Microeconomics Test 2 Joab Corey Chapter 1 The Economic Approach Economics how we make choices under scarcity o What is scarcity Less of a good freely available from nature than people would like Not the same as poverty Necessitates rationing The Economic Way of Thinking 1 Resources are scarce so decision makers must make trade offs a No such thing as a free lunch b Opportunity Cost The highest valued alternative that must be sacrificed when choosing an option i Example How will you spend an hour of your time 2 3 Individuals are rational they try to get the most from their limited resources Incentives matter choice is influenced in a predictable way by changing incentives a The money game no one wanted the penny but everyone wanted the 5 dollar bill 4 Individuals make decisions at the margin a Marginal describes the effect of a change in the current situation b Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but its costly a New car VS New pencil 6 Beware of secondary effects economic actions generate both indirect and direct effects a Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable 7 The value of a good or service is subjective a FSU football tickets not everyone will want a ticket because not everyone is an FSU fan although they should be b How much would you pay for a bottle of water Remember Joab sold the bottle of water 8 The test of a theory is it ability to predict a If real world events are consistent with a theory then that theory is valid Positive Economics Normative Economics Testable Judgments not testable 4 Pitfalls of Economic Thinking 1 Violation in ceteris paribus principle all other things constant If the price of roses then people will buy less roses ceteris paribus think Valentines Day a 2 Belief that good intentions guarantee desirable outcomes a The Nirvana Fallacy logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative 3 Belief that association is causation a Superstitions 4 Fallacy of composition the fallacious belief that what is true for one is true for all Chapter 2 TRADE CREATES VALUE better off When Individual engage in voluntary exchange both parties are made When people get goods and resources that they value most trade creates value and increases the wealth created by a society s resources Transaction costs time effort and other resources needed to search out and complete an exchange Middle man a person who buys and sells goods and services or arranged trades A middleman reduces transaction costs What is the importance of property rights 1 Right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property 4 Incentives of Property Rights 1 Incentive to use resources in ways that are considered beneficial to others a Empty lot finding a spot at traditions b Owners bear the cost of ignoring the wishes of others 2 Private owners have an incentive to care for and manage what they own a How do you drive a rental car compared to your own car b When Joab left the tuna fish in the fridge no one cleaned it because it was a communal fridge 3 Private owners have an incentive to conserve for the future a Popcorn at the movies sharing popcorn with someone and making sure you get some of it before they eat it all Yet when you two get your own bags you conserve it for the rest of the movie 4 Private owners have an incentive to make sure their property does not damage your property a Keeping your dog on a leash Production Possibilities Curve PPC PPC Outlines all possible combinations of total output that could be produced assuming Fixed amount of productive resources Given amount of technical knowledge Full and efficient use of resources Efficient points A B C D Unattainable point F Inefficient Point E 2 units of food 2 units of clothing 4 Factors that shift the PPP 1 A change in resource base investment the purchase construction or development of resources 2 Changes in technology a Technology the knowledge available in an economy at any given time i Technology determines the amount of output we can generate with our limited resources 3 A change in rules under which an economy functions a Reducing trade barriers 4 Changes in work habits a Working harder can shift curve outward b Working less can shift curve inward Law of Comparative Advantage the total output will be greatest when whoever gives up the least to produce something produces it Should LeBron clean his own house NO Bob Bob s Father Wage 8 25 Mowing time 4 2 Cost 32 50 Socialism state Capitalism private Ownership and control of the means of Productive resources are owned production rest with the state Resource allocation is determined by centralized planning privately Goods and services resources are allocated through market prices Market organization method of organization in which private parties make their own plans and decisions with the guidance of market prices Why does capitalism work and socialism does not Capitalism is similar to natural selection It uses the idea of market efficiency Socialism suffers from an information problem Chapter 3 Supply Demand and the Market Process Demand curve Law of Demand there is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase As price quantity demanded The height of the demand curve at any quantity shows the maximum price that consumers are willing to pay for an additional unit o When consumers have more of a good they value it way less Consumer Surplus The difference between the maximum amount consumers would be willing to pay and the amount that they will actually pay o Consumer surplus is the area below the demand curve but above the price Change in quantity demanded A movement along the curve Caused by o in quantity demanded movement the curve to the o in quantity demanded movement up the curve to the left right What causes a change in demand A change in anything EXCEPT PRICE in demand curve shifts right in demand curve shifts left 1 Change in consumer income a Normal Goods Steak b Inferior goods Ramen noodles 2 Change in number of consumers a Change in class size 3 Change in the price of a related good a Substitutes beef and chicken b Compliments milk and cereal 4 Change in expectations
View Full Document
Unlocking...