Econ 2013 Study Guide For Exam 2 like Chapter 1 Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity o There is always less of a good freely available from nature than people would Time money cars not enough hours in the day who has too much can t have as many cars as we want Scarcity is not the same as poverty everyone faces scarcity Scarcity necessitates rationing or allocating scarce goods to those who want them Scarcity leads to competitive behavior which leads to the most efficient use of scarce resources Know the difference between the different kinds of resources that we use to produce o Human resources capital our strength speed endurance knowledge economic goods creativity o Physical resources capital man made tools pen hammer o Natural resources Land coal iron Capital Human made resources used to produce other goods and services Example of human capital Michael Phelps swimming ability or Bill Gates creation of Microsoft Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs Know the concept of opportunity cost i sacrifices when choosing an option Opportunity cost The highest valued alternative that must be 1 Ex An hour of my time I am choosing to make this study 2 guide on a Saturday morning and giving up sleeping in Individuals are rational They try to get the most from their limited resources i Greatest benefits at the least possible cost 1 Are you gonna buy beer or liquor If they re the same price you choose the one you like better If you re happy with either and they have different prices you get the cheaper one 2 Maximize utility happiness 3 Incentives matter people respond in predictable ways to changes in costs and benefits i Ex Killer seatbelts the safer we make driving the more risks people are willing to take ii iii Ex if prices go down consumption will go up Ex money game in class when Joab increased the dollar amount of the bill he dropped in the floor the amount of students who ran to get it increased too Individuals make decisions at the margin Be able to calculate marginal benefits marginal costs and perform a cost benefit analysis drive or fly example 4 1 i ii i i i i ii i ii Ex Ponderosa Buffet all you can eat sidebar costs 7 50 and all you can eat sidebar with steak costs 9 00 1 Marginal benefit Steak Marginal Cost 1 50 Ex Driving to Dallas Texas takes 14 hours and costs 100 Flying to Dallas takes 4 hours and costs 400 MB 10 hours MC 300 300 10 30 if your time is worth more than 30 hour it is worth it to fly but if your time is worth less than 30 hour then the costs outweigh the benefits 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 we often make decisions without full information i Ex new car vs new pencil the bigger the decision the more info we choose to gather before making it 6 Beware of secondary effects Economic actions generate both direct and indirect effects 1 Secondary effect indirect impact of an event policy that may not be easily and immediately observable a Ex yacht tax a luxury tax on the rich to increase revenue but then the Viking Yacht company had to lay off soooo many people 7 The value of a good or service is subjective Ex FSU football tickets FSU students value them more than UF 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is derelicts valid Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not Positive econ To test if something is true or false 1 Ex test temperature outside 2 Ex Cost of textbook Normative econ Judgments of what ought to be 1 Ex It s too hot out might not be for everyone Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle Other things constant i Ex Buying roses if price goes up people will buy fewer roses 1 Generally true but consider Valentine s Day 2 The belief that good intentions equal desirable outcomes Ex Endangered species act can t build around a particular tree because woodpeckers are nesting in them 1 What if you just bought a plot of land to build a dream home on but these trees are everywhere So instead of preserving the woodpecker people cut down those trees The Nirvana Fallacy The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative 2 1 Ex child labor sweatshops a People in the US protest against child labor in 3rd world countries not realizing that alternative for these children would not be going to school and playing outside but probably just a worse job in child prostitution or something 3 The belief that association is causation Ex Superstitions you play a good baseball game while wearing a new bracelet doesn t mean the lucky bracelet made you win 4 The fallacy of composition the fallacious belief that what is true for one is true for Ex standing up at a football game you can see better but no one else all does Chapter 2 Understand how voluntary trade creates value and leads to economic progress Activity 2 The Candy Game o Because the value of a good is subjective voluntary trade creates value o When individuals engage in voluntary exchange both parties are made better off o By channeling good and resources to those who value them most trade creates value and increases the wealth created by a society Know the characteristics of private property rights and four incentives they provide o Right to exclusive use of property you can choose to allow others to use it or prohibit them o Legal protection against invasion from other individuals o Right to sell transfer exchange or mortgage the propety o Use resources in ways that other people value Owners bear the cost of ignoring the wishes of others Make the most money if your turn your property into something that most people want need o Care for and manage what you own Ex you drive your own car and take care of it better than a rental car o Make sure your property does not damage anybody else s property if a rental car needs an oil change you don t care You return in and the dealership will fix it If your car needs an oil change you take care of it asap o Conserve for the future If you park your car in between a Ferrari and a BMW you re gonna be careful opening your
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