Eco 2013, exam 1 study guide
Eco 2013, exam 1 study guide Eco2013
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This 9 page Study Guide was uploaded by Lauren Carstens on Thursday February 11, 2016. The Study Guide belongs to Eco2013 at Florida State University taught by Joan Corey in Spring 2016. Since its upload, it has received 213 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.
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Date Created: 02/11/16
Macroeconomics Exam 1: Study Guide Chapter 1: Life is getting better, not worse (Look at the positive changes) o Life expectancy o Health o Income o Education o Entertainment What is Economics? o The study of how individuals make choices under scarcity Scarcity: The concept that there is less of a good freely available from nature than people would like (Time, money, textbooks) Necessitates rationing, or allocating goods to those who want them most (first come/first serve, price) Leads to competitive behavior Resources o An input used to produce an economic good Human Resources (Human Capital) Intelligence, endurance, kindness Physical Resources (Physical Capital) Pencils, paper, laptop Natural Resources (NOT Natural CapitalNot man-made) Gold, iron 8 Guideposts to the Economic Way of Thinking o 1. Resources are scarce so decision makers must make trade-offs No such thing as a free lunch Opportunity Cost When you make a decision to do one thing, everything needed for that decision can not now be used for any other alternative Ex: An hour of your time, where to spend money o 2. Individuals are rational; they try to get the most from their limited resources Try to get the greatest benefit from the least possible cost What is rational for one person may not be rational for everybody o 3. Incentives Matter; Choice is influenced in a predictable way by changing incentives Ex: As price goes up, producers are willing to make more, but customers are less willing to buy o 4. Individuals make decisions at the margin Marginal Benefits vs. marginal costs Perform a cost-benefit analysis (examples in notes) o 5. Information helps us make better choices, but it is costly to acquire We sometimes make decisions without perfect information The bigger the decision, the more information we are likely to acquire Buying a new pencil vs. buying a new car o 6. Beware of secondary effects Indirect impacts of an event or policy that may not be easily and/ or immediately observable Pitbull on the subway in a shoulder bag o 7. The value of a good or service is subjective Whoever owns an item creates the value for it Voluntary trade creates value o 8. The test of a theory is its ability to predict If real world events are consistent with a theory, then the theory is valid Positive vs. Normative Economics o Positive: The scientific study of what is; testable “It’s 45 degrees outside” o Normative: Judgments about what people think “ought to be”; not testable “It’s too cold outside” 4 Pitfalls to Avoid in Economic Thinking o 1. Violation of the ceteris paribus principle Ceteris Paribus: All other things constant Ex: “If the price of eggs goes up, people will buy less… ceteris paribus.” NOT during Easter o 2. Good intentions do not guarantee desirable outcomes Ex: suicide warnings on antidepressant medicine o 3. Association is not causation Just because two things happen together does not mean one causes the other Often an unseen third variable o 4. Fallacy of composition False belief that what is true for one might be true for all If one person stands at a football game, they will see better; but if everyone stands, not everyone will see better Microeconomics vs. Macroeconomics o Micro: Focuses on how human behavior affects the conduct of affairs within individually defined units o Macro: Focuses on how human behavior affects outcomes in larger markets Chapter 2: Trade Creates Value (only with voluntary trade) o Ex: The Candy Trading Game o Both parties are better off when they engage in voluntary trade Creation of Wealth o If people become rich through voluntary exchange (creating something that everyone wants to buy), it makes everyone richer Don’t hate the rich. Private Property Rights o 1. The right to exclusive use of the property and the right to deny people from using it o 2. Legal protection against invasion from other individuals o 3. The right to sell, transfer, exchange or mortgage the property o Incentives of private property rights 1. Incentive to use resources in ways that are considered beneficial to others You will make more money by using your property for what the majority wants 2. Private owners have an incentive to care for and manage what they own People take better care of what they own than what they share with others 3. Private owners have an incentive to conserve for the future When you share, you want to use everything so the other person can’t. When it’s only yours, you will save it for when you really need it. 4. Private owners have an incentive to make sure their property does not damage other’s property They don’t want to be responsible for any damage. o Lack of property rights lack of economic progress Production Possibilities Curve (PPC) o Outlines all possible combinations of total output that could be produced within an economy The amount of productive resources must be fixed The amount of technical knowledge must be given to us The use of resources must be full and efficient o Efficient points: on the curve o Inefficient points: below the curve o Unobtainable points: above the curve *Graphs are in notes* o Factors that shift the PPC 1. A change in the economy’s resource base Changing how an economy invests (investing now is more efficient for the future) 2. Changes in technology Determines the amount of output we can generate with our limited resources 3. A change in the rules under which an economy functions Ex: Imposing trade barriers reduces economic growth and shifts the PPC inward 4. Changes in work habits Ex: Working harder shifts the curve out Law of Comparative Advantage o The total output of a group of individuals, an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost Ex: Bill Gates should not do his own dishes because he can hire someone to do it for much cheaper while he does something that makes him more money Economic Organization o Every economy asks: What will be produced? How will it be produced? For whom will it be produced? o Capitalism: A system of economic organization where productive resources are owned privately and the goods and resources are allocated through market process Market Organization: private parties make their own decisions and plans with the guidance of market prices Private individuals making decisions for themselves o Socialism: A system of economic organization where ownership and control of the means of production rest with the state/governor and resource allocation is determined by centralized planning Collective Decision Making: Relies on public sector decision making to resolve basic economic questions Economic Freedom o Economic Freedom of the World Scale Determines how free each country is based on how likely they are to make their own decisions Bluer countries are more free Redder countries are less free Shows a strong relationship between economic freedom and quality of life o Capitalism is similar to natural selection: when individuals make decisions for themselves regarding use of resources, they are more likely to make decisions that will create economic growth and keep customers happy in order to maximize their success More Freedom o Socialism: