Economics Study Guide - Exam on 10/2/15
Economics Study Guide - Exam on 10/2/15 ECO 108
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Date Created: 09/30/15
Eco 108 Study Guide Midterm Friday October 2 2015 at 2 pm DAY ONE The essence of economics exchange happens in markets This can be informal like drugs or shopping Remember markets don t equal capitalism People respond to incentives Pro t opportunities motivate effort Is profit always good We do things to improve our own condition If whatever we do hurts someone else on the way it s not profitable or sustainable Are these unintended consequences There are certain social outcomes that look like they re working but are they really Did people think through these behaviors For example improve working conditions of babysitters A hired babysitter in CA gets a break every 2 hours this is mandated We respond to incentives as an act of human nature in regards to the social system we re placed in We respond to all incentives in some way not just the monetary ones Is more effort put in for a bigger incentive Remember not everyone responds to incentives in the same way Even some monetary incentives don t work the way they are intended Sometimes a psychological incentive can come before monetary incentive Sometimes there are desires that consumers have that they don t even know that they have You can create other options that weren t there due to pro t opportunity spawn innovation Are there consumer desires that aren t as useful Is there are a guarantee that desires are the right ones to have For example croc rubber decorations that rubber would be better spent on prosthetics DAY TWO There are a lot of misunderstood concepts People aren t really understanding of role incentives play There are 10 key words to know At what cost Compared to what How do you know DAY THREE We will never run out of a resource that s non renewable At least we haven t yet we ve already run out of some renewable sources Think about this In the 19th century the price of wood was very expensive Then coal became the main source of energy then it became harder to find Natural gas became the next option to replace coal Subsidizing programs is a bad idea any effort towards the programs may not work because the outcome may not even be achieved at any point According to estimations we should have run out of oil in about 2002 but now this is untrue clearly Also our behavior changes when actionseventsproblems become to hard for us How could this behavior change Think about this who matters and how the incentive changes You always want bad competitors unless you are a consumer Consumers react the same way to high price incentive They could easily switch to a different product or change actions Let s go back to the resource work Scientistic behavior It s sometimes dangerous to analyze how people behave in the societal behaviors Complex Policy Issue There are more or less smart ways to perceive an issue People are STARVING but we have the ability to put a man on the moon It s not a problem of political will What is the Human Condition People respond to incentives to make them better off people act purposefully People ALWAYS have a goal whatever we do will be in pursuit of that goal How do we know that people have a goal What makes you realize they tend to act with a purpose and are forced to act with purpose Because of the driving principle SCARCITY Scarcity There is not enough stuff to go around not in terms of not being enough stuff Even if stuff is abundant there may not be enough to sustain To say that economics doesn t apply to this is a lie It s actually the study of scarcity DAY FOUR Scarcity is THE human condition It doesn t mean it s not abundant there are just more claims to resources than there are resources If you ve never had a hard choice it means there s no need to describe dif culties How dramatic is an event if you know what s going to happen There is a struggle with scarcity Also poverty does not need an explanation If you don t need to explain the human condition you don t need to explain anything The question is how any of us are moderately successful If there is anything economists have done it s that they can articulate the way we make choices based on the scarcity in society Economizing behavior the concept of being rational and doing things that bene t yourself or others We choose the option that leaves us better off Even though there are some things that are good for some and bad for others It makes values and costs subjective Culture and Social norms cause different behaviors causes changes in economic behaviors Ethical norms matter Our behaviors signal something about ourselves We can be benign Economic theory at heart is human theory Economics is the study of the allocation of scarce resources to competing uses by economics uses There are consequences of choices They need to be focused on not just through the actions and immediate happenings Humans act in a world where they make choices for things that they want even if that can t receive Economics is not just the study of prudence but also the study of temperance What is greed We weren t greedy before the nancial crisis IS A LIE It s always been around and probably won t go away any time soon If greedy behavior isn t necessarily bad behavior then there is some bene t to the world Micro v Macro This helps to appreciate economics for what it really is The classic textbook will tell you Small things are studied with micro larger with macro BUT this could be the wrong de nition They re actually uniquely related inseparable They are considered individual orders gt social orders This means that there are consequences based on choices made No one determines inequality unplanned results based on decision of those in the marketplace You always want to try to make yourself better off Raising income taxes will raise or lower your incentive to work that s microeconomics You can t just point to good or bad behaviors Focus on incentives DAY FIVE People worry that when immigrants come to the US that they ll steal their jobs There are economics bene ts for America that are positive A LOT of them High school dropouts have the biggest struggle nding jobs in the workforce