ECO 2013 Exam 1 Study Guide Chapter 1 Economics o The study of how we make choices under scarcity o Scarcity The concept that there is less of a good freely available from nature than people would like Ex Time money Necessitates rationing Allocating scarce goods to those who want them Leads to competitive behavior Resources o An input used to produce an economic good o 3 types Human resources human capital Our actions the things we can do Physical resources physical capital Natural resources Land gold natural gas oil 8 guideposts to economic thinking o 1 Resources are scarce so tradeoffs must be made No such thing as a free lunch Opportunity Cost when choosing an option ex An hour of your time The highest valued alternative that must be sacrificed o 2 Individuals are rational They try to get the most from their limited resources Getting the greatest benefit at least possible cost If 2 things cost the same you re going to choose the one that makes you happiest Ex Chick fil A vs 5 guys burger o 3 Incentives matter Choice is influenced in a predictable way by changing Ex The money game we played in class o 4 Individuals make decisions at the margins incentives Marginal Describes the effect of a change in the current situation Deciding between 2 prices the difference in price Cost benefit analysis One will undergo an action when the marginal benefits outweigh the marginal costs 1 o 5 Information helps us make better choices but is costly The bigger the decision the more information you ll gather before you make it Ex New house vs new notebook You ll put more time into getting information about a o 6 Beware of secondary effects house than buying a notebook Economic actions generate both direct and indirect effects Secondary effects the indirect impact on an event or policy that may not be easily and immediately observable Ex Trade restrictions o 7 The value of a good or service is subjective Because goods are subjective voluntary trade creates value Moving goods services to those who value them most is a primary source of economic progress Ex The price of the Rose Bowl ticket means more to FSU Oregon fans than it does to Nebraska fans o 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid Positive Economics vs Normative Economics o Positive Economics The scientific study of what is TESTABLE Ex The government is over 28 trillion in debt o Normative Economics Judgments about what people think ought to be NOT TESTABLE Ex its too cold outside 4 pitfalls in economic thinking o Violation of the ceteris paribus principle Ceteris paribus all else constant o The belief that good intentions equal desirable outcomes Ex Suicide warnings on antidepressant medication o The belief that association is causation Ex Tiger attack preventing watch I m wearing it so I m not getting attacked o The fallacy of composition Ex When you get a raise vs when everyone gets a raise Chapter 2 Voluntary trade creates value o Ex Candy game we played in class 2 o When individuals engage in voluntary exchange both parties are made better off o Channeling goods and resources to those who value them most increases the wealth created by a society s resources o Leads to economic progress 4 Incentives of private property rights o Incentive to use resources in ways that other people value Owners bear the cost of ignoring the wishes of others Ex Reselling your textbook o Incentive to care for and manage what you own Ex Communal refrigerator vs your own you ll clean your own fridge more often o Incentive to conserve for the future Especially if you think the future value will go up o Incentive to make sure your property doesn t damage someone else s property Ex Making sure your tree doesn t fall on the neighbor house Production Possibilities Curve PPC o Outlines all possible combinations of total output that could be produced assuming a fixed amount of productive resources Given amount of technical knowledge Full efficient use of resources o To get more of one unit we have to give up some of the other unit o Slope the exchange rate for when you give up on thing to give another rise over run o A point on the line efficient o A point under the curve inefficient o A point above the curve unattainable because we don t have enough resources o If curve shifts outward produces growth o If curve shifts inward decrease in economic growth o 4 facotors that shift the PPC o Change in the resource base 3 Investment the purchase construction or development of resources Investment requires us to give up consumption goods Ex Giving up partying to get good grades o Change in technology The knowledge available in an economy at any given We can produce more today due to the increase in o Change in rules law under which an economy operates The rules can affect how much we get out of our time technology resrouces The rules can cause the PPC to shift inward or outward Ex Imposing trade barrier Ex Eliminate business franchise tax o Change in work habits How hard you choose to work vs how much you choose to relax Ex Working harder3 can shift curve outward Law of Comparative Advantage o 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 o Its not who can do it the best or fastest its who can do it the cheapest o To find the comparative advantage of a good calculate the o Ex USA Produces 2 cars 12 computers vs Japan produces 5 cars opportunity cost 15 computers Comparative advantage in making cars USA 12 2 6 Japan 15 5 3 Japan has CA in making cars because it gives up less computers than USA o Ex Ted serves 20 customers per hour for 100 per hour Barney serves 10 customers per hour for Barney s Wage should be less than 50 hr because he can cover half of the customers that Ted can 3 questions that every economy faces o What are we going to produce o How are we going to produce it o For whom will it be produced Capitalism vs Socialism o Capitalism A system of economic organization where 4 o Socialism Productive resources are privately owned Goods and resources are allocated through market prices Market organization A method of organization in which private parties make their own plans and decisions with the guidance of market prices A system of economic organization where Ownership and control of the means of production rest Resource allocation is
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