Econ 2013 Study Guide For Exam 1 Chapter 1 LIFE IS NOT GETTING WORSE Know that Economics is the study of how we make choices under scarcity Understand the concept of scarcity o There is less of a good freely available from nature than people would like o Ex Time money o Scarcity is not the same thing as poverty o Scarcity necessitates rationing allocating scarce goods to those that want them o In a market economy price is used to ration goods o Scarcity leads to competitive behavior Darwinism Know the difference between the different kinds of resources that we use to produce economic goods o Resources An input used to produce an economic good 1 Human resources human capital 2 Physical resources physical capital 3 Natural resources o Capital Human made resources used to produce other goods and services Know the 8 guideposts to economic thinking 3 4 1 Resources are scarce 2 they try to get the most from their limited resources greatest benefit so decision makers must make trade offs no such thing as free lunch choice is influenced in a predictable way by changing incentives Individuals are rational at least possible cost Incentives matter Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Information helps Ex New house vs new notebook Secondary effects the indirect impact of an event or policy that may not be easily and economic actions generate both direct and indirect effects us better make choices but is costly 6 Beware of secondary effects 5 7 The value of a good or service is subjective because goods are subjective voluntary trade immediately observable creates value 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not i Positive Economics the scientific study of what it testable ex Temperature ii Normative Economics judgments about what people think ought to be not testable ex too cold Know the four pitfalls to avoid in economic thinking Vinny Gave Andrea Flowers 1 Violation of ceteris paribus principle ex buying eggs Ceteris paribus all other things constant 2 Good intentions do not guarantee desirable outcomes ex suicide warnings on antidepressant medications 3 Association is not causation ex tiger attack preventing watch 4 Fallacy of composition belief that what is true for one might not be true for all ex when you get a raise vs everyone gets a raise Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game Know the characteristics and 4 incentives of private property rights 1 Incentive to use resources in ways that are considered beneficial to others 2 Private owners have an incentive to care for and manage what they own Ex cleanliness of communal fridge vs your own fridge 3 Private owners have an incentive to conserve for the future Ex endangered species 4 Private owners have an incentive to make sure their property doesn t damage your property Understand the concept of the Production Possibilities Curve PPC 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 o Identify points on the PPC curve o Efficient A B C Inefficient D Unattainable E Know the four factors that shift the production possibilities curve 1 A change in the economy s resource base Investment the purchase construction or development of resources requires us to give up consumption goods 2 Changes in technology Technology the knowledge available in an economy at any given time determines the amount of output we can generate w limited resources 3 A change in the rules under which the economy functions ex imposing trade barriers 4 Changes in work habits ex working harder can shift curve outward working less shifts it inward Understand the law of comparative advantage and be able to calculate the opportunity cost of production to figure out who has the comparative advantage in a certain good o 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 o Ex should Floyd Mayweather Jr be his own body guard 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 Understand the difference between socialism and capitalism and how it relates to economic freedom and know why capitalism tends to work better at creating economic growth and prosperity Capitalism vs Socialism Capitalism Productive resources are owned privately Goods and resources are allocated through market prices Market organization a method of organization in which private parties make their own plans and decisions with the guidance of market prices Socialism Ownership and control of the means of production rest with the state Resource allocation is determined by centralized planning Collective decision making the method or organization that relies on public sector decision making to resolve basic economic questions Why capitalism works Capitalism is similar to natural selection It uses the idea of market efficiency Socialism suffers from an information problem Chapter 3 Understand the law of demand and why demand curves are downward sloping o Law of demand is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase which is why it results in a downward sloping curve o As price increases quantity demanded decreases Know how to find consumer surplus on a graph and calculate it involving one or more transactions o Consumer surplus The difference between the maximum amount consumers would be willing to pay and the amount that they actually pay o Consumer surplus is the area below the demand curve but above the price o A B H 2 Area base times height 2 because it is a triangle Know the shifters of demand 1 Change in Consumer Income A Normal Goods I DNormal B Inferior Goods I DInferior 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
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