ECO 2023 Joab Corey The specific concepts are underlined and the answers to the practice questions are in red Good Luck Chapter 1 The Economic Approach Economics is the study of how we make choices under pressure Choice act of selecting among alternatives Scarcity less of good freely available than people would like not the same as poverty ex Time money Scarcity necessitate rationing Rationing Allocating of scarce goods In a market economy price is used to ration goods services Resources Input used to produce a good 1 Human Resources Human Capital 2 Physical Resources Physical Capital 3 Natural resources Capital human made resources used to produce other goods The Economic way of thinking things aren t always as they seem 8 Guidepost to Economic Thinking 1 Resources are scarce so decisions must make trade offs no such thing as a free lunch Opportunity Cost highest value of alternative that must be sacrificed when choosing an option 2 3 Individuals are rational try to get the most out of the resources Note what is rational to one person may not be to another Ex Beer vodka Incentives Matter choice is influenced I a predictable way by changing incentives Ex Money game Individuals make decisions at the margin Marginal Benefit vs Marginal Cost Cost benefit analysis one will undergo an action when MB outweighs MC Information helps us make better choices but it is costly 5 6 Beware of secondary effects Economic actions generate both direct and 4 indirect effects Ex Yacht Tax 7 The value of a good or service is subjective How much would you pay for water right now Moving goods and services to those who value them most is a primary source of economic process 8 The test of a theory is its ability to predict If real world events are consistent with the theory it is valid red car example Positive Vs Normative Economics Positive is testable Normative Judgments about what ought to be not testable 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principle all other things constant Ex Rose V day 2 The belief that good intensions guarantee desirable outcomes Ex Endangered species act child safety caps Nirvana fallacy the logical error of comparing the actual situation with it idealized counterparts Ex Sweatshops Every economy must go Agriculture Low tech Hi tech Service 3 The belief that association is causation Just because two things happen together does not mean they are related 4 Fallacy of composition The Fallacious belief that what is true for one is true for all Micro Vs Macro Micro Focuses on how human behavior affects the conduct of affair within individual defined units such as household firms Trees Macro focuses on how human behavior affects the outcome of a highly aggregated market Forest Activity 1 Know we will most likely never run out of oil and understand the economic way of thinking seatbelts don t always make cars safer etc EXAM Questions Bob believes that corporations who move their operations overseas are evil because they hire young children to work for low wages In reality without these companies hiring them it is likely that these children would be worse off Which of the following best describes the error that Bob is making in his thinking A The Nirvana Fallacy Which of the following is an example of a physical resource A The computer you are currently using to take your exam and expand your education Practice Questions The basic difference between macroeconomics and microeconomics is that a macroeconomics is concerned with the forest aggregate markets while microeconomics is concerned with the individual trees subcomponents b macroeconomics is concerned with policy decisions while microeconomics applies only to theory c microeconomics is concerned with the forest aggregate markets while d macroeconomics is concerned with the trees subcomponents opportunity cost is applicable to macroeconomics and the fallacy of composition relates to microeconomics Which one of the following is a positive economic statement a An increase in the minimum wage will reduce employment b The minimum wage should be increased c Social justice will be served by increasing the minimum wage d Thoughtful people oppose an increase in the minimum wage What do economists mean when they state that a good is scarce a b c d The amount of the good that people would like exceeds the supply freely available There is a shortage or insufficient supply of the good at the existing price It is impossible to expand the availability of the good beyond the current amount People will want to buy more of the good regardless of the price of the good from nature Economic choice and competitive behavior are the result of a b c d basic human greed poverty private ownership of resources scarcity The expression There s no such thing as a free lunch implies that a b c d everyone has to pay for his own lunch the person consuming a good must always pay for it opportunity costs are incurred when resources are used to produce goods and services no one has time for a good lunch anymore Which one of the following states a central element of the economic way of thinking a b Scarce goods are priceless Incentives matter human choice is influenced in predictable ways by changes in personal costs and benefits The realism of the assumptions is the best test of an economic theory c d When deciding how to allocate time the concept of opportunity cost is meaningless Which of the following is most clearly consistent with the basic postulate of economics regarding the reaction of people to a change in incentives a Farmers produce fewer bushels of wheat in response to an increase in the price of wheat People will buy more milk at a price of 2 per gallon than at 1 per gallon People will buy less gas if the price of gas increases by 20 per gallon People will consume more beef if the price increases from 1 to 2 per pound b c d Joe and Ed go to a diner that sells hamburgers for 5 and hot dogs for 3 They agree to split the lunch bill evenly Ed chooses a hot dog The marginal cost to Joe then of ordering a hamburger instead of a hot dog is a b c d 1 2 2 50 3 While waiting in line to buy two tacos at 75 cents each and a medium drink for 80 cents Jordan notices that the restaurant has a value meal containing three tacos and a medium drink all for 2 50 For Jordan the marginal cost of purchasing the third taco would be a b c d zero 20 cents 75 cents 80 cents Chapter 2 How Trade Creates Value Is trade a zero sum game Not if
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