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Chapter 1 1 Know that Economics is the study of how we make choices under scarcity 2 Understand the concept of scarcity a Can t have everything you want there s less of a natural good than people want 3 Know the difference between the different kinds of resources that we use to produce need to ration economic goods a Human resources workers teachers intelligence etc b Physical resources man made technology aka a factory 4 Know the 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs a Ex price tags opportunity cost 2 3 4 Individuals are rational They try to get the most from their limited resources and receive greatest benefit at least possible cost a Ex highest GPA least amount of time studying Incentives matter people respond in predictable ways to changes in costs and benefits a Ex raises price hikes sales Individuals make decisions at the margin Be able to calculate marginal benefits marginal costs and perform a cost benefit analysis drive or fly example Chicken burrito 7 00 Chicken Burrito w guac 9 15 Marginal benefit guac vs marginal cost 2 15 Travelling to LA Drive 38 hours 200 Fly 8 hours 500 MB 30 hours saved vs MC 300 spent Divide cost by benefit If your time 10 an hour fly If your time 10 an hour drive 5 Information helps us make better choices but is costly we often make decisions without full information a Ex buying laptop without actually trying it out 6 Beware of secondary effects a economic actions generate both direct and indirect effects Ex Yacht Luxury Tax to tax rich since rich have Yachts Tax was dodged by rich Yacht industry badly damaged middle class workers in the industry lose jobs Ex Trade restrictions in Russia are designed to hurt US and Allies SE Russian consumers unhappy and suffering 7 The value of a good or service is subjective a Ex An FSU ticket to a football game is worth a lot more to FSU fans than a Wisconsin basketball fan 8 The test of a theory is its ability to predict a Positive economic statement testable theory b Normative economic statement judgement 5 Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle a Failure to keep things constant Ex not adjusting for inflation 2 The belief that good intentions equal desirable outcomes a The Nirvana Fallacy The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative b Giving money to the homeless may use it to buy drugs 3 The belief that Association is Causation a Ex crime associated with broken families but that doesn t mean broken families cause crime 4 The Fallacy of Composition a Ex Asian student is excels at math This doesn t mean all asians are good at math I m living proof b Ex Policeman is racist This doesn t mean all police officers are racist Chapter 2 Voluntary trade trade between two or more consenting parties Transaction costs cost of participating in trade Ex time spent getting to the store Middleman Person party who links the consumer with the producer Ex Grocery store linking farms to consumers 1 Know the characteristics of Private Property Rights and four incentives they provide a Use resources in ways that other people value Ex turning empty lot into parking lot to make b Care for and manage what you own Keeping your car looking good vs a rental car c Conserve for the future Ex Popcorn at movies You own that popcorn You ll have the need to pace yourself d Make sure your property does not damage anybody else s property Ex Keeping your dog on a leash to avoid getting sued in case of an accident i i i i 2 Understand the concept of the Production Possibilities Curve PPC The PPC outlines all possible combinations of total output that could be produced assuming a 1 fixed amount of productive resources 2 given amount of technical knowledge 3 full and efficient use of resources 3 Know the four factors that shift the production possibilities curve inward and outward 1 A change in the economy s resource base ex of workers output 2 A change in technology 3 A change in the rules under which an economy functions 4 A change in work habits 4 Understand the 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 Ex Japan is a great producer of electronics USA is a great producer of automobiles If they stick together and stick to what they do best they ll all be in good shape 5 Know the 3 questions that every economy faces 1 What will be produced 2 How will it be produced 3 For whom will it be produced 6 Understand the difference between socialism and capitalism and know why capitalism tends to work better at creating economic growth and progress Socialism State controls means of production resources allocated by centralized planning Capitalism Productive resources are privately owned goods resources allocated through market prices not whatever gov t says they should be Chapter 3 1 Understand the Law of Demand and why demand curves are downward sloping a Law of Demand As price quantity demanded b Demand curves are downward sloping because of this c that the height of the demand curve is the maximum price consumers are willing to pay for an additional unit 2 Know how to find and calculate consumer surplus involving one or more individuals or on a graph the area below the demand curve but above price X Unobtainable Customers aren t willing to pay 6 25 for 6 Y Consumer surplus Customers willing to pay 6 for 5 actually drops 2 75 for 5 CS 3 25 Z Consumer surplus Customer pays max 2 for 8 CS 0 3 Quantity demanded is a point moving up on the demand curve 4 A change in demand moves the entire curve left right 5 Know the shifters of demand 1 Change in Consumer Income a Normal Goods Income Demand b i more money more high quality dinners Inferior Goods Income Demand i more money less Ramen Subway 2 Change in the Number of Consumers a of Consumers Demand i more Nike sneakers fans greater Demand 3 Change in the Price of a Related Good a Substitutes Substitute s Price Demand i price of Miller Lite Demand for Bud Lite b Compliments Compliments Price Demand i price of coffee creamer coffee s Demand 4 Change in Expectations a Expected Price Expected future price Demand i gas expected to rise current Demand will b Expected Income Future Income Demand i Knowing a raise will occur in the near future current Demand


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FSU ECO 2023 - Chapter 1

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