Econ 2023 F13 Study Guide For Final Exam Chapter 1 Economics is the study of how we make choices under scarcity Concept of scarcity the concept that there is less of a good freely available from nature than people would like economic goods Know the difference between the different kinds of resources that we use to produce o Human resources human capital Physical Resources physical capital man made tools Natural resources Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs Opportunity cost the highest valued alternative that must be sacrificed when choosing an option Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin marginal Information helps us make better choices but is costly 2 3 4 5 6 Beware of secondary effects the indirect impact of an event or policy that many not be easily and immediately observable 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Positive testable vs normative economic statements not testable 4 pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle all other things constant 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 4 The fallacy of composition fallacious belief that what is true for one is true for all Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Transaction cost the time effort and other resources needed to search out and Candy Game complete an exchange o Middleman A person who buys and sells goods or services or arranges trades REDUCES transaction costs 4 incentives of private property rights 1 Incentive to use resources in ways that are considered beneficial to others 2 Private owners have an incentive to care for and manage what they own 3 Private owners also have an incentive to conserve for the future 4 Private owners have an incentive to make sure their property does not damage your property 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 full and efficient use of resources 1 3 Efficient points on the curve Inefficient points under the curve Unattainable points outside the curve Moving down the curve if slope is 1 give up 1 unit of A to gain 1 unit of B Know the four factors that shift the production possibilities curve inward and outward 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 Changes in technology the knowledge available in an economy at a given time Technology determines the amount of output we can generate with our limited resources 3 A change in the rules under which the economy functions Ex Reducing Trade Barriers The Jim Crows laws 4 Changes in work habits Ex Working can shift curve outward working can shift curve inward Law of comparative advantage or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost 3 questions that every economy faces The total output of a group of individuals an entire economy What will be produced How will it be produced For whom will it be produced Socialism vs Capitalism Capitalism tends to work better Socialism a system of economic where ownership control of the means of production rest w the state resource allocation is determined by centralized planning Capitalism a system of economic organization where productive resources are owned privately goods resources are allocated through market prices Chapter 3 Law of demand 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 Consumer Surplus Amount willing to pay amount actually pay in Quantity Demanded vs in Demand o Change in quantity demanded A movement along the curve Caused by a P of that good in quantity demanded movement down the curve to the right in quantity demand movement up the curve to the left o Change in demand a shift of the curve Caused by a in anything that affects D other than the P of good in demand curve shifts right 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 2 3 Change in the Price of a Related Good A Substitutes Psubstitute D B Compliments Pcompliments D 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 The Law of Supply There is a direct positive relationship b t the price of a good or service and the amount that suppliers are willing to produce The height of the supply curve is the minimum price that sellers are willing to accept to supply an additional unit Producer surplus Willing to accept what they receive in Quantity Supplied vs in Supply o Change in quantity supplied a movement along the curve o Caused by a P of that good in quantity supplied Movement up the curve to the right in quantity supplied Movement down the curve to the left o Change in supply A shift of the curve o Caused by a in anything that affects S other than the P of the good in supply curve shifts right in supply curve shifts left Know the shifters of supply 1 A change in resource price Presource S 2 A change in technology Technology S 3 A change in Nature or Politics Depends on Change 4 A change in taxes Taxes S o Inelastic Changes in quantity ARE NOT sensitive to changes in price inelastic o Elastic Changes in quantity ARE sensitive to changes in price elastic curves are Elasticity curves are steeper flatter Market Equilibrium 1 All trades generating more benefits than costs are undertaken 2 No trades generating more costs than benefits are undertaken 3 The combined area of producer and consumer surplus is maximized 4 There is nor excess supply or excess demand Single double shift
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