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This 17 page Study Guide was uploaded by Taylor Landis on Sunday February 7, 2016. The Study Guide belongs to ECON*202*04 at Coastal Carolina University taught by Dr. Jordan in Spring 2016. Since its upload, it has received 63 views. For similar materials see Microeconomics in Economcs at Coastal Carolina University.
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Date Created: 02/07/16
ECON 202 Exam 1 Study Guide (ch. 1-4) Chapter 1 I. Scarcity A. choice 1. limited liability of resources vs. unlimited wants 2. decision-making 3. initiates technological progress B. poverty 1. some basic level of need is not being met a. subjective concept (opinionated) 2. our desires for goods and services cannot be fully satisfied C. rationing 1. every society (scarcity is everywhere) must have some means of rationing scarce resources among competing uses 2. ways to ration a. price i. those willing to give up other things ii. incentive to earn income - purchasing power b. central planning/first come-first serve i. lobbying and rent-seeking ii. people seeking to get in line early (queuing) D. competition 1. natural outgrowth of scarcity 2. rationing method will influence form of competition 3. when price is rationing criterion, people engage in income-generating activities that enhance their ability to buy goods and services they want 4. competition is a key ingredient in economic progress, facilitating efficiency and innovation a. better, newer, less expensive products b. higher wages, better benefits, and better working conditions II. 8 Guidelines to Economic Thinking A. use of scarce resources to produce goods and services is always constant 1. trade-offs are necessary 2. opportunity cost B. individuals choose purposefully - they engage in economizing behavior which stems from rational decision-making 1. given benefit. . . . . . lowest cost 2. given cost. . . . . . greatest benefit 3. weighing benefits vs. costs C. incentives matter 1. as personal benefits (costs) from choosing an option increases ——> discourages buying activity D. economic reasoning focuses on the impact of marginal changes 1. decisions will be based on marginal costs and marginal benefit 2. effects of net addition to or net subtraction from current conditions E. since information is scarce and therefore costly to acquire, uncertainty is fact of life 1. people tend not to gather all relevant information, gathering information becomes costly F. economic events often generate secondary effects that may be felt only over time 1. consideration to secondary effects is the key ingredient of economic thinking G. the value of a good or service is subjective and varies with individual preferences and circumstances 1. because of differences in the way people value goods, trade (exchange) creates value H. test of economic theory is its ability to predict and explain events in the real world 1. economic thinking is based on scientific reasoning 2. concern is with prediction average or typical behavior of people, not behavior of specific individuals III. Positive vs. Normative Economics A. positive economics - scientific study of “what is” among economic relationships 1. can be proved true of false (verifiable) B. normative economics - judgements on “what ought to be” in economic matters 1. subjective values (opinionated) - cannot be proven true or false IV. 4 Pitfalls A. violation of the ceteris paribus (all things remain constant) condition 1. when describing effect of a change, the outcome might be influenced by changes in other things B. good intentions do not guarantee desirable outcomes C. fallacy of composition 1. erroneous view that what is true for the part is also true for the whole D. association is not causation 1. statistical association (correlation) alone cannot establish causation 2. just because two things appear to be related, does not mean that they are related Chapter 2 I. Opportunity Cost A. the highest valued activity sacrificed in making a particular choice B. subjective C. based on expectations D. all choices involve cost 1. monetary cost - money related 2. non-monetary cost - forgone earnings 3. monetary costs do not represent total opportunity cost of an option II. Trade A. trade and transactions costs 1. mutual gain is the foundation of trade (voluntary exchange) - both parties are better off 2. value can be created by exchanges that move goods to individuals who value them more a. differences in preferences and circumstances 3. transactions costs - time, effort, and other resources needed to search out, negotiate, and continue an exchange a. reduction in transactions costs tend to increase gains from trade b. internet reduces transactions costs B. trade and the middleman 1. middleman - person who buys and sells, or arranges trade a. reduces transactions costs b. facilitate trade by making exchanges cheaper and more convenient III. Private Property A. private property rights 1. when exchange occurs, it is really property rights of the item that changes hands 2. property rights - right to use, control, and obtain benefits from a resource, good, or service 3. private property rights involve: a. exclusive use b. protection against invaders c. transfer to another 4. private owners can do anything they want with their property as long as they do not use it in a way that infringes on others’rights B. private property and incentives 1. private ownership is key to prosperity a. private owners can gain by using their resources in ways beneficial to others i. strong incentive to care for and manage what they own/conserve for the future b. with private property rights, owners are liable if their property damages others c. commonly owned property (multiple people have or claim ownership rights) will be poorly maintained and over-utilized C. tragedy of the commons 1. an economic theory 2. individuals acting independently and rationally according to each of one’s self- interest, behave contrary to the best interest of the whole group D. private property and markets 1. when private property rights are are protected and enforced, permission of owner is required for use of resource a. buy or lease from owner 2. market prices provide strong incentive IV. Production Possibilities Curve • efficient • inefficient A. shifting production possibilities curve outward 1. more resources 2. increase/advancement in technology 3. better “rules” a. ex: lower taxes B. investment and production possibilities in the future 1. the long-term benefits of investment include greater future output 2. increase in capital = increase in economic growth V. Value and Gains from Trade A. division of labor 1. trade creates value by moving goods from people who value them less to those who value them more 2. trade expands output through specialization and division of labor a. division of labor - breaks down production of a good into series of tasks performed by different workers i. individuals take advantage of specific skills ii. workers become more skilled with time iii. mass production technologies B. law of comparative advantage 1. joint output of trading partners will be greatest when each good is produce by a low opportunity cost producer a. products are produced by individuals who can produce best at the lowest cost C. sources of gains from trade 1. channels goods to individuals who value them most 2. possible for people to produce more 3. large-scale production processes and lower cost production methods and improved products 4. expands and diversifies market 5. economics of scale: large scale production leads to lower per unit cost 6. innovation: how to get more from existing resources a. larger, more diverse markets VI. The Three Basic Questions Faced ByAll Economists A. What to produce? ——> output mix B. How to produce it? ——-> technology C. For whom to produce it? ——> distribution VII. Market Organization and Political Planning A. market organization 1. markets: a. unregulated prices b. decentralized decisions c. private property owners 2. capitalism 3. government plays limited role 4. buyers and sellers act in their own interest B. political planning 1. collective decision-making 2. socialism 3. political decision-makers (government) 4. election process a. democratic political process relies on votes of the majority C. voluntary exchange vs. elected government regulations D. all economies use a variation of both market organization and political planning Chapter 3 I. Law of Demand A. inverse relationship between price and quantity P • income • number of consumers • prices of other goods • preferences • expectation prices D Q as price increases, quantity demanded decreases *Additional notes and graphs for chapters 3 and 4 are hand written and attached below*
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