study Go through class notes Study old extra credit and online quizzes activities understand how to answer the question Do the questions in your coursebook at least multiple choice CHAPTER 1 Know the definition of scarcity Scarcity the concept that there is less of a good freely available from nature than people would like There are three things that you MUST know about scarcity 1 Not the same thing as poverty 2 Scarcity necessitates ration you can rationate based on who has the most power etc 3 Scarcity leads to competition 8 GUIDEPOSTS TO ECONOMIC THINKING 1 Resources are scarce no such thing as free lunch Ex concept of opportunity cost highest alternative 2 Individuals are rational getting greatest benefit at least possible cost Example What is the LEAST I can do to make an A in this class 3 Incentives matter ex the money game When benefit increases more people are more likely to take position in it 4 Individuals make decisions at the margin Marginal effect of change in current situation outweigh the benefits and costs of one more Ex Drive or fly Ex Supersize your extra value meal cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs When we are deciding whether to stay at a medium drink or upgrade to a large size for 50 cents more we are making a marginal analysis Therefore it is sufficient to say we use marginal analysis in our everyday lives 5 Information helps us make better choices but is costly Example Some things we value info on more than the other A good example would be a new car vs a new pencil Surely we don t care much to seek out information towards finding which pencil is best it s useless yet when seeking information on a new car we want to buy the info on the car is HIGHLY important 6 Beware of secondary effects economic actions generate both direct and indirect effects Ex placing high tax on yachts lowers amount of yachts bought affects rich yacht owners etc 7 The value of a good or service is subjective What one may value may not be as important to somebody else Example One may value hats more than you so he may be willing to spend more on hats 8 The test of a theory is its ability to predict Know the difference between a normative economic statement and a positive economic statement Ex Positive statement A pencil costs 37 cents Testable statement but isn t ALWAYS true Ex Normative statement That pencil is WAY too expensive A statement that is opinion based and you cannot test Know the 4 pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principle Ceteris paribus other things constant 2 Good intentions do not guarantee desirable outcomes Ex endangered species act safety caps on medicine preventing harm from children but some places left caps off Ex nirvana fallacy comparing actual situation with what you hope would be true and child labor sweatshops if the children weren t in sweatshops they would actually end up in worse conditions 3 Association is not causation Example There is a myth that your initials relate to your I Q or one day you may feel that you did bad on your test because of the weather outside 4 Fallacy of composition belief that what is true for one is true for all Ex Standing at a football game Just because you can see it doesn t mean everyone can CHAPTER 2 Know how trade creates value candy trade Candy got shuffled around to people who valued the candy piece itself more than the person trading it did Know that middlemen support trade by reducing transaction costs Understand the process of wealth creation through voluntary transactions Know the 4 incentives of private property rights 1 Use the resource in ways that benefit others Ex empty lot making it into a parking lot for students to benefit them 2 Care for and manage what they own Ex driving rental care vs driving own car Obviously you would take care of your own car more 3 Private owners have an incentive to conserve for the future Ex Tragedy of the commons if nobody owns it nobody has the incentive to control it 4 Private owners have an incentive to make sure their property does not damage your property Ex keeping your dog on a leash What is the Production Possibilities Curve Identify inefficient point inside of curve efficient point on curve unattainable point outside of curve Know shifters of PPC curve 1 Change in the economy s resource base 2 Changes in technology Technology the knowledge available in an economy at any given time 3 A change in the rules under which the economy functions rules shrinking growth go inward rules expanding growth go outward 4 A change in work habits Know the Law of Comparative Advantage and how it works 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 Example If you were to ask who should clean Lebron Jame s house him or a maid In this scenario the maid should because she has a lower opportunity cost Lebron James could spend time doing other things such as playing basketball and doing interviews Ex The wage you are trying to guess should always be equivalent to amount of hours So if one person s typing speed is 120 at 50 per HOUR another s wage may be 25 with a speed of 40 in 3 hours 3 questions every economy answers 1 What will be produced 2 How will it be produced 3 For whom will it be produced Know the difference between capitalism and socialism and why capitalism works important Capitalists decide how much to make what to make etc Socialists decide for EVERYONE how much to make towards whole population CHAPTER 3 Law of demand Consumer surplus difference between max amount consumers would be willing to pay and the amount they actually pay Consumer surplus is the area BELOW the demand curve but above the price be able to find on graph and also know how to calculate 1 2Bh Know the difference between change in demand and quantity demanded Change in quantity demanded caused by a change in the current price of the good shifts along the curve Change in demand caused by a change in anything else that affects demand shifts the demand curve Shifters of Demand 1 A change in consumer income A Normal Goods income goes up demand goes down B Inferior Goods income goes up demand goes down 2 Change in number of consumers number of consumers goes up demand goes up 3 Change in price of
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