Over the last 50 years there seems to be a prevalence of obesity in the US Think of your role as an individual in this world You re making the decision to engage in unhealthy or healthy habits You should compare the bene ts to the costs and how they ve changed over time Bene ts it s gotten cheaper the share of people s income spent on food is less easiermore ef cient to get than actually making food branding means you know what you re going to get Costs medical care from 1950 to today is much more eXpensive tons of problems relating to obesity Could we put in place an obesity taX This could cause BMI to go up an not work at all What makes a doctor a trusty one You don t dismiss medicine but there is no de nition of the perfect body We must know what a well functioning market looks like Not advocating that a market is going to work well What is order You know something is orderly when it s not talked about Something is out of order when it s talked about or unusual There are 3 things to keep in mind when studying Economics It s important to know various facts Basic appreciation is always good Appreciation for the numbers understanding of what the economy is like You should develop a wonder for economic issues You have to understand certain concepts DAY SIX Which country has eXperienced the largest amount of economic growth China But how fast Think about the Endangered Species Act in 1970 Just having the act doesn t mean it s successful The act itself has actually caused some species to go extinct If a creature that s endangered ends up on your property you re supposed to stop any activity Due to providing incentives that are incompatible with society s incentives Free Healthcare We are entitled to incentives involved with the concept If you want to give something for free something free has to be provided Important Facts How can you know if you should increase a budget if you don t know the entire facts of the original budget Focus on eXpected costs and bene ts What would taking away giving more money do for us 19 of the population make the minimum wage or less Even if you doubletriple the wage there s still 4045 of the group that s still in poverty 1110 people earn minimum wage or less The typical pro t margin is said to be 36 but is actually only 67 and that s biased up Walmart s pro t margin is only 1 or so Economic systems are complex Tim Horton s Coffee Story DAY SEVEN You re relation to society is different from your relationship with others like family Impersonality is very important All of economics is one big problem Spontaneous Order There are 2 lessons to know i the Invisible Hand not saying it s inherently good it is possible to collaborate without being force to do so ii Knowledge solved through the production and dissemination of knowledge how you solve the scarcity issue dispersed tacit you might not even realize the knowledge that you have until it s called upon The PRICE SYSTEM Incentive to act on someone else s interest Most of the problems in history are economic problems Nothing about spontaneous order that guarantees positive outcomes Our Economic Evolution from the Stone Age to the Information Age Path of economic change through history followed a predetermined physical law Are you better off today than you were 10 years ago To ask the question is impressive enough To eXpect improvement is astounding What events gave rise to our modern world We live in a world of staggering INEQUALITY The USA produces over 50 times the poorest countries and 15 times more than the typical poor country Today s world is characterized by SUSTAINED GROWTH Prior to 1750 living standards were Roughly equal across countries Roughly unchanging over time DAY EIGHT What is GDP A way to measure the outsourced productive potential of an economy Gross Domestic Product What are we missing What aren t we missing The concert in economics is human wellbeing The black market This is obviously not included in GDP They don t do business above ground so is the nation s GDP actually greaterlower When you work for yourself it s technically not a trade in the market GDP doesn t include human satisfaction Most of the stuff we care about isn t included in GDP Living in a dynamic age with new things these are also not included Once it s included it s far beyond what the cost might be The number is honestly meaningless to begin with It s not picking up descriptors of environmental progress It s not guilty to capture the important things Growth is all that matters It s a bad idea to care about economic growth because GDP is a awed concept It s a bad idea to compare economic growth because it will be limited 50 of what China is making is mediate output because it ends up being parts to a product in the US In the beginning We were all miserably poor The Stone Age was approximately 500000 years ago Man like creatures appeared to master weaponry hunting cooking ornamentation For over 490000 years no advance AT ALL The same tools we found from 500000 BC are found until the last ice age The average income seems to double every 1520 years after a revolution In the last 200 years we ve seen an increase in per capita income by a factor of 40 It took millions of years to see it not change The typical person earns over 10000 a year DAY NINE In the beginning We were all miserably poor Income was less than a dollar per day Earning grew slowly up until the dawn of the Industrial Revolution We re able to produce a lot more stuff today than in the past We re not just getting rich we re getting ridiculously rich and this is true of any societal group So when will the next revolution be Mass production of labor allows for the fastest way to make money What could possibly make you work faster to produce more Most of what we rely on is also human related Labor v Machines 30 of what we make comes from factories or machines The next revolution should happen in about 2040 World growth should accelerate to the next generation By 2045 the world per capita income will increase by 14 EXTENSIVE GROWTH To the extent that we as a population increase output because we re doing stuff not increasing work INTENSIVE GROWTH The growth that we are getting today Not by the increase in people But