ECO 2013, Exam 1 Study Guide
ECO 2013, Exam 1 Study Guide ECO2013
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This 16 page Study Guide was uploaded by Valerie Aranya on Monday February 15, 2016. The Study Guide belongs to ECO2013 at Florida State University taught by Joab Corey in Winter 2016. Since its upload, it has received 113 views. For similar materials see macroeconomics in Economcs at Florida State University.
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Date Created: 02/15/16
ECO 2013 Exam 1 Study Guide Macroeconomics CHAPTER 1 1. Economics definition: the study of how we make choices under scarcity. 2. Choice the act of selecting among alternatives. 3. Scarcity the concept that there is less of a good freely available from nature than people would like (ex: time, money, textbooks) Because we have scarcity, we have to make choices and know how to get the most out of our lives. Scarcity is NOT poverty. Poverty is subjective. Scarcity necessitates rationing (allocating scarce goods to those who want them) Price is used to ration goods. (encourages people to work) Scarcity leads to competitive behavior (people compete over scarce resources.) 4. Resources= an input used to produce an economic good Human Resources (Human Capital) writers’ creativity, athletes’ speed, Einstein’s intelligence etc. Physical Resources (Physical Capital) any tool, machine hand made to produce something. Natural Resources gold, natural gas. 5. 8 Guideposts to economic thinking: (1) No solutions only trade-offs. No such thing as free lunch (it doesn’t mean it’s free to the world) opportunity cost: highest valued alternative that must be sacrificed when choosing an option. (ex: Guns n butter) (2) Individuals are rational; they try to get the most from their limited resources. “greatest benefit at least possible cost” (ex: chick-fil-A vs. Subway, welfare vs. education) Note that what is rational for one person may not be rational for everyone. Incentives matter; choice is influenced in a predictable way by changing incentives. (ex: lessons from father, prices) Individuals make decisions at the margin. Marginal: describes the effect of a change in the current situation. Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs. Information helps us make better choices, but it is costly. (ex: new house vs. new notebook) Beware of the secondary effects; economic actions generate both direct and indirect effects. Secondary effects: the indirect impact of an event or policy that may not be easily and immediately observable. (ex: fuel efficiency regulations, trade restrictions) The value of a good or service is subjective because goods are subjective, voluntary trade creates value. ** moving goods and services to those who value them most is a primary source of economic progress. ** The test of a theory is its ability to predict (if real world events are consistent with a theory, then that theory is valid.) 6.Positive vs. Normative Economics Positive economics: the scientific study of what is (testable) Normative economics: judgments about what people think “ought to be” (not testable) 7. 4 Pitfalls to avoid in economic thinking 2 Violation of ceteris paribus (other things constant) principle. If you violate this principle and don’t control other factors, it wont be a good study. (ex: if the price of eggs increases, people will buy fewer eggs ceteris paribus) Good intentions do not guarantee desirable outcomes (ex: suicide warnings on antidepressant medication. If you’re depressed and see the warning you don’t want to buy it, instead it should have said something like ‘caution, see your doctor before taking it’) Association is not causation (ex: ice cream sales and homicides?!) The fallacy of composition: belief that what is true for one might not be true for all. (ex: when you get a raise vs. when everyone gets a raise) CHAPTER 2 8.How trade creates value Because the value of goods is subjective, voluntary trade creates value. When individuals engage in voluntary exchange, both parties are made better off. Channeling goods and resources to those who value them most is the primary way the society increases wealth. 9.Private property rights The right to exclusive use of property Legal protection against invasion from other individuals The right to sell, transfer, exchange, or mortgage the property 3 10. 4 Incentives of property rights 1. Incentive to use resources in ways that are considered beneficial to others. (you have an empty land in middle of the campus and everyone needs parking spots so you turn it to a parking garage) Ex: south park: Cartmen’s amusement park (has to let people in to make money and to run the park) Ex: reselling textbook (instead of burning them) 2. Private owners have an alternative to care for and manage what they own Communal refrigerator vs. your own 3. Private owners have an incentive to conserve for the future. Ex: Tragedy of the commons (if you let a fish go to grow, someone else is going to catch it) Ex: endangered species 1979-1989 1989-1995 Zimbabwe 50,00094,000 15% increase Kenya 65,00019,000 20% decrease ** caused by private property rights** 4. Private owners have an incentive to make sure their property does not damage your property. Ex: being careful cutting down the trees, cautious mean old lady who didn’t let the kids get their ball back because she didn’t want to take the risk if they got hurt. ** lack of property rights= lack of economic progress** 4 11. Production Possibilities Curve (PPC) Outlines all possible combinations of total output that could be produced, assuming a; 1. Fixed amount of productive resources 2. Given amount of technical knowledge 3. Full and efficient use of resources Efficient points: points that are on the line Inefficient points: points that are inside the graph Unattainable points: points that are outside the graph 12. 