ECO2013 Principle of Macroeconomics Final Exam Study Guide Chapter 1 The Economic Way of Thinking 4 questions Adam Smith is the founder of economics Political economy is a study of mankind in the ordinary business of life it examines that part of individual and social action which is most closely connected Alfred Marshall Scarcity leads to tradeoffs which results in making choices economics Problems of scarcity in history though are in force tradition authority and all markets Guidelines 1 There are ALWAYS tradeoffs a Opportunity cost Individuals choose purposefully a Rational behavior Incentive matters 2 3 a As the incentive goes up the more likely one is to decide to do it 4 Think on the margin a Marginal means additional or incremental 5 More information leads to better decision making but more information is costly to get 6 Many choices create a secondary effect a Comes after the primary effect 7 Value is subjective a Beauty is in the eye of the beholder 8 Economic thinking is scientific thinking a Predict actions through models and graphs Pitfalls to Avoid in Economic Thinking 1 question Errors to avoid 1 Violating ceteris paribus other things constant 2 Good intentions do not always result in good outcomes 3 Association is NOT causation 4 Fallacy of composition a Assuming that what is good for an individual will be good for an entire group Chapter 2 What Shall We Give Up 1 question Opportunity cost the choice to do something and at the same time chose not to do another Trade creates value and value is subjective When an individual engages in a voluntary exchange both parties are better off especially when channeling goods and resources to those in need it creates value for trade and increase the wealth in society through its resources The Importance of Property Rights 1 question Private Property Rights rights exclusively held by the owner and overall protected against trespassing and invasions Private property owners can be sold transferred or altered and the discretion of the owner Trade Output and Living Standards 2 questions The division of labor is efficient way to produce a product The law of comparative advantage the total output of a group of individuals an entire economy or nations will be greatest when the output of each good is produced by those who can make it at the lowest opportunity cost for that particular good Chapter 3 Changes in Demand Vs Changes in Quantity Demanded Quantity of a good purchased price change quantity demanded which creates a movement along the demand curve A change in demand is a shift in the entire demand curve A change in quantity demanded is a movement along the demand curve Changes in Supply vs Changes in Quantity Supplied Supply units change due to price quantity supplied 1 Change in resource prices when resource prices are higher there will increase the production cost while reducing the profit of firms that supply the good 2 Changes in technology ultimately reduce production costs and increase supply How Market Prices are determined Supply and Demand Interact 3 questions Equilibrium a state in which the conflicting forces of demand and supply are in balance The decisions of consumers and producers are brought into harmony with one another and the quantity demanded will equal the quantity supplied Economic efficiency when the potential gains for a product is noted and in action it is efficient only if it creates more benefit than cost with well constructed property rights competition of trade equilibrium in the market place is affective How Markets Respond to Changes in Demand and Supply 5 questions In a market when a demand for a good increases its price will rise which will in turn motivate consumers to search for alternatives and cut back on purchasing additions of the good and motivate producers to supply more of the good these two actions will eventually create equilibrium Invisible Hand Principle market prices coordinate the actions of individuals and direct them toward activities that promote the overall welfare The efficiency of a market organization is dependent upon 1 Competitive markets 2 Well constructed property rights Market prices communicate information motivate economic consumers and producers and set up the actions that take place within the market for participants Chapter 6 Similarities and Differences Between Political and Market Allocation 2 questions 1st public sector organization can break the linkage between payment and consumption of a good 2nd private sectors action is based on mutual agreements public sector action is based on majority rule 3rd when political choices are made legislatively voters face a bundle purchase problem They must choose among candidates who represent a bundle of positions on issues 4th income and influence are distributed differently in the two sectors When political process works properly 2 questions Special interest issues an issue that generates substantial individual benefits to a small minority while imposing a small individual cost on many citizens Logrolling the exchange between politicians of political support on one issue for political support on another Pork barrel legislation a package of spending projects bundled into a single bill It is often used as a device to obtain funding for a group of projects intensely desired by regional interest groups that would be unlikely to pass if separately voted Earmarking the direction of budgeted funds to specific groups programs and locations Shortsightedness effect the misallocation of resources that results because public sector action is biased 1 in favor 2 against proposals Rent seeking actions by individuals and groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves or the projects they promote Political favoritism Crony Capitalism and Government Failure 1 question Crony capitalism a situation where the institutions of markets are maintained but the allocation of resources and the profit and loss of business are determined by political decision making rather than consumer purchase and market forces To a large degree the activities of business firms are directed and controlled by government spending and regulation In turn many of the business firms will use contributions and other forms of political support to compete for government favors Chapter 7 GDP as a Measure of Output 2 questions Gross domestic product the market value of all final goods and
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