ECO2013 Final Exam Study Guide Dr Lora Holcombe s Class Spring 2015 Made by Patrick Martin 1 Side Note The final will be about 50 50 About half is the stuff that was on midterms 1 and 2 and the other half on what was covered after midterm 2 Ch 1 What is economics Positive testable Normative opinion based Pitfalls in economics Study of how people make choices under constraints Ceteris paribus all else equal Good intentions do NOT necessarily make good policy Fallacy of Composition just because it is good for one does not mean it is good for all Micro economics vs Macro economics Micro individual studying unemployment of just agricultural Macro big picture studying unemployment of whole US Poverty vs Scarcity Poverty 1 2 3 4 if they are under the standard of living Poverty line Poverty is defined as people who do not meet the value added up of the total cost of all the necessities of a household and life Scarcity not enough goods it needs to be chosen who gets it The only three non scarce goods free goods are dirty air salt water and sunshine 5 6 guideposts to economic thinking 1 Opportunity cost one most highly valued thing that you give up when you decide to do one thing rather than another 2 Choosing purposefully trying to get the most for the least 3 Incentives matter people respond to incentives in a predictable way 4 Marginal thinking people make decisions at the margin the additional thing added after EX if at wends you finish your burger and fries and then start thinking about and buy a frosty Marginal thinking would NOT be if the person bought it along with when they ordered the burger and fries 5 Information is costly rational ignorance the cost of educating on an issue exceeds the potential benefit that the knowledge would provide the cost of knowing vs benefit of knowing it if I don t specifically NEED to know it there is no point in learning it if I can just look it up whenever I want to EX who is the secretary of the treasury I could find out by just looking it up however I do not need to know it so I don t worry about learning it because I can look it up whenever I want to need to EX when is the final exam 2 The benefit of knowing is worth more than the cost of learning it because if it is on Thursday come Friday if I was to look it up then and figure it out Thursday I would be out of luck for taking it Missing it on that Friday because I didn t want to learn it would just be ignorance not rational ignorance 6 Remember the secondary effects effects something changes later on either expected or unexpected People tend to ignore the long run secondary effects and focus on the short run Ch 2 Tools of the Economist 1 2 Trade creates value only voluntary trade does meaning both people want to Private Property 1 Incentive to use property for society s benefit not just their own 2 Incentive to conserve if your property at your cost goes up you want to conserve to spend less EX son of parents never turns off lights because he isn t paying bills yet once he moves out to his own place he is always turning off the lights and electronics to conserve so there will be no extra costs to his bill since he is now paying and it is at HIS cost 3 Incentive to care for their property and increase it s value take care of your property to protect the value Tragedy of the Commons if everybody owns it nobody takes care of it 3 Production Possibilities a graph of how much many goods can be produced 1 Linear vs Non linear Linear graph Linear opportunity cost is constant and resources are interchangeable Non linear opportunity cost is increasing because resources are NOT 3 interchangeable Non linear graph 2 Limits PPC fewer resources it is fewer because it is countable 3 Causes it to grow increases in technology and or resources 4 Gains from Specialization and trade 1 Comparative advantage the entity who produces with a lower opportunity cost 2 Absolute advantage the entity who does it better they either have the same resources yet have a better outcome or have the same outcome but use fewer resources Ch 3 Supply and Demand 1 Law of Demand there is an inverse relationship between price and quantity demanded Law of Supply there is a positive relationship between price and quantity supplied Difference between change in Demand and change in Quantity Demanded 2 Demand what people are willing and able to pay Quantity Demanded what people are willing to pay for one price only Graph of Demand and what QD would be on it 4 1 Things that cause demand to change NOT price 1 income normal good if incomes go up the demand of the good goes up as well inferior good if incomes rise then the demand of the good goes down 2 Price of related products complements if a good s price decreases the quantity demanded of the compliment good goes up EX If the price of hot dogs go down the quantity demanded of hot If the price of hot dogs go up the quantity demanded of hot substitutes if a good s price goes up the quantity demanded of another EX If the price of Coca Cola goes up more people will by its dog buns go up dog buns go down alternate good goes up alternate Pepsi 3 Tastes and preferences for example if a new trend comes along 2 Causes quantity demanded to change PRICE 3 Difference between change in Supply and change in Quantity Supplied 1 What causes supply to change Supply a schedule of all the various quantities of a good or service a producer is willing and able to sell at various prices and at a specified time place and population Quantity Supplied the amount supplied at a given price 1 Cost of production if resources cost more less will be made 2 Price of related products related in production not consumption EX if making glass vases and mirrors both made out of glass if the price of mirrors go up then the production of mirrors goes up meaning they will make less glass vases 3 Weather etc natural disasters a factory may be destroyed or loose power so there is a loss in productivity which means less products are produced 2 What causes quantity supplied to change PRICE 4 Consumer Surplus the difference between what a consumer is willing to pay versus what the 5 actually pay there is no such thing as a negative consumer surplus on a Supply and Demand graph 5 6 7 8 9 Why the demand curves slope downward there is an inverse relationship between price and Why the supply curves slope upward there is a direct relationship between price and quantity quantity demanded demanded Height of the demand curve this …
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