4 factors that shift the PPC 1. A change in the economy’s resource base Investment: purchase, construction, or development of resources. However, it requires us to give up consumption goods 2. Changes in technology Technology: the knowledge available in an economy at any given time. It determines the amount of output we can generate with our limited resources. Ex: tanks and buses 3. A change in the rules under which the economy functions Ex: imposing trade barriers and eliminate the business franchise tax in West Virginia. 4. Changes in work habits Ex: working harder, putting in more effort can shift curve outward, less work can shift curve inward. 13. Law of Comparative Advantage Output of each good is produced by whoever has the lowest opportunity cost. 5 Ex: Bill Gates has more important things to do than washing the dishes as he earns thousands of $$ an hour) Absolute advantage = who can produce more Corn OC (opportunity cost) Cars OC U.S 50 1/5 car 10 5 corn Japan 20 1/4 car 5 4 corn ** U.S. produces corn, Japan produces cars = 4.5 corn for 1 car ** 14. 3 questions every economy faces: What will we make/produce? How will we make it? Who will buy it? 15. Capitalism vs. Socialism Capitalism: A system of economic organization where: Productive resources are owned privately Goods and resources are allocated through market prices Market organization: a method of organization where: Ownership and control of the means of production rest with the state Resource allocation is determined by centralized planning 6 1 North Korea U.S Hong Kong 10 socialism capitalism Socialism: A system of economic organization where: ownership and control of the means of production rest with the state resource allocation is determined by centralized planning Collective decision making: the method of organization that relies on public sector decision making to resolve basic economic questions. Means of production Resource allocation Capitalism Private individuals market prices Socialism state (government) central planning 16. Why Capitalism tends to work and Socialism does not: Capitalism is similar to natural selection. It uses the idea of market efficiency (getting the most out of our scarce resources) more income and equality. Socialism suffers from an information problem (it’s harder to make decisions for others) 7 CHAPTER 3 17. The 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. Ex: deriving the demand curve ** As price increases, quantity demanded decreases** Consumer surplus The difference between the max amount consumers would be willing to pay and the amount that they actually pay. It is the area below the demand curve but above the price. There is no such thing as negative surplus We as consumers don’t like paying more when the prices go higher consumer surplus decreases (area of the triangle on the graph gets smaller) Ex: (iclicker question): the most Stewie Griffen is willing to pay for a sonic death ray is $500, while his evil half brother Bertram is willing to pay as much as $400 for one. They both find sonic death rays on sale for $350. What is their combined consumer surplus? Stewie: CS $150 Bertram: CS $50 TOTAL: CS $200 18. !!!!DEMAND VS. QUANTITY DEMANDED!!! Change in quantity demanded: A movement along the curve. We’re changing the amount of goods we’re going to buy because the price changes. 8 Increase in quantity demanded: movement down the curve (to the right) Decrease in quantity demanded: movement up the curve (to the left) Change in demand: a shift of the curve. Caused by a change in anything that affects demand and your desire other than the price of the good itself. Increase in demand: curve shifts right Decrease in demand: curve shifts left Ex: (iclicker question): which of the following would result from a decrease in the price of a good? INCREASE IN QUANTITY DEMANDED 19. Shifters of Demand 1. Change in consumer income Even if the price a good doesn’t changes, your desire will change as your income changes. Ex: normal goods (foods you like to eat that are expensive to you) when your income goes up, your demand of normal goods also goes up. Ex: inferior goods (we don’t like so much but we buy it because they’re cheap and we’re poor) when your income goes up, your demand of inferior goods will go down. ** know the difference between normal (ex: shrimp, steak, sushi) stand inferior (ex: ramen noodles, bologna, cheap shit) goods** 2. Change in number of consumers More consumers = more demand Less consumers = less demand 3. Change in the price of a related good 9 Ex: substitutes if the price of a substitute goes up, the demand for the other good goes up. (beef prices go up, you buy less beef and demand more chicken) Ex: compliments if the price of a compliment goes up, the demand to the good goes down. (peanut butter and jelly considered compliments. If the price of peanut butter goes up, you won’t buy it. And because you only eat jelly with pb, your demand for jelly goes down.) – beer and fishing in WV lol 4. Change in expectations Expected change in price: if we expect the future price to increase, we’re going to buy more now, current demand goes up. If you’re expecting a future sale, you’re not going to buy right now, you will wait = current demand goes down Expected change in income: if you expect your future income to increase, your current demand will also increase. (millions of $$ on its way but you’re not going to wait for two weeks, you will start spending now.) 5. Change in consumer tastes/preferences Something becomes more popular, your demand tends to go up. 20. The supply curve Law of supply: there is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce. **as price increases, quantity supplied increases** 10 Producer surplus The difference between the minimum price suppliers are willing to accept and the price they actually receive. It is the