Eco 2023 Final Study Guide Chapter 1 Economics is the study of how we make choices under scarcity Scarcity Concept that there is less of a good freely available from nature than people would like EX Time money textbooks Resources An input used to produce an economic good 1 Human resources 2 Physical resources 3 Natural resources 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs Know the 2 3 4 5 concept of opportunity cost Individuals are rational They try to get the most from their limited resources Incentives matter people respond in predictable ways to changes in costs and benefits Individuals make decisions at the margin Be able to calculate marginal benefits marginal costs and perform a cost benefit analysis drive or fly example Information helps us make better choices but is costly we often make decisions without full information 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 Positive economic statements are testable Normative economic statements are not 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 When individuals engage in voluntary exchange both parties are made better off EX The Candy Game How trade leads to economic progress 1 Gains from specialization and division of labor 2 Gains from mass production methods 3 Gain from innovation Transaction costs Time effort and other resources needed to search out and complete an exchange Middlemen Person who buys sells goods or services or arranges a trade Property rights involve 1 Right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 Right to sell transfer exchange or mortgage the property 4 incentives of property rights 1 Use resources in ways that other people value 2 Care for and manage what you own 3 Conserve for the future 4 Make sure your property does not damage anybody else s property 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 Four factors that shift the production possibilities curve 1 A change in the economy s resource base 2 A change in technology 3 A change in the rules under which an economy functions 4 A change in work habits Law of comparative advantage 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 5 What will be produced 6 How will it be produced 7 For whom will it be produced Socialism 1 Ownership and control of the means of production rest w state 2 Resource allocation is determined by centralized planning Capitalism 1 Productive resources are owned privately 2 Goods and resources are allocated through market prices Capitalism tends to work better at creating economic growth and progress 1 Capitalism uses idea of market efficiency 2 Socialism suffers from an information problem Chapter 3 Law of demand inverse negative relationship between price of a good and the quantity that buyers are willing to purchase Height of the demand curve is the maximum price consumers are willing to pay for an additional unit Consumer surplus the area below the demand curve but above price Change in quantity demanded a movement along the curve caused by a change in the price of the good in question Change in demand a shift of the curve caused by anything other than the change in price of the good in question 2 Change in the Number of Consumers Consumers D 3 Change in the Price of a Related Good Know the shifters of demand 1 Change in Consumer Income A Normal Goods I DNormal B Inferior Goods I DInferior 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 Law of supply direct relationship between the price of a good or service and the amount that suppliers are willing to produce Height of the supply curve is the minimum price that sellers are willing to accept to supply an additional unit Producer surplus the area above the supply curve but below price Change in quantity supplied a movement along the curve caused by a change in the price of the good in question Change in supply a shift of the curve caused by anything other than the change in price of the good in question 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 Inelastic not as responsive to a change in price steeper curves Elastic more responsive to a change in price flatter curves 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 no excess supply or excess demand Single and double shift Demand changes Price moves in same direction Quantity moves in the same direction Supply change Price moves in opposite direction Quantity moves in the same direction Invisible hand principle tendency for people while pursuing their own interest to promote the economies well being Ch 4 Supply and Demand applications and extensions The labor Market Price for labor is called Wage W Quantity of labor is employment E Labor demand 1 Firms demand labor 2 Labor demand curve downward sloping bc as wage decreases firms will want to employ more people Labor supply 1 Workers supply labor 2 Labor supply curve is upward sloping bc as wage increases people will want to work more Changes in labor demand supply 1 Increase in labor demand supply shifts right 2 Decrease in labor demand supply shifts left Linking the markets close relationship between the demand for products and the demand for resources used to make those products Price floor legally established minimum price buyers must pay for a
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