Econ 2023 Study Guide For Exam 2 Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity Scarcity The concept that there is less of a good freely available from nature than people would like Ex Time money cars etc Know the difference between the different kinds of resources that we use to produce economic goods Human resources human capital Ex human labor such as cashiers and bartenders Physical resources physical capital Ex buildings machinery Natural resources Ex trees for lumber mills natural springs for bottled water businesses etc Know the 8 guideposts to economic thinking Resources are scarce so decision makers must make tradeoffs Know the concept of opportunity cost Opportunity cost The highest valued alternative that must be sacrificed when choosing an option Ex an hour of your time how you spend your next 15 2 Individuals are rational They try to get the most from their limited resources Obtaining the greatest benefit at the least possible cost Ex Getting SLAMMED after this test with a 10 12 pack of beer or a 15 bottle of liquor Note What is rational for one person may not be rational for everyone Ex While some people find it rational to spend the 15 for liquor others may see that as irra tional since they would rather drink the cheaper beer and still get just as fucked up 3 Incentives matter 4 Individuals make decisions at the margin Choice is influenced in a predictable way by changing incentives Ex An incentive to wearing a helmet while driving a motorcycle is possibly preventing death Ex An incentive to studying this study guide is getting an A on the test Marginal Describes the effect of a change in the current situation Ex paying an additional 50 cents to supersize your meal Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Ex is the extra 50 cents for a supersize worth it to you Or not 5 Information helps us make better choices but is costly Ex When buying a new car one will go to as many dealerships as they deem necessary to find the best price for the car they want Ex On the other hand when buying a new pencil one will probably just go to Wal Mart and buy a value pack of many pencils 6 Beware of secondary effects Economic actions generate both direct and indirect effects Secondary effect the indirect impact of an event or policy that may not be easily and imme diately observable Ex If the government makes the taxes on yachts too high in hopes of generating more tax rev enue less people will buy yachts which might put yacht companies out of service 7 The value of a good or service is subjective Ex People who buy their football tickets in advance value the ticket at that price people who don t have a ticket at game time find the value of a ticket much higher which is why they pay up to 100 more for a scalped ticket Note Moving goods and services to those who value them most is a primary source of eco nomic progress 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not Positive economics the scientific study of what is testable Normative economics Judgments about what ought to be not testable Know the four pitfalls to avoid in economic thinking Violation of the ceteris paribus principle Ceteris Paribus other things constant The belief that good intentions equal desirable outcomes The Nirvana Fallacy The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative Ex Child resistant safety caps the intention was to keep children away from prescription pills but adults started leaving the caps off because of the difficulty involved in taking off the caps which made it easier for children to access the dangerous pills The belief that association is causation Ex Just because people file divorces on rainy days doesn t mean that the rain causes the di vorces The fallacy of composition Belief that what is true for one might be true for all It is easier for one person to see by standing at a football game but that is not true for all because if everyone stood up it would be the same as everyone sitting Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game Because the value of goods is subjective voluntary trade creates value When individuals engage in voluntary exchange both parties are made better off Helpful Hint One man s trash is another man s treasure By channeling goods and resources to those who value them most trade cre ates value and increases the wealth created by a society s resources Gains from specialization and division of labor Gains from mass production methods Gains from innovation Transaction costs The time effort and other resources needed to search out and complete Know what transaction costs are and understand the importance of middlemen an exchange Middleman A person who buys and sells goods or services or arranges trades A middleman reduces transaction costs Ex Publix we can obtain all grocery items from one trip to Publix instead of going to each dif ferent farm where the products originate Know the characteristics and 4 incentives of private property rights Private property rights involve The right to exclusive use of the property Legal protection against invasion from other individuals The rights to sell transfer exchange or mortgage the property Lack of property rights lack of economic progress 4 Incentives A Incentive to use resources in ways that are considered beneficial to oth ers Ex Empty lot if you own an empty lot in the middle of FSU s campus it would be most bene ficial to the students to use it as an additional parking area Consequently you would gain the most from that decision Owners bear the cost of ignoring the wishes of others B Private owners have an incentive to care for and manage what they own Ex The more someone cares for what they own the more value their property will have at the time they sell it C Private owners have an incentive to conserve for the future Ex Popcorn at the movies if you eat all of the popcorn at the beginning of the movie then you will have none left for the rest of the movie D Private owners have an incentive to make sure their property does not damage your property Ex
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