Econ 2023 Fall 2012 Study Guide For Final Exam Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity Know the difference between the different kinds of resources that we use to produce economic goods 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 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 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 Know the characteristics and 4 incentives of private property rights 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 and identify efficient inefficient and unattainable points as well as what is produced at each point and what is given up and gained from moving from one point to another Know the four factors that shift the production possibilities curve inward and outward Understand the law of comparative advantage Know the 3 questions that every economy faces Understand the difference between socialism and capitalism and know why capitalism tends to work better in economics Chapter 3 1 Understand the law of demand and why demand curves are downward sloping Know that the height of the demand curve is the maximum price consumers are willing and able to pay for an additional unit Know how to find and calculate consumer surplus Know the difference between a change in quantity demanded a movement along the curve caused by a change in the price of the good in question and a change in demand a shift of the curve caused by anything other than the change in price of the good in question 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 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 and able to accept to supply an additional unit Know how to find and calculate producer surplus 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 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 Understand the concepts of elasticity of supply and elasticity of demand Know everything there is to know about 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 Know how to do single shift questions where demand or supply shifts and change equilibrium price and quantity Understand the invisible hand principle Know how an economist defines profit and how it differs from how an accountant defines profit Economist definition of profit looks at bringing together resources worth a certain amount and increasing their value by producing something with them Losses decrease the value of the resources in the production process Chapter 4 2 Understand how the labor market works It works the same as the market for goods and services with just a different name for price 1 Know why labor demand is downward sloping 2 Know why labor supply is upward sloping Understand how the labor market and goods and services market are linked together Know the effects of price controls on the market equilibrium be able to analyze graphs and their real life applications 1 Price Floors 2 Price Ceilings Be able to analyze the impact of a tax graph in particular 1 What happens to the price that buyers pay and consumer surplus 2 What happens to the price that sellers receive and produce surplus 3 What happens to the quantity sold 4 What happens to government revenue be able to calculate 5 How taxes create deadweight loss be able to calculate Understand that the burden of the tax does not depend on whom the tax is imposed but it does depend on elasticity Whoever is relatively more inelastic will bear the higher burden of the tax Be able to calculate Average Tax Rate ATR and Marginal Tax Rate MTR and know whether a tax system is progressive regressive or proportional Understand the Laffer curve and the general relationship between tax rates and tax revenue Understand the concept of subsidies Chapter 5 Understand the idea of economic efficiency You should only do those things in which the benefits outweigh the costs and avoid doing those things in which the costs outweigh the benefits Know the role of government protect individuals and their property rights and overcome market failure by providing goods and services that cannot easily be provided by the market Know the four types of market failure 1 Lack of competition without competition firms can hold back production and 2 Externalities
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