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THE ECONOMIC WAY OF THINKING 4 questions Econ Final Review There are ALWAYS trade offs Individuals choose purposefully o What you give up is your opportunity cost value of next best alternative o Referred to as economizing behavior choosing the option that offers the greatest benefit at the least possible cost o Utility the benefit or satisfaction an individual expects from a choice of action Incentives matter o Changes in incentives influence human choices in a predictable way As incentives go up you will be more likely to do something and vice versa o Incentive doesn t have to be money Think on the margin o Marginal o Rule of thumb continue to engage in an activity as long as the expected marginal means additional or incremental benefit is greater than the expected marginal cost More information leads to better decision making but more information is costly to get o People will rationally choose not to become fully informed when making decisions Beware of secondary effects o Economic actions often generate indirect as well as direct effects o Primary direct effects are often immediate and visible o Secondary effects are indirect and may not be easily observable In policy making these affects are often both unintended and overlooked Value is subjective o Value is determined by purchaser beauty is in the eye of the beholder Economic thinking is scientific thinking o The test of a theory is its ability to predict Good theories produce consistent results and vice versa developing a theory from basic principles and testing it against o Scientific thinking events in the real world The dispassionate development and testing of theories about how the world works o Economist use data and info to explain and predict actions PITFALLS TO AVOID IN ECONOMIC THINKING 1 question Violation of ceteris paribus o Ceteris paribus o We isolate variables and allow for only one to change at a time because economist Latin for other things constant recognize unpredictable changes in other factors would give different results Good intentions do not necessarily result in good outcomes Association is not causation o Statistical association alone cannot establish this causation Fallacy of composition be true for the group erroneous view that what is true for the individual or the part will aso POSITIVE AND NORMATIVE ECONOMICS 1 question Positive economics scientific study of what is among economic relationships o Does not have to be correct simply must be testable Normative economics judgments about what ought to be in economic matters o Can neither be confirmed nor proven false by scientific testing WHAT SHALL WE GIVE UP 4 questions Because of scarcity we constantly face choices that involve tradeoffs between our competing desires Scarcity necessitates rationing There is no such thing as a free lunch principle Opportunity costs are subjective because this they depend on how much the decision maker a curve that outlines all the possible combinations of total values his or her options PRODUCTION POSSIBILITES CURVE 1 question Production possibilities curve output that could be produced assuming o A fixed amount of resources o A given amount of technical knowledge o Full and efficient use of all resources o On the curve efficient o Inside the curve inefficient o Outside the curve unattainable Shifting the curve outward Slope of the curve indicates the amount of one product that must be given up to produce more of another Points on the graph o Investment technology invention and innovation o Entrepreneur consumers at a lower cost a person who introduces new products or improved techniques to satisfy Through entrepreneurial discovery and innovation new products and methods of production are continuously replacing old ones this is called creative destruction o Improvement in rules governing economic functions o Task force working harder increasing output THE IMPORTANCE OF PROPERTY RIGHTS 1 question Property rights Private property rights invasion by others the right to use control and obtain the benefits from a good or resource property rights exclusively held by an owner and protected against o Private property can be transferred sold mortgaged at the owners discretion Incentives created by private property rights o Private owners can gain by employing their property rights in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others o Private owners have strong incentive to care for and properly manage what they own o Private owners have an incentive to conserve for the future particularly if the property is expected to increase in value o Private owners have the incentive to lower the chance that their property will cause damage to the property of others 2 kinds of property rights o Common rights o Private rights everybody owns it only one person owns it TRADE CREATES VALUE 1 question Two opposing views of trade o When people trade one person gains and the other person loses Referred to as zero sum game o When people trade both parties gain Wealth is created by this type of trade By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources Voluntary trade creates wealth and promotes economic progress o With or without production with or without money exchanges voluntary trade is expected to benefit both parties involved the time effort and other resources needed to search out negotiate and Transaction costs complete an exchange o A monetary or non monetary barrier that lowers the value of trade people who buy and sell goods and services or arrange trades Middleman o A middleman reduces transaction costs TRADE OUTPUT AND LIVING STANDARDS 2 questions Division of labo r a method that breaks down the production of a product into a series of Trade makes it possible for people to generate more output through specialization and division of labor large scale production processes and the dissemination of improved products and production methods specific tasks each performed by a different worker Law of comparative advantag can gain by specializing in the production of goods that they can produce cheaply at a low opportunity cost and exchange for goods they cannot produce cheaply at a high opportunity cost Low opportunity cost comparative advantage specialization division of labor voluntary trade increased wealth e a principle that states individuals firms regions and nations Adam Smith Wealth of


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FSU ECO 2023 - Econ Final Review

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