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1 Unit 1 Ceteris Paribus means other things remaining constant used to determine effect of a change in one variable on another Correlation Does Not Imply Causation 4 possibilities for observed correlation 1 Cause and effect 2 Reverse causation 3 Omitted variables and 4 Spurious correlation Scarcity and Marginal Analysis Scarcity Definition condition that arises because the available resources are insufficient to satisfy our wants resources are scare when our desires for them exceed the amount available in nature just because something is physically limited doesn t mean its scarce Choice Costs because resources are scarce we must make a choice on how to use that resource we always have a choice no true needs opportunity cost Definition the highest valued alternative forgone to get something when we use a resource in a certain way we also chose not to use it in a different way The opportunity cost of our choice is the value of the thing we give up to use the resource money is not an opportunity cost We can use it to measure opportunity cost but the true opportunity cost of something is the value or benefit from the option we had to forgo Marginal Analysis choices are made at the margin which means they are small or incremental We usually don t make all or nothing choices we use marginal analysis because it helps us make the right decision it conserves scare resources and it is descriptive of most real world decisions marginal cost the opportunity cost of a ONE unit increase of an activity MC increases as you do more of an activity due to the principle of increasing marginal cost to maximize net gain you should increase activity where MB MC and decrease activity where MB MC the optimal or economically efficient amount of every activity is where MB MC 2 Incentives a benefit or cost of doing something which causes people to act in a certain way people respond to incentives when choosing how to use scarce resources if MB of an activity increases do more of it if MC of an activity increases do less of it Production Possibilities and Comparative Advantage Production Possibilities Definition boundary between the combination of goods and services that can be produced and the combinations that cannot be produced given the available resources and technology PPF graph is a valuable tool for illustrating the effects of scarcity and its consequences available resources land capital and labor force land raw land and natural resources taken from the land capital machines tools buildings equipment etc labor force all people who are willing and able to work whether they re currently employed or not increases decreases in available resources increase decrease the economy s production possibilities The PPF shifts out in PPF illustrates attainable and unattainable combinations full employment and unemployment and tradeoffs all points inside or on the PPF are attainable All points outside are unattainable full employment occurs when all the available resources are being used Unemployment occurs when some resources are available but no being used When resources are fully employed production points are ON the PPF When resources are unemployed production points occur INSIDE the PPF a tradeoff is a limit to what is possible that forces an exchange of one thing for something else When production is ON the PPF we face tradeoffs We must forgo some good to produce more of another producing water and CD s opportunity cost of one good is the decrease in the other good divided by the increase in number of the good you are making more of opportunity costs of a good increase as the quantity produced increases This causes the PPF s bowed shape saving an investment today means more total output in the future but less output today the benefit of current investment is more future consumption The opportunity cost of current investment is less current consumption There is a tradeoff PPF shift represents economic growth Faster economic growth for the future requires society to conserve its current resources and invest them instead of consuming them Comparative Advantage Specialization and Exchange 3 absolute advantage ability to perform an activity or produce more of a good or service with a given amount of resources or in a given amount of time Greater physical productivity comparative advantage ability to produce a good or service at a lower opportunity cost Reflects greater economic efficiency it is possible to have an absolute advantage in everything but not a comparative advantage law of comparative advantage individuals firms states and nations all gain by specializing in the production of goods for which their opportunity cost is low and not in which it is high and then exchange the goods they produce for the other goods they wish to consume specialization and exchange increase economic efficiency Supply and Demand Demand quantity demanded the amount of a good service or resource that people are willing and able to buy during a specified period at a specified price It is an amount per unit of time demand relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same Demand is a list of quantities at different prices Information on demand is displayed in a demand schedule or illustrated by a demand curve price and quantity demanded are inversely related if the price rises quantity demanded decreases If the price falls quantity demand increases Demand curve are negatively sloped a change is QUANTITY DEMANDED is a result of a change in price and is shown by a move from one price quantity pair in a demand schedule to another one a change in demand is a change is quantity people plan on buying because of any other variable except price It is shown by a change in data on a demand schedule and results in a shift in the demand curve A decrease in demand shift towards the y axis and an increase in demand shifts out away from the y axis main influences on demand prices of related goods complements a good that is consumed with another good The demand for a good increases if the price of a complement falls and the demand of a good decreases if the price of a complement increases Substitutes a good that can be consumed in place of another good Demand for a good increase if the price of a substitute increase and the demand for a good decreases if the price of a substitute decreases income normal good demand for a normal good increases if income increases Inferior


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FSU ECO 2023 - Ceteris Paribus

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