ECO 2013 Study Guide Unit I 12 06 2014 Chapter One Economics is the study of how individuals male choices that are subject to the constraints such as scarcity Economic way of thinking is based on 8 guideposts There will always be tradeoffs exchange one thing for another Individuals choose purposefully people are rational Incentives matter more likely to do something if paid more Individuals think on the margin marginal benefit vs cost More info better choices yet more info higher costs Secondary effects Valuation is subjective Good theories should be able to predict behavior Opportunity Cost value of the best forgone alternative Positive statement statement based on facts can be proven Normative statement based on opinion cannot always be proven should be ought to be common statements Pitfalls in the economic way of thinking Violation of ceteris parabius Good intentions do not always lead to good outcomes Association is not causation Fallacy of composition what is good for the individual is not always good for the whole team Chapter Two Voluntary trade creates value for both parities involved Channeling goods to the people that value them most creates wealth Transaction costs are the costs incurred when completing a transaction Time effort resources need to complete the exchange Monetary or non monetary Middlemen increase the gains from trade reduce transaction costs thus create value Property rights create incentive to protect conserve resources distribute them to people who value them the most Private right of exclusive use Common allow multiple people to claim ownership rights Production Possibility Curve shows the maximum combinations of two goods that can be produced from a set of fixed resources Technology constant resources utilized efficiently Point inside inefficient Point on the line efficient Point outside the line unattainable Have to give up one to get more of another Can only produce more of one good when producing less of another good Law of increasing opportunity cost reason for the outward bow of the PPC more of good A desired more of good B you have to give up Factors shifting PPC outward Increase in resources Improving technology Improving legal systems to allow resources to be utilized efficiently Work harder less leisure Law of comparative advantage in order to maximize output individuals must produce goods for which they have the lowest opportunity cost States that countries should trade for those economic goods for which it is a high opportunity cost producer Trade for goods you produce inefficiently make goods you produce efficiently Societies 3 questions What to produce How to produce it For whom to produce it for Chapter Three Law of demand there is an inverse or negative relationship between the price of a good or service and the quantity of it that consumers are willing to purchase Price increases buyers purchase less Price decreases buyers purchase more Substitutes Goods that perform similar functions Consumer Surplus consumers net gain from making a purchase Difference in the maximum amount consumers would be willing to pay and the amount they actually paid for the good Elastic Goods Goods in which a change in the price will lead to large change in the amount purchased Inelastic Goods Goods in which a change in the price of a good will lead to a small change if any in the amount purchased gas Change in Quantity Demanded Movement along the curve Only caused by a change in PRICE QD P Movement along the curve Change in demand shift of the entire curve Caused by anything other than price o Changes in consumer income o Changes in the number of consumers in the market o Changes in the price of a related good o Changes in expectations o Changes in demographics o Changes in consumer tastes and preferences Substitute good increase in demand for one good leads to a decrease in demand for the second good Complementary goods as the price of one good increase the demand for another good decreases Law of supply as price increases producers are willing to make more of a good Change in Quantity Supplied Movement along the curve ONLY BE CAUSED BY CHANGE IN PRICE Change in Supply Movement shift of the entire curve Has to be a change in anything but the price of a good o Change in resource prices o Change in technology o Change in taxes o Political unrest and weather Market prices are determined where the supply and demand curves intersect Equilibrium occurs when QUANTITY SUPPLIED QUANTITY DEMANDED Invisible hand self interested individuals will produce what is valued by society the most without the direction of a central authority ECO 2013 Study Guide Unit II 12 06 2014 Chapter 7 Gross domestic product market value of all final goods and services produced within a country during a specific time period Only the market value of all FINAL goods and services count o Price of the entire car not the immediate purchase of tires Service has to be produced GDP is added to the location of where the item is produced Will include income payments of foreigners for their work in the US Doesn t account for the general improvement of goods Nominal GDP has inflation Real GDP Takes out inflation Measure of GDP using prices from that year quarter Adjusts for inflation in order to compare GDP across different years quarters Real GDP Nominal inflation Examples of Yes I E getting a haircut Purchase sales from a broker Real estate agent sells your home commission Buy juice at store Examples of No GDP Receiving a social security check transfer payment Purchase 100 shares of apple stock transfer payment Buy pot from neighbor underground economy Volunteer work for red cross no market value for work Calculating GDP Y C I G X Y GDP C consumption G government purchases X exports imports net exports foreigners I investment business purchases and home purchases Consumption purchases include food clothing etc Largest component of GDP 67 Gross private investment include purchases of machinery and buildings used in the production process Government purchases payments to law enforcement veterans hospitals construction of roads and buildings Net Exports different between exports and imports Exports goods and services produced in the US but sold to foreigners Imports foreign goods and services sold in the US Another way to calculate GDP is to use the income approach Sum of all the income generated from the production of goods and services Based either on how much people spend or how much people make
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