ECO2013 Sherron Ch 1 Ch 2 Ch 3 Ch 7 Ch 8 Test 1 Study Guide This guide is intended to help you study but is not a replacement for reviewing homework assignments and class notes attending class or reading the text Your first test will contain 50 multiple choice questions ten questions from each chapter 1 2 3 7 and 8 Calculations and Graphs by Chapter Marginal cost Opportunity cost Bus or plane Look for parking or get ticket value of time Graph production possibilities curve Consumer surplus Producer surplus Graph supply and demand Calculate GDP using expenditure and resource cost income approaches Percent change in real GDP percent change in nominal GDP Inflation rate Price in today s dollars Old price CPI today CPI old Inflation rate CPI year 2 CPI year 1 CPI year 1 Labor force participation rate Unemployment rate unemployed labor force Employment population ratio Inflation rate CPI year 2 CPI year 1 CPI year 1 Chapter 1 Adam Smith o Founder of economics o Invisible hand the idea that self interested individuals actually help others For example a butcher wants to earn an income In doing so he provides others with a good that they benefit from Scarcity o Almost everything is scarce this is an objective statement o Because of scarcity we have to make choices goods must be rationed o There s no such thing as a free lunch Jimmy John s recently offered practically free 1 sandwiches but the total cost involved waiting in a long line o Don t confuse scarcity with poverty Eight Guideposts to Economic Thinking o Everyone faces trade offs all the time There s no such thing as a free lunch Opportunity costs what you give up to get something o People are rational o Incentives matter They are capable of maximizing their utility Rational doesn t mean safe virtuous or healthy Writing policies w o considering incentives is a bad idea passing a law to require bicycle riders wear helmets will increase helmet use but decrease bike riding If people aren t exercising in other ways requiring bike helmets could actually lead to more deaths caused via obesity related disease than lives saved from avoiding head injuries Seatbelts give people an incentive to drive more carelessly o People think at the margin Prices are based on the marginal value of something This is why water having a high total benefit but low marginal benefit is less expensive than diamonds having a high marginal benefit o Acquiring info is costly o Watch out for unintended consequences Lowing mortgage lending standards led to more foreclosures people got loans but couldn t afford the payments Making marijuana illegal drove up its price and the potential profits from selling it Raising government spending e g a bail out or stimulus package must eventually correspond with higher taxes government does not create jobs Raising tariffs won t save jobs either just reshuffle them o Value is subjective Trade sale moves things from people who value them less to people who value them more Trade benefits both groups o Good theories predict outcomes Positive statements fact Normative statements opinion Don t do these things o Forget ceteris paribus Remember to hold all else constant o Think good intentions guarantee desirable outcomes o Think association is causation o Think that what s good for one person is good for everyone Chapter 2 Know how to graph a PPC o What shifts it o What points are possible impossible o What points are efficient inefficient Always consider opportunity costs o Spending gov t on a stadium means Higher taxes or Less for education medical research etc o Installing seatbelts in busses for 1800 each has the same implications o You can sell your property and use it in any way that does not infringe on the Voluntary exchange makes both parties better off Transaction costs limit trades o Distance time lack of information o Middlemen reduce transaction costs Private property rights rights of others o Gives owners an inventive to use property wisely Common property Division of labor o Tends to get abused e g the tragedy of the hot pockets o Public property is an example o You don t have to make all your food clothing and shelter o Specialize in what you have a comparative advantage in and you ll be better off o The same goes for countries the U S benefits from importing inexpensive clothing made in other countries Two ways to organize economies o Markets Decisions are made by buyers and sellers Gov t enforces private property rights protects citizens from violence You don t like something blog about it tell your friends and simply don t buy it o The government Decisions are made by gov t officials or votors Gov t decides what you can and can t do use medicinal marijuana marry a same sex partner open a flower shop You don t like something you ll have to move somewhere else Chapter 3 Be sure to review your supply and demand graphs and schedules Law of demand o quantity demanded and price move in opposite directions o demand curves slope downward Consumer surplus o The net benefit a buyer gets from buying a good service o Willingness to pay minus the price o The area below the demand curve above the market price Law of supply o quantity supplied and price move in the same direction o supply curves slope upward Producer surplus a code word for economic profit o The net benefit a seller gets from selling a good service o Price minus costs of production including opportunity costs o Area above the supply curve below the market price Change in demand supply the curve shifts Change in quantity demanded supplied a movement along a single curve Elasticity o Inelastic o Elastic the quantity demanded supplied is relatively unresponsive to a change in price steep curves the quantity demanded supplied is relatively responsive to a change in price Flat curves Things that shift demand curves A CHANGE IN PRICE DOES NOT SHIFT THE DEMAND CURVE o Change in consumer income o Change in number of consumers o Change in prices of related goods Substitutes Complements o Change in consumer expectations o Change in population demographics o Change in tastes preferences Things that shift supply curves o Change in resource prices o Change in technology o Change in nature or political disruptions o Change in taxes Increase in Demand o Demand curve shifts right o Higher equilibrium price o Higher equilibrium quantity o A movement upward and to the right on the supply curve that is an increase in quantity supplied Decrease in Demand quantity supplied Increase
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