Microeconomics Chapter 1 1 Scarcity and poverty are basically the same 2 Economics is the study of how individuals make choices based on scarcity 3 When an economist states a good is scarce she means that a Desire for the good exceeds the amount that is freely available from nature 4 When economists say an individual displays economizing behavior they simply mean that the individ a Making choices to gain max benefit at least possible cost 5 The national debt is too large The government must stop spending so much money This statement is ual is a a normative statement what ought to be not testable i ex it is too hot in this room b NOT positive economics what is testable i Ex higher rates of investment lead to higher rates of economic growth 6 8 guideposts to economic thinking a use of scarce resources is costly decision makers must make tradeoffs there is no such thing as a free lunch individuals choose purposefully try to get most from limited resources economizing behavior incentives matter b c d beware of secondary effects e f vale of a good service is subjective g info can help make better decisions but aquistion is costly the test of a theory is its ability to predict good theories help explain real world events 7 competive behavior occurs as a reaction to scarcity 8 In economics the statement There is no such thing as a free lunch refers to 9 a a Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers If income were redistributed in favor of the poor we would eliminate scarcity The preceding state ment is incorrect it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity 10 An individuals time air pencils or automobiles which isn t scarce 11 People make decisions at the margin Thus when deciding whether to purchase a second car they a additional benefits and costs of just the second car 12 macroeconomics focuses on the aggregate economy and microeconomics focuses on small components 13 Highest valued alternative that must be given up in order to choose an action 14 actions consistent with the guidepost that incentives matter a Consumers buy fewer potatoes when the price of potatoes increases b A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election c Farmers produce less corn because corn prices have declined a air would compare of that economy a opportunity cost a 50 15 If Susan bought nine gallons of gasoline at 1 50 per gallon the car wash cost 1 but if she bought 10 gallons of gasoline the car wash was free Given that Susan is going to get the car wash the marginal cost of the tenth gallon of gasoline is 16 Economic way of thinking stresses that changes in personal costs benefits will exert a predictable in fluence on the choices of human decision makers 17 ceteris paribus indicates a all other factors are assumed to be constant 18 benefit or satisfaction that an individual gets from an activity is called utility Chapter 2 1 opportunity cost to the U s of placing a man on the moon was a the loss of utility from the highest valued bundle of products that had to be forgone because of the moon mission b When Ben Franklin wrote remember that time is money he understood opp cost 2 Law of comparative advantage firm or anything can gain by specializing in production of goods they can produce cheaply exchange for goods they cant produce cheaply a a If each person sells goods for which he or she has the greatest comparative advantage in produc tion and buys those for which his or her comparative advantage is least the i Total output available to each person can be expanded by specialization exchange 3 Keri decided to sleep in rather than attend her class According to economic analysis her choice is rational if Keri values sleep more highly than the benefit she expects to receive from attending the class 4 Basic economic q s that all economies must answer a What will be produced b To whom will the goods produced be allocated c How will goods be produced d NOT which gov agency will set the price of the good 5 Owners of private property will use their property in ways that others value because the market will gen erally reward them with profits or a higher selling price if they do so Ken values his boat at 5 000 and Monica values it at 8 000 If Monica buys it from Ken for 7 000 which of the following is true 6 a Ken gains 2000 monica gains 1000 7 Collective decision making relies on public sector voting lobbying taxes MAJOR ALTERNATIVE TO MARKET ORGANIZATION private ownership make their own plans a DIFFERENCE market organization allows for wider variety of products creates constant competition among suppliers Central planning responds to votes of majority 8 When collective decision making the political process is used to resolve economic questions regarding the allocation of resources a Central planning political bargaining will replace market forces 9 Law of comparative advantage suggests that a individuals states and nations can all benefit if they trade with others 10 When resources are being used wastefully or inefficiently the a economy is operating at a point inside its production possibillites constraint 11 Production Possibility Curve shows max comno of any 2 products that can be produced with fixed quantity of resources 12 Transaction cost a Time effort other resources necessary to search out negotiate conclude an exchange b Barrier to potentially productive exvhange ex Getting dressed to get fast food c Ex Time spent standing in line to buy ticket NOT price of ticket 13 Private property rights exist when property rights are a exclusively controlled by owner s b c protected by legal enforcement transferable to others tion of less of some other good because 14 When an economy is operating efficiently the production of more of one good will result in the produc a resources are limited scarce and efficiency implies that all are already in use 15 would allow the production possibilities curve for an economy to shift outward a Simply put investment technology invention innovation entrepreneur creative destruction new products methods or production continuously replace old ones i A better social organization of economic activity such as conversion from socialism to capitalism ii an increase in the labor force or resource base iii more investment leading to better technology and
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