Econ 2013 Study Guide For Exam 1 Chapter 1 Know that Economics is the study of how we make choices under scarcity o Economics is the study of how we make choices under scarcity Understand the concept of scarcity o Scarcity is the concept that there is less of a good freely available from nature than people would like Example time money textbooks Scarcity is not the same thing as poverty Leads to competitive behavior Necessitates rationing allocating scare goods to those who want them Know the difference between the different kinds of resources that we use to produce economic goods o Resources an input used to produce an economic good 1 Human resources human capital 2 Physical resources physical capital 3 Natural resources Know the 8 guideposts to economic thinking 1 Resources are scarce so tradeoffs must be made Know the concept of opportunity cost Resources are scarce so decision makers must make trade offs Opportunity cost the highest valued alternative that must be sacrificed No such thing as a free lunch 2 Individuals are rational They try to get the most from their limited when choosing an option o Example an hour of your time o Example Guns and butter resources Greatest benefit at least possible cost o Example Chick Fil A vs 5 Guys o Example Welfare vs education What one person thinks is rational may not be rational for everyone 3 Incentives matter Choice is influenced in a predictable way by changing incentives o Example Money game o Example Economic Lesson from Father 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation o Example Taco Bell o Example Olive Garden Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs o Example Airport security vs lead clean up 1 Beware of secondary effects the indirect impact of an event or policy that 5 Information helps us make better choices but is costly Example New House vs New notebook 6 Beware of secondary effects may not be easily and immediately observable o Example Fuel efficiency regulations o Example Trade restrictions 7 The value of a good or service is subjective Because goods are subjective voluntary trade creates value o Example How much are you willing to pay for a pack of Moving goods and services to those who value them most is a primary gum right now source of economic progress Know the difference between positive and normative economic statements If real world events are consistent with a theory then the theory is valid 8 The test of a theory is its ability to predict positive economic statements are testable normative economic statements are not Positive the Scientific study of what is testable Normative Judgments about what people think ought to be not testable Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle Ceteris paribus other things constant i Example buying eggs 2 The belief that good intentions equal desirable outcomes Example Suicide warnings on antidepressant medication Example C H taxi 3 The belief that association is causation Example Tiger Attack Preventing Watch Example Sun spots and economic activity 4 The fallacy of composition Belief that what is true for one might not be true for all o Example When you get a raise vs when everyone gets a raise The Candy Game better off Chapter 2 Understand how voluntary trade creates value and leads to economic progress o 1 When individuals engage in voluntary exchange both parties are made o 2 Channeling goods and resources to those who value them most increases the wealth created by a society s resources Know the characteristics and 4 incentives of private property rights 1 Incentive to use resources in ways that other people value o Incentive to use resources in ways that are considered beneficial to others o Example South Park Cartmens Amusement Park 2 Owners bear the cost of ignoring the wishes of others Example Reselling your textbook 2 Incetive to care for and manage what you own o Private owners have incentive to care for and manage what they own Example Communal refrigerator vs your own refrigerator 3 Incentive to conserve for the future o Private owners have an incentive to conserve for the future Example Tragedy of the Commons Example Endangered species 4 Incentive to make sure your property does not damage someone else s property o Private owners have an incentive to make sure their property does not damage your property Example Your tree falling on your neighbors house Understand the concept of the Production Possibilities Curve PPC Be able to Lack of property rights lack of economic progress 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 o 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 Know the four factors that shift the production possibilities curve 1 Change in the resource base Investment the purchase construction or development of resources a b However investment requires us to give up consumption goods 2 Change in technology a Technology the knowledge available in an economy at any given time b Technology determines the amount of output we can generate with our limited resources i Example Tanks and Busses 3 Change in rules laws under which an economy operates a A Change in the rules under which the economy functions i Example imposing trade barriers ii Example Eliminate the business franchise tax in West Virginia 4 Change in work habits a Working harder can shift curve outward b Working less can shift curve inward Understand the law of comparative advantage and be able to calculate the opportunity cost of production to figure out who has the comparative advantage in a certain good 3 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 Example Should Floyd Mayweather Jr be his own bodyguard o No Know the 3 questions that every economy faces 1 What are we going to produce 2 How are we going to produce it 3 For whom will it be produced who gets it once its made Understand the difference between socialism and capitalism and how it relates to economic
View Full Document
Unlocking...