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ECO 2023 Notes From the 3 Review Sessions Micro Review Session Exam 1 Content Ch 1 3 1st part of Ch 4 including price floors 34 multiple choice 3 points each 1 point just for taking it How to Study Go through class notes Do Coursebook practice questions on BB Study old extra credit online quizzes understand Chapter 1 Scarcity concept that there s less of a good freely available from nature than people would like o Ex of Scarce goods mostly everything including clean air o Ex of non scarce goods air in general unless scuba diving Scarcity is NOT the same thing as poverty Everyone faces it all the time and everywhere Scarcity leads to competition innovation Eight Guideposts to Economic Thinking 1 Resources are Scarce no such thing as a free lunch a Concept of opportunity cost i Value of highest forgone alternative 2 3 Individuals are Rational want most benefit least cost Incentives Matter a People respond in a predictable way to changing incentives b Cost of actions go up less likely to engage in action 4 Individuals make decisions at the margin a Marginal Effect of change in current situation benefits cost of ONE MORE b Ex Drive or fly i Be able to calculate a cost benefit analysis ii One will undergo an action when the marginal benefits outweigh the marginal costs Ex Drive or fly to New Orleans Drive 5 hours Fly 1 hour 50 gas 450 ticket Marginal Cost Marginal Benefits 5 1 400 4 hours how much time would be saved If time 100 hour then individual will choose to fly Information helps us make better choices but is costly to acquire 5 6 Beware of secondary effects economic actions generate both direct and indirect effects a Secondary effects can make seemingly good actions bad actions b Ex Yacht tax put many people put out of work 7 The Value of a good or service is subjective a Different values for different people b People make exchanges through this both sides made better off 8 The test of a theory is its ability to predict a In order to test theories implemented in real world examples Know difference between normative economic statement and positive econ statement both can be true OR false o Normative based on someone s opinion not true or false for everyone Ex It s too cold outside o Positive can be tested to see if it s true or false Ex It s 67 degrees outside 4 Pitfalls to Avoid in Economic Thinking 1 Violation of the Ceteris Paribus principle a Trying to control for everything keeping all other things constant 2 Good intentions do NOT guarantee desirable outcomes a Ex Safety caps on medications led to more children ingesting drugs b Ex Rallying against sweat shops i They may be the reasons children are not in a worse position 3 Association is not causation 4 Fallacy of Composition the belief that what is true for one is true for all a Ex Standing at a football game Chapter 2 Know how trade creates value o Moving goods and services into the hands of those who value them the most Know that middlemen support trade by reducing transaction costs Understand the process of wealth creation through voluntary transactions o Becoming wealthy by providing things that other people value o Doesn t take someone s piece of pie makes the pie bigger better Stealing taking someone else s piece though Know 4 Incentives of Private Property Rights 1 Use the resource in ways that benefits others ex empty lot a Empty lot on campus would probably turn it into a parking lot on 2 Care for and manage what they own a Communal things cared for less than personal belongings 3 Private owners have incentive to conserve for the future a Tragedy of the commons 4 Private owners have incentive to make sure their property doesn t damage yours a Ex keeping a dog on a leash Production Possibilities Curve PPC o Maximum combination of goods a country can produce given a fixed amount of resources etc o Be able to identify and describe points on a PPC Inefficient points INSIDE curve Efficient Unattainable point OUTSIDE the curve points ON curve o Shifters of PPC Changes in the economy s resource base Changes in technology Technology knowledge available in economy given time Change in rules under which economy functions Reducing trade restrictions free trade shift curve out Increasing restrictions shift curve inward Change in work habits Working hard shift outward Laziness shift inward Law of Comparative Advantage o The total output of a group of individuals entire economy group of nations will be greatest when output of each good is produced by whoever has the lowest opportunity cost Ex Why Lebron James shouldn t clean his own house Ex Winston Janine Wage 60 Typing Speed 120 wpm 60 wpm 2x Winston has absolute advantage but what must Janine s wage rate be less than in order for Winston to continue ghost busting etc Therefore time 30 hour 1 2 of 60 Every economy must answer 3 Questions o WHAT will be produced o HOW will it be produced o For WHOM will it be produced Know difference between capitalism and socialism Socialism social planners decide what to produce who gets it Capitalism people produce for themselves and allocation based on market prices Know why capitalism works Chapter 3 Law of demand inverse relationship between price and quantity o Demand curve is DOWNWARD sloping Consumer surplus difference between maximum amount consumers would be willing to pay and the amount that they actually pay o It s the area below the demand curve and above the price o Be able to find it on a graph and calculate it Area of Triangle BH 10 Q Know the difference between change in demand and quantity demanded o Change in quantity demanded caused by a change in the current price of the good shift ALONG the curve o Change in the demand caused by change in anything else that affects demand shifts the ENTIRE demand curve P 50 Consumer Surplus 30 S D Demand Shifters of 1 Change in consumer income a Normal goods steak etc b Inferior goods ramen noodles 2 Change in of consumers 3 Change in the price of a related good a Substitutes Beef v Chicken b Compliments PB J 4 Change in expectations a Expected Price b Expected Income 5 Change in consumer tastes and preferences The Law of Supply Direct positive relationship between price and quantity Producer Surplus The difference between the minimum price suppliers are willing Supply curve is UPWARD sloping to accept and the price they actually receive Producer Surplus is the area above the supply curve but below price Know the difference between change in supply and quantity supplied o Change in


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FSU ECO 2023 - Exam 1

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