FSU ECO 2023 - Chapter 2 Some Tools of the Economist Study Guide

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ECO 2023 Principles of Microeconomics Chapter 2 Some Tools of the Economist Study Guide 6 Learning Goals Key term 1 Define and recognize examples of opportunity costs Chapter heading What Shall We Give Up Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option LeBron James would have incurred a large opportunity cost from going to college What is your opportunity cost of going to college YOUR ANSWER MAY VARIES FROM MINE Can opportunity costs be objectively measured Why or Why not No opportunity costs are subjective They depend on how the decision maker values his or her option 2 Discern why voluntary trade creates value Chapter heading Trade Creates Value Key term Transactions costs The time effort and other resources needed to search out negotiate and complete an exchange What are the two important aspects of voluntary exchange 1 When individuals engage in a voluntary exchange both parties are made better off 2 By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources How do transactions costs decrease the benefits of voluntary exchange Reduction in transaction cost will increase the gains from trade 3 Realize why property rights are key to economic progress Chapter heading The Importance of Property Rights Key term Private property rights Property rights that are exclusively held by an owner and protected against invasion by others Private property can be transferred sold or mortgaged at the owner s discretion Property rights change behavior in four key ways 1 Private owners can gain by employing their resources in ways that are beneficial to others and bear the opportunity cost of ignoring the wishes of others 2 3 4 Private owners have a strong incentive to care for and properly manage what they own Incentive to conserve for the future particularly if the property is expected to increase in value Incentive to lower the chance that their property will cause change to the property of others 4 Illustrate the concepts of tradeoffs opportunity costs and growth Chapter heading Production Possibilities Curve Key terms Production Possibilities Curve A curve that outlines all possible combination of total output that could be produced assuming a fixed amount of proactive resources a given amount of technical knowledge and full and efficient use of those resources The slope of the curve indicates the amount of one product that must be given up to produce more of the other Investment The purchase construction or development of resources including physical assets such as plants and machinery and human assets such as better education Investment expands an economy s resources The process of investment is sometimes called capital formation Entrepreneur A person who introduces new products or improved techniques to satisfy consumers at a lower cost Creative Destruction The replacement of old products and production methods by innovative new ones that consumers judge to be superior Draw a PPC with two goods you like to purchase on the axes Place point A at an inefficient point point B at an efficient point and point C at an unattainable point Four factors that could potentially shift the PPC outward 1 An increase in the economy s resources base would expand our ability to produce goods and services 2 Advancements in technology can expand the economy s production possibilities 3 An improvement in the rules under which the economy functions can also increase output 4 By working harder and giving up current leisure we could increase out production of goods and services 5 Recognize that specialization and division of labor lead to higher output levels and living standards Chapter headings Trade Output and Living Standards Human Ingenuity and the Creation of Wealth Addendum Key term Law of comparative advantage A principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply of a low opportunity cost and exchanging them for goods they cannot produce cheaply at a higher opportunity cost How is the law of comparative advantage related to specialization and division of labor Trading partners benefit from specialization and the division of labor because having a worker who specializes in just one narrow area becomes more experienced and more skilled in that task over time and the division of labor separates production tasks into a series of related operation with both they can produce cheaply and therefore will have a low opportunity cost In addition to specialization and division of labor how else is economic progress achieved 1 Trade also promotes economic progress by making it possible by making it possible for firms to lower their per unit cost with mass production 2 Trade also makes it possible to realize gains from the discovery and dissemination of innovative products and production processes Is the economic pie fixed or variable Why The economic pie is variable not fixed Human ingenuity can expand output by discovering lower cost methods of production and new products that are highly valued relative to cost 6 List society s three questions and specify the kinds of economic organizations Chapter heading Economic Organization Key terms Market organization A method of organization in which private parties make their own decision with the guidance of un regulated market prices Capitalism An economic system in which productive resources are owned privately and goods and resources are allocated through market prices Socialism A system of economic organization in which the ownership and control of the basic means of production rest with the state and resources allocation is determined by centralized planning rather than by market forces What are society s three basic questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced What is the key difference between market organization and collective decision making Economies can either be organized by decentralized markets capitalism or they can be centrally planned by government through political decision making


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FSU ECO 2023 - Chapter 2 Some Tools of the Economist Study Guide

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