ECO2013 Study Guide For Exam 1 Chapter 1 Economics is the study of how we make choices under scarcity Scarcity is the concept that there is less of a good freely available from nature than people would like It s the reason for why chose between resources there is not enough for everything Know the difference between the different kinds of resources that we use to produce economic goods Human resources Human capital education knowledge speed etc Physical resource Physical capital ex Furniture building technology Natural resource Natural capital ex Wood land coal iron ore Know the 8 guideposts to economic thinking Individuals are rational They try to get the most from their limited resources Incentives matter choice is influenced in a predictable way by changing incentive Individuals make decisions at the margin marginal describes the effect of a change in the current situation Information helps us make better choices but is costly 1 Resources are scarce so tradeoffs must be made Know the concept of opportunity cost 2 3 4 5 6 Beware of secondary effects 7 8 The value of a good or service is subjective because goods are subjective voluntary trade values The test of a theory is its ability to predict Know the difference between positive and normative economic statements Positive economic statements are testable Normative economic statements are not Example its 50 degrees outside vs its too cold outside Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principal Ceteris paribus other things constant If the price of eggs changes people will buy less eggs Nothing else changes in the economy all else is constant 2 The belief that good intentions equal desirable outcomes Ex Suicide warnings on antidepressant medication Decreased amount of antidepressants bought 3 The belief that association is not causation Ex Thinking your watch prevents tiger attacks 4 The fallacy of composition what is true for one might not be true for all Proof you have never been attacked while wearing that watch Chapter 2 Voluntary trade creates value and leads to economic progress Transaction costs the time effort and other resources needed to search out negotiate and consummate an exchange Characteristics and 4 incentives of private property rights 1 2 3 4 Incentive to use resources in ways that other people value Ex Reselling property Incentive care for and manage what you own influenced to care for an manage what they own Incentive to conserve for the future Incentive to make sure your property does not damage someone else s property Ex Remove large trees away from neighbors house Production Possibilities Curve PPC outlines all possible combinations of total output and could be produced assuming a Fixed amount of productive resources o o Given amount of technical knowledge o Full and efficient use of resources Be able to read a production possibilities curve and identify efficient inefficient and unattainable points as well as what is produced at each point and what is given up and gained from moving from one point to another 1 Know the four factors that shift the production possibilities curve 1 Change in the resource base 2 Change in technology b c technology determines the amounts of output we can generate with our limited resources 3 Change in rules or laws under which an economy operates Ex Imposed barrier trade 4 Change in work habits shifts curve inward or outward Law of Comparative Advantage The total output of a group of individuals an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost Know the 3 questions that every economy faces 1 What are we going to produce 2 How are we going to produce it 3 For whom will it be produced who gets it once its made Capitalism tends to work better in an economy it is similar to natural selection use market efficiency Socialism suffers from information problems Capitalism a system of economic organization 1 Productive resources are owned privately 2 Good s resources allocated through market prices o Market Organization the guidance of market prices Socialism a system of economic organization where 1 Ownership and control of means of production rest with the state 2 Resource allocation is determined by centralized planning o Collective Decision Making the method of organization that relies on public sector decision making to resolve basic economic questions a method of organization in which private parties make their own plans and decisions with Chapter 3 Law of Demand an inverse negative relationship between the price of a good and the quantity buyers are willing to purchase result in a downward sloping curve o As prices increase quantity demand increases o As prices decrease quantity demand decrease Consumer surplus the difference between the maximum amount consumers would be willing to pay and the amount they actually pay On a graph it s the area between the demand curve but above the price Know the difference between a change in quantity demanded a movement along the curve caused by a change in the price of the good in question Change in demand a shift of the curve caused by anything other than the change in price of the good in question 2 Know the shifters of demand 1 Change in Consumer Income A Normal Goods I DNormal Inferior Goods I DInferior B 2 Change in the Number of Consumers Consumers D 3 Change in the Price of a Related Good A Substitutes Psubstitute D B Compliments Pcompliments D 4 Change in Expectations A Expected Price Pfuture D B Expected Income Ifuture D 5 Change in Consumer Tastes and Preferences Tastes and Preferences D Law of Supply There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce Production increase means sellers want to make more Ex People are willing to stand naked in front of the class As the reward price for nakedness increases the volunteers increase o o Producer Surplus Difference between the minimum price suppliers are willing to accept and the price they receive Area above the supply curve but below the price o Area above the supply curve but below the price o Price decrease producer surplus decreases Price decrease means that people are willing to buy a larger quantity If more supply is bought the remaining surplus left decreases Know the difference between a change in quantity supplied and a change in supply o Change in quantity supplied
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