Econ 2023 F13 Study Guide For Exam 1 Chapter 1 Economics is the study of how we make choices under scarcity o Concept of scarcity there is less of a good freely available from nature than people would like ex Time money cars Types of resources o Human resources human capital o Physical resources physical capital o Natural resources Capital human made resources used to produce other goods and services Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs Know the concept of opportunity cost Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Information helps us make better choices but is costly 2 3 4 5 6 Beware of secondary effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle roses on valentines day 2 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 3 The belief that association is causation superstitions 4 The fallacy of composition standing at football game Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game Know what transaction costs are and understand the importance of middlemen o Transaction Costs The time effort and other resources needed to search o Middleman out and complete an exchange trades A middleman reduces transaction costs A person who buys and sells goods or services or arranges Private Property Private property rights involve 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 1 3 The right to sell transfer exchange or mortgage the property 4 Incentives of private property rights 1 Incentive to use resources in ways that are considered beneficial to others Ex Empty Lots 2 Private owners have an incentive to care for and manage what they own Ex How do you drive a rental car compared to your own car 3 Private owners also have an incentive to conserve for the future Ex Popcorn at the movies Instead of sharing a large bucket 4 Private owners have an incentive to make sure their property does not damage your property Keeping your dog on a leash Understand the concept of the Production Possibilities Curve PPC 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 Be able to read a production possibilities curve Efficient points on the curve Unattainable points outside the curve Inefficient points under the curve Know the four factors that shift the production possibilities curve inward and outward 1 1 A change in the economy s resource base Investment the purchase construction or development of resources However investment requires us to give up consumption goods 2 2 Changes in technology o Ex Consider the two PPC s Technology the knowledge available in an economy at any given time Technology determines the amount of output we can generate 3 3 A change in the rules under which the economy functions with our limited resources Ex Reducing Trade Barriers Ex The Jim Crow laws 4 4 Changes in work habits Ex Working harder can shift curve outward Ex Working less can shift curve inward Understand the law of comparative advantage 2 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 Know the 3 questions that every economy faces What will be produced How will it be produced For whom will it be produced capitalism tends to work better 1 Socialism a system of economic where Understand the difference between socialism and capitalism and know why Ownership and control of the means of production rest with the state Resource allocation is determined by centralized planning 2 Capitalism A system of economic organization where o 1 Productive resources are owned privately o 2 Goods and resources are allocated through market prices Chapter 3 Understand the law of demand and why demand curves are downward sloping The height of the demand curve is the maximum price consumers are willing to pay for an additional unit o Law of Demand There is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase Know how to find and calculate consumer surplus o Amount willing to pay amount that they actually pay Demand vs Quantity Demanded KNOW FOR TEST o Change in quantity demanded A movement along the curve Caused by a change in the price of that good Increase in quantity demanded movement down the curve to the right Decrease in quantity demand movement up the curve to the o Change in demand a shift of the curve left Caused by a change in anything that affects demand other than the price of the good Increase in demand curve shifts right Decrease in demand curve shifts left Know the shifters of demand 1 Change in Consumer Income A Normal Goods I DNormal B Inferior Goods I DInferior 2 Change in the Number of Consumers Consumers D 3 Change in the Price of a Related Good A Substitutes Psubstitute D B Compliments Pcompliments D 3 4 Change in Expectations A Expected Price Pfuture D B Expected Income Ifuture D 5 Change in Consumer Tastes and Preferences Tastes and Preferences D Understand the law of supply and why supply curves are upward sloping Know that the height of the supply curve is the minimum price that sellers are willing to accept to supply an additional unit o The Law of Supply There is a direct positive relationship between the price of a good or service and the amount that suppliers are willing to produce Know how to find and calculate producer surplus o Willing to accept what they receive Know the difference between a change in quantity supplied a movement along the curve caused by a change in the price of the good in question and a change in supply a shift of the curve caused by anything other than the change in price of the good in question o Change in quantity supplied a movement
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