ECO2023 Final Study Guide Chapter 1 Economics the study of human behavior and how individuals make choices that are subject to constraints such as scarcity Adam Smith wrote The Wealth of Nations 8 points of how people make decisions 1 There will always be tradeoffs 2 3 4 Individuals choose purposefully Incentives Matter Individuals think on the margin good cost a Best forgone alternative is opportunity cost b c An opportunity cost is always present when scarce resources are used to produce a there is no such thing as a free lunch a People are rational when making decisions subjective in nature a Always think about the additional benefit it will bring and is it higher than the additional b Ex an individual will go back for another plate at an all you can eat buffet when the marginal cost is greater than 0 5 More information leads to better choices but more information increases cost money time a People tend to seek more information when making bigger purchases ex buying a car vs buying paper 6 Secondary effects a Often fail to look at effect in the future b Ex Going home with someone fulfills satisfaction immediate effect a few weeks later you get a burning sensation and need to go get tested secondary effect 7 People value goods differently 8 Good theories should be able to predict behavior a What the average individual would do not unique individual b The best test of an economic theory is the ability to predict real world events Positive statement based on facts can be proven Normative statement based on opinion should be ought to be 4 things to avoid in economic thinking 1 Violation of ceteris paribus a When economists say ceteris paribus they mean other things are constant 2 Good intentions do not always lead to good outcomes 3 Association is not causation 4 Fallacy of Composition a What is good for the individual is not always good for the group b Ex If you are at a football game and can t see you can stand on the bleachers to get a better view but then the group of people behind you are screwed Chapter 1 Practice Questions 1 According to Adam Smith what is individual self interest Answers a It is a major factor in retarding the economic progress of humankind b It could be either a positive or negative force for economic progress depending on the moral influences of political leaders c It is a powerful force for economic progress when individuals are wisely directed by a strong central government d It is a powerful force for economic progress when it is directed by competitive markets 2 What does the expression There s no such thing as a free lunch mean Answers a If one person gains someone else must lose b You cannot have a free lunch at the expense of someone else c The use of resources to produce a good has an opportunity cost because of scarcity d Each person must pay for exactly what he or she receives 3 The fallacy of composition is the incorrect view that Answers a a small change in an economic variable will have unrecognizable but significant consequences on the economy b everything else is always held constant when a change occurs c when two events are associated the one observed first must have caused the second d if something is true for an individual then it must also be true for the group 4 A restaurant offers an all you can eat lunch buffet for 12 Jim has eaten three servings and is trying to decide whether or not to go back for a fourth The economic way of thinking suggests that Jim should go back for the fourth serving if and only if Answers a his marginal benefit of the additional serving is at least 3 b his marginal benefit of the additional serving is greater than zero c his marginal benefit of the additional serving is 12 or more d his total value from the meal exceeds 12 5 A rational decision maker takes an action if and only if Answers a the marginal cost of the action is zero b the marginal cost of the action exceeds the marginal benefit of the action c the marginal benefit of the action exceeds the marginal cost of the action d the opportunity cost of the action is zero 6 Which of the following about economic thinking is true Answers a If a good is provided free to an individual by government its production will not consume valuable scarce resources b If one individual gains from an economic activity then someone else must lose c Changes in personal costs and benefits will exert a predictable influence on the choices of people d If the intentions behind a policy are good you can be assured that the outcome will be desirable 7 What is meant by scientific method Answers a The use of modern electronic testing equipment to understand the world b The use of controlled laboratory experiments to understand the way the world works c The dispassionate development and testing of theories about how the world works d Finding evidence to support preconceived theories about how the world works 8 Modern economics as a field of study is usually thought to have begun with Answers a David Ricardo and the writing of The Principles of Political Economy and Taxation b Adam Smith and the writing of The Wealth of Nations c Aristotle and the writing of Politics and Ethics d Moses and the Ten Commandments 9 The fallacy of composition is the fallacious view that Answers a association does not necessarily indicate causation b it is possible for the whole to be greater than the sum of the individual parts c economic activity will benefit everyone d what is true for the individual will also be true for the group 10 Harry a wheat farmer is deciding whether or not to add fertilizer to his crops If he adds 1 pound of fertilizer per acre the value of the resulting crops rises from 80 to 100 per acre According to marginal analysis Harry should add fertilizer if it costs less than how much Answers a 100 per pound b 20 per pound c 80 per pound d 12 50 per pound following Answers 11 Criteria for rationing goods and resources must be established due to which of the a The use of capitalism as a form of economic organization b The inability of politicians to develop efficient forms of economic organization c The law of comparative advantage d Scarcity imposed by nature 12 Economists use the term ceteris paribus to indicate which of the following 12 Answers a The analysis is true for the individual but not for the economy as a whole b Supply and demand are in balance c Other things are assumed to be constant d Their conclusions are based on normative economics rather than positive economic
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