ECO 2013 Final Exam Study Guide Chapter 1 Economics the study of how we make choices under scarcity Scarcity the concept that there is less of a good freely available from nature than people would like 8 guideposts to economic thinking 1 Resources are scarce so tradeoffs must be made Opportunity cost ex giving up a movie to study Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Marginal effect of change Information helps us make better choices but is costly 2 3 4 5 6 Beware of secondary effects economic actions generate both direct and indirect effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Positive economic statements are testable normative economic statements are not 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 3 The belief that association is causation 4 The fallacy of composition belief that what is true for one is true for all Chapter 2 Trade creates value for both parties involved and leads to economic progress 4 incentives of private property rights o 1 Use the resource in ways that benefit others o 2 Care for and manage what they own o 3 Private owners have incentive to conserve for the future o 4 Private owners have incentive to make sure their property is protected does not cause harm Production Possibilities Curve PPC o Inefficient inside the curve o Efficient on the curve o Unattainable outside the curve 4 Shifters of the production possibilities curve o 1 Change in economies resource base o 2 Change in technology knowledge o 3 Change in rules under the economy o 4 Change in work habits Law of comparative advantage the total output of a group will be BIGGEST when output of each good is produced by the person with the lowest opportunity cost 3 Q s that every economy faces what how and for whom is the production for Capitalism is private businesses whereas socialism is businesses owned by the state 1 Chapter 3 Law of Demand there is an inverse relationship downward sloping between Price P and Quantity Q o Consumer surplus maximum amount willing to pay what you actually pay Found below demand curve and above price o in Quantity demanded in price o in Demand in anything else o Shifters 1 in Consumer Income A Normal Goods I DNormal B Inferior Goods I DInferior shift along the curve shifts demand curve 2 in the Number of Consumers Consumers D 3 in the Price of a Related Good A Substitutes Psubstitute D B Compliments Pcompliments D 4 in Expectations A Expected Price Pfuture D B Expected Income Ifuture D 5 in Consumer Tastes and Preferences Tastes and Preferences D Law of supply proportional relationship upward sloping between P and Q o Producer Surplus minimum price that sellers are willing to sell for what they receive Found above supply curve and below price o in Quantity supplied in price o in Supply in anything else o Shifters shift along the curve shifts the supply curve 1 in resource price Presource S 2 in technology Technology S 3 in Nature or Politics Depends on Change 4 in taxes Taxes S Elasticity Market Equilibrium o Elastic in quantity is sensitive to in price flat o Inelastic in quantity is NOT sensitive to in price sleep o When quantity demanded quantity supplied 1 2 If there is excess supply price will fall If there is excess demand price will rise So in equilibrium there is no excess supply or excess demand 3 Gives you the equilibrium Price and Quantity Double shift Q s o Demand o Supply Price same Quantity same Price same Quantity same Invisible hand principle Tendency for people to promote economic well being of society Chapter 6 2 Transfer payments transfers of income from some individuals to others social security unemployment benefits welfare of government spending Voting theorires 1 Rational Ignorance Effect a rational individual has little or no incentive to acquire information needed to cast an informed vote 2 Median voter theory The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates and the preferences of the median voter will be represented Political process works when voters pay in proportion to the benefits they receive then productive projects will be passes and unproductive will not o User changers requires people who use a service more to pay a larger share o DOES NOT WORK 1 Special interest effect generates substantial benefits for a small group by generating minimal costs to a large group Done through A Logrolling trading votes B Pork barrel Legislation spending projects benefitting local areas financed through the federal government 2 Shortsightedness Effect politicians will favor programs that generate current visible benefits even if long term costs of the project outweighs the benefits 3 Rent seeking Actions taken by individuals and groups in order to use the political process to take the wealth of others 4 Lack of profit motive Unlike private firms the public sector lacks the incentive to produce efficiently Chapter 7 Gross Domestic Product GDP The market value of all final goods and services produced within a country during a specific period usually a year o Market value goods are weighted according to the purchase price of the good or service o Final goods goods purchased by their ultimate user o Production only goods that are produced transfers are not included NOT COUNTED graduation gift welfare payments financial transactions COUNTED sales commision o Within a Country within the geographic borders o Specific Period only those in that year 2 Ways to Measure GDP 1 Expenditure approach Y GDP C consumption I private investment G government consumption and gross investment NX net exports 2 Resource cost income approach Y GDP employee compensation proprietor s income rent corporate profits interest income indirect business taxes depreciation Net income of foreigners Consumption durable and nondurable goods services Investment fixed and inventory investment Investment depreciation net investment 3 Government expenditures spending on goods and services capital goods Does not include transfer payments are count at cost to tax payers Net Exports exports imports Gross National Product GNP o Total market value of all final goods and services produced by the citizens of a country Counts
View Full Document
Unlocking...