suffers from an information problem as in the government does not know everyone’s preferences at every point so it is hard for them to determine who will get the most benefit from resources Less Freedom Chapter 3: The Demand Curve and the Law of Demand o There is an inverse/ negative relationship between the price of a good and the quantity that buyers are willing to purchase Downward sloping curve Consumer Surplus o The difference between the maximum amount of money consumers would be willing to pay and the amount that they actually pay Area below the demand curve but above price (1/2bxh) There will never be negative consumer surplus Demand vs. Quantity Demand o Quantity demanded Changes move ALONG the curve (right/left) Buying a different quantity because the price changes o Demand Changes shift the WHOLE curve Caused by a change in anything that affects demand other than the price Ask yourself why you are buying more/less? Shifters of demand Change in consumer income o If you have more money, you will buy more normal goods (goods you tend to like) and less inferior goods(goods you only buy because they are cheap and you are poor). Change in number of consumers o When there are more people, demand is higher Change in the price of a related good o When the price of a substitute increases, demand of the actual good increases (Chicken vs. beef) o When the price of a compliment good goes up, demand goes down (cereal and milk) Change in expectations o If the future price is expected to increase, current demand increases and also the opposite Expected change in income o If you expect your future income to increase, your current demand will increase because you know you’ll be able to pay it off Change in consumer tastes and preferences (popularity) o When a media star is popular, the demand for their tickets and merchandise increases The Supply Curve and the Law of Supply o There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce If the price goes up, sellers are willing to sell more (quantity supplied increases) Upward sloping curve Producer Surplus o The difference between the minimum price suppliers are willing to accept and the price they actually receive o Producer surplus will never be lower than zero o Area above the supply curve but below price (1/2b x h) Supply vs. Quantity Supplied o Quantity Supplied Changes move ALONG the curve Caused by a change in the price of the good o Supply Changes SHIFT the whole curve Caused by a change in anything that affects supply other than the price of the good Shifters of supply 1. A change in resource price o If the price of a resource increases, supply decreases 2. A change in technology o If technology increases, supply/production increases 3. A change in nature and politics o Depends on what the change is Bad weather decreases supply Good weather increases supply 4. A change in taxes o As taxes increase, supply decreases Elasticity o Inelastic: Changes in quantity are not sensitive to changes in price Steep curve If price changes, quantity of demand does not change Perfectly inelastic: you buy the same amount of the item no matter how much the price changes Vertical line o Elastic: changes in quantity are sensitive to changes in price Flatter curve If the price changes, the quantity of demand changes more drastically Perfectly elastic: If the price goes up at all, you will buy none; if the price goes down at all, you will buy an infinite amount Horizontal line Market Equilibrium o When the conflicting forces of supply and demand are in balance Where the demand curve and supply curve intersect o Economically efficient because there is no excess demand or supply Excess supply: Quantity supplied > quantity demanded Excess demand: Quantity demanded> Quantity supplied Move the price to eventually reach equilibrium Changes in Demand: o Demand increases when price increases o Demand increases when quantity increases Changes in Supply o Supply increases when price decreases o Supply increases when quantity increases Changes in Both Demand and Supply o 1. Take it one statement at a time A. Does it affect demand or supply? B. Is demand/ supply increasing or decreasing C. Does it affect price nd quantity? o 2. Repeat steps A-C for the 2 statement o 3. Add effects together o *Apply the rules from supply/ demand individually in order to solve the statements Invisible Hand Principle o The tendency for people, while pursuing their own interests, to promote the economic well-being of society Ex: Waitresses Chapter 6: Role of Government o 1. Protect individuals and their property rights o 2. Provide goods that cannot be easily provided by the market Debate among economists regarding this role because, just because the government gets involved, does not mean things will get better When the government takes over, it can lead to a government failure. Size and Growth of the U.S. Government o Indicated by government expenditures as a percentage of U.S. GDP Has been steadily increasing o Where is the government spending our money? Federal Spending Medicare and Health Social Security National Defense State and Local Spending Education Public Welfare and Health Administrative Expenses Transfer Payments: Transfers of income from some individuals to others Giving money to another group of people just because they are in that group o Ex: Taking money from young people and giving it to older people About 50% of total government spending Economics of Voting o 1. Rational Ignorance Effect: a rational individual can have little or no incentive to acquire the information needed to cast an informed vote For most people, the marginal cost of voting outweighs the marginal benefit of voting o 2. Median Voter Theory: The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates and the preference of the median voter will be represented Politicians want to be closer to the middle of conservative and liberal to maximize voters o When the Political Process Works When voters pay in proportion to the benefits they receive from a particular policy, productive projects will be passed and unproductive projects will not be passed When benefits outweigh the costs for most, the plan will be passed o When the Political Process Does Not Work Special Interest Effect Special Interest Groups forming to lobby the government for benefits Benefits a small group with minimal costs to a larger group Logrolling o Politicians trading votes in order to get their legislation passed (Offering to vote for someone else’s policy in order for them to vote for yours) Pork-Barrel Legislation o State representatives adding their own stipulations to national bills that will benefit them locally through the finances of the federal government The president can not take out their additions without vetoing the whole bill that he initially proposed Shortsightedness Effect Politicians favor policies that generate immediate benefits with long-term and not immediate costs Everyone keeps letting the next guy worry about debt Rent Seeking Individuals and groups spend their time lobbying and trying to gain political favors instead of bettering their production methods or working on their job. Lack of Profit Move Unlike private firms, the public sector/ government lacks the incentive to produce efficiently o Private firms see their benefits and personally get hurt if they act inefficiently o The government could loose funding if they act efficiently or gain funding if they say they can not work with what they have (acting inefficiently) Good Luck!
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