ECO2013 Study Guide for Exam 1 S16 Chapter 1 Know that Economics is the study of how we make choices under scarcity o Choice the act of selecting among alternatives o Scarcity the concept that there is less of a good freely available from nature than people would like Understand the concept of scarcity o Scarcity is not the same thing as poverty Scarcity necessitates rationing Rationing is allocating scarce goods to those who want them In a market economy price is used to ration goods Scarcity leads to competitive behavior 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 Human resources human capital intelligence creativity etc Physical resources physical capital chair screen etc Natural resources Know the 8 guideposts to economic thinking 1 Resources are scarce so tradeoffs must be made Know the concept of opportunity cost No such thing as a free lunch those resources are a cost i Opportunity cost the highest valued alternative that must be sacrificed when choosing an option 2 3 Individuals are rational They try to get the most from their limited resources i What is rational for one person may not be rational for everyone Incentives matter choice is influenced in a predictable way by changing incentives i For example Joab threw balls of money at the crowd who screamed the loudest in class The higher the amount of money the louder the screams 4 Individuals make decisions at the margin i Marginal describes the effect of a change in a current situation Example Taco bell sells one taco for 0 75 Taco bell has a special offering three tacos for 2 00 only 0 50 more than the price of two tacos and 0 25 less than the price of three tacos without the special So you might have only wanted two tacos at first but saving money to get that third taco might benefit you in that current situation ii Entails a cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but is costly For example buying a house is a very big deal that requires a lot of research and information that costs you time and effort 6 Beware of secondary effects economic actions generate both direct and indirect effects 1 i Secondary effects indirect impact of an event or policy that may or may not be easily and immediately observable 7 The value of a good or service is subjective because goods are subjective 8 The test of a theory is its ability to predict if real world events are consistent with voluntary trade creates value a theory then that theory is valid Know the difference between positive and normative economic statements i Positive economics The scientific study of what is testable ii Normative economics 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 means other things constant For example one could say If the price of eggs increases people will buy fewer eggs ceteris paribus The ceteris paribus is necessary because on Easter it doesn t matter the price people will buy more eggs 2 The belief that good intentions equal desirable outcomes Good intentions do not guarantee desirable outcomes For example when there was a suicide warning label on anti depressant meds people stopped taking them and this created more suicidal behavior 3 The belief that association is causation Association is NOT causation 4 The fallacy of composition The belief that what is true for one is true for all Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game o During the candy game students received one piece of candy and assigned a number value to that piece of candy The students were allowed to trade candy with other students or keep their own piece of candy After voluntarily trading candy the number value increased collectively o This voluntary trade led to economic progress because channeling goods and resources to those who value them most increases wealth created by a society s resources Know the characteristics and 4 incentives of private property rights o Private property rights involve the right to the exclusive use of the property legal protection against invasion from others and the right to sell transfer exchange or mortgage the property 1 Incentive to use resources in ways that are considered beneficial to others a For example during an episode of South Park Cartman acquired his own amusement park In order to pay for this amusement park he was incentivized to let other people use the amusement park as well for a certain entrance charge 2 Incentive to care for and manage what they own a For example Joab kept his fridge at home much more clean than the fridge that he shared with his coworkers at work 3 Incentive to conserve for the future 2 a For example if you own your own water well then you will most likely conserve that during an apocalypse because you know resources will become scarce But communal property will become consumed much faster This is known as tragedy of the commons 4 Incentive to make sure your property does not damage someone else s property a You might get into a lawsuit or a lot of trouble if your property damages someone else s property Lack of property rights lack of economic progress Understand the concept of the Production Possibilities Curve PPC 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 o PPC outlines all possible combinations of total output that could be produced assuming a Fixed amount of productive resources Given amount of technical knowledge Full and efficient use of resources o Points on the curve are named efficient points o Points below the curve on the inside are inefficient points because they are not using the resources fully o Points above the curve on the outside are called unattainable because there are not enough resources to make them Know the four factors that shift the production possibilities curve 1 Change in the economy s resource base a Investment the purchase construction or development of resources 2 Change in technology the knowledge available in an economy at any given time 3 Change in rules laws under which an economy operates a For example
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