area above the supply curve, below the price Know what happens if the price falls or rises. (change in the area of the graph) 21. SUPPLY VS. QUANTITY DEMANDED Change in quantity supplies: movement along the curve Caused by a change in the price of that good Different point with same relationship (same line) Increase in quantity supplied movement up the curve (to the right) Decrease in quantity supplied movement down the curve (to the left) Change in supply: a shift of the curve Caused by a change in anything that affects supply other than the price of the good Different point with different relationship (line changes) Increase in supply: curve shifts right Decrease in supply: curve shifts left 22. Shifters of Supply 1. Change in resource price If the price of an ingredient changes that’s when it shifts the curve (tires to make cars) If the ingredients cost a lot to make, we produce less (Price of the ingredient increases, Supply decreases) 2. Change in technology Technology helps us produce more (more technology higher supply) 11 3. Change in nature/politics Depends on what these changes are (Bad weather vs. good weather for natural products) 4. Change in taxes Taxes go up (takes your money) supply goes down (you would probably want to do less of that thing) Taxes down supply up (want to do more of that) 23. Elasticity Inelastic: changes in quantity are not very sensitive to changes in price (inelastic curves are steeper) You’re going to buy the same amount no matter how much it costs. Elastic: changes in quantity are sensitive to changes in price (elastic curves tend to be flatter) You buy a lot more or a lot less (big change) even though the price changed very slightly. 24. Market Equilibrium A state in which the conflicting forces (supply and demand) are in balance (reach the perfect harmony) Occurs where the demand curve intersects the supply curve The amount of people who are willing to produce is the same as the amount of people who want to buy. It is all about economic efficiency we need to get most out of what we have No transactions if the cost to sellers (supply) is larger than the benefits to buyers (demand) Excess supply: quantity supplied is greater than quantity demanded they will decrease the prices 12 Excess demand: quantity demanded is greater than quantity supplied they will increase the prices 25. Invisible Hand Principle Pencil making process example. Thousands of people from all around the world come and cooperate together to get one pencil to you as cheaply as possible but they don’t care about you. People only who care about themselves will do a better job in doing what is the best interest for other people. (ex: You do a great job as a waiter not because you care about the customers, but because you think about the tips) It is accomplished through prices. CHAPTER 6 26. Role for the Government Primary role: protect individuals and their property rights. Provide goods that overcome the market value Market Government (market failure) (Government failure) Size of the government %of GDP (Gov. spending) Where is the gov. spending most of the $$? Federal spending 1. Medicare &health ($857.51 billion) 2. social security 3. national defense 13 State & local spending 1. Education ($859 billion) 27% 2. public welfare & health 3. administrative expenses 27. Transfer Payments The government takes $$ from one group of people and gives it to another group of people. (giving money to the police not transfer, it is service money) Ex: welfare (taking from higher income, giving it to lower) Transfer payments are nearly half of the total government spending 28. Rational Ignorance Effect a rational individual can have little or no incentive to acquire the information needed to cast an informed vote. Marginal benefit of voting= the chance that your vote was the deciding vote multiplied by how much you care that a certain candidate wins. Marginal cost of voting= the cost of informing yourself (information is costly), registering to vote, and actually voting. (that’s why ½ of the population chose not to vote.) 29. Median Voter Theory 14 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 preferences of the median voter will be represented. 30. When the political process works… when voters pay in proportion to the benefits they receive, then productive projects will be passed and unproductive projects will not. User charges: requires people who use a service more to pay a larger share of the cost. (ex: gas tax for road repair) 31. When the political process does NOT work… Special Interest Effect: an issue that generates substantial benefits for a small group by generating minimal costs to a larger group. all the benefits and money the government is handing out goes to a small group of people who lobby to obtain more government money. The government takes the money as tax from other people (make me rich tax) this is done through: Logrolling: the practice of trading votes by a politician to get the necessary support to pass desired legislation. Ex: Ohio 120M to build tanks Wa 3M fishermen subsidy Alaska 2.6M to build infrastructure 15 (they vote for each other) Pork-barrel legislation: a package of spending projects benefitting local areas financed through the fed. gov. Shortsightedness Effect: politicians will favor programs that give immediate benefits, even if long-term costs of the project outweigh the benefits. Rent seeking: actions taken by individuals and groups in order to use the political process to take the wealth of others. People spend more time trying to gain political favors and less time producing. (productive, unproductive, destructive entrepreneurship) Lack of profit motive: unlike private firms, the public sector lacks the incentive to produce efficiently. ---------------- THE END---------------- 16
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