Jason Garry September 25 2013 Economics Study Guide Short Answer Topics 1 Voluntary transactions going to benefit both buys and sellers 2 Enough buyers and sellers for price to decrease 1 Theory of the Invisible Hand a Regulates by itself i No government help b Self Invented Behavior i Chaos c Competitive Markets i Buyers and sellers d Result Socially Optimal i Get what s best for society e What is the role of the government i Want little involvement ii Laissez Faire 1 Hands off approach 2 Positive Economics vs Normative Economics a Positive Economics What WILL is i ii Facts iii Claims objectivity iv Science v Seeks answers without judgments vi Examples b Normative Economics What SHOULD be i ii Opinions 1 This room is cold iii Concedes objectivity iv Not Science 1 Examples 1 Income goes down rise in demand for supermarket foods generic brands 2 If A happens B is the outcome a Any opinion b Government should increase minimal wage to eliminate poverty c Government is right to induce ban on smoking in public places so it is healthier to third party i Positive is a fact and normative is an opinion ii Positive seeks answers without making judgments while normative evaluates 3 Production Possibilities Frontiers contrasting various points factors that shift c Contrasting outcomes good or bad a Definition i A graph that shows all the combinations of goods and services that can be produced if all of society s resources are used efficiently Illustrates the principles of constrained choices opportunity cost and scarcity b c Y Axis Quantity of capital goods produced d X Axis Measure the quantity of consumer goods e All points above curve represent outcomes that are not possible to reach f All points under the curve represent when an economy is not using its resources efficiently and not fully employed i Unemployment of resources ii Production inefficiency g All points along the curve represent full resource employment and production efficiency i Resources are not going unused and there is no waste economy is producing h Represents choices available within the constraints imposed by current state of efficiently technology and resources i Factors i Unemployment 1 Periods of unemployment correspond to points inside the ppf ii Inefficiency 1 Could be using resources inefficiently a Waste and mismanagement results of a firm operating below potential i Can be mismanagement of firm or economy 1 Government pass laws that corn can only be produced in Ohio when the land in Kansas is better suited for corn iii The Efficient Mix of Output 1 To be efficient economy must produce what people want a Must operate at the right point on the ppf i Output efficiency 2 Ex a Economy devotes all resources to beef production and runs efficiently b Suppose however that everyone in society is a vegetarian i Results in a total waste in resources 1 To decide if one point is more efficient than the other depends of preferences of society that is not shown on the ppf iv Economic Growth 1 Definition a An increase in the total output of an economy 2 Occurs when a society acquires new resources technology or learns to produce more with existing resources a Improved productivity 3 Ex a US agriculture i More efficient farming techniques ii More and better capital 1 Tractors combines other equipment Advances in scientific knowledge iii 1 Hybrid seeds fertilizers v Shifts in ppf 1 Up and to the right increase 2 Down and to the left decrease vi Gains in trade 4 Opportunity Cost including constant vs increasing a Definition decision ii Example i The best alternative that we forgo or give up when we make a choice or a 1 The Opportunity Cost of going to a movie is not only how much you pay for the ticket but also the time you give up that you could have been doing other stuff with the same money and time b Opportunity Costs arise because resources are limited i Only 24 hours in a day and must decide what to do and what not to do with that time c Slopes are the indicating factors that differentiate two opportunity costs i Bill and Colleen Island example from the textbook Chapter 2 1 Bill is faced with two options a Either collecting fruit and berries for immediate food or planting and farming for future agricultural benefits i His opportunity cost of choosing to collect fruit is the amount of farming he could do in the future 2 Bill is trading present value for future value a Ex i Saving money giving up products you could buy now by putting income aside and using it in the future ii Building capital 3 Bill and Colleen made trade berries or time lying in the sun for extra time building and cutting logs to build a nicer house in the future d Production Possibility Frontier i Definition 1 A graph that shows all the combinations of goods and services that can be produced if all of society s resources are used efficiently a A hypothetical economy e Why is the slope of the PPF always negative i Since society is constrained by available resources and existing technology more capital can be produced only by reducing production of consumer goods ii The Opportunity Cost of the additional capital is the forgone production of capital goods iii Illustrates the fact the scarcity exists f Marginal Rate of Transformation i Definition 1 The slope of the PPF g The Law of Increasing Opportunity Cost i Negative slope indicates the trade off that society faces between two goods ii In the case of Bill and Colleen a straight line represents a constant marginal rate of transformation 1 Each activity doesn t have the same trade off a Spend resources time on one thing or the other i Have no correlation iii A Bowed out ppf tells us that as society increases production of one good rather than another the harder it is 1 Some resources are better suited for different products a If society spends more resources on one good versus all the others getting more production of that good often becomes increasingly harder i Corn and Wheat Production 1 Demand for corn increases 2 Farmers want to shift some of land that produced wheat to Corn production to match demand 3 More difficult to produce corn a Best land for corn already in use b Use wheat suited land for corn decreases the production of c Ultimately the opportunity cost of more corn measured in wheat as well terms of wheat increases 5 Views of International Trade Mercantilist Smith Ricardo pg 36 a Mercantilist Thought 1500 1750 i Gold is wealth ii Belief 1 Trade is zero sum game a Some win and some loose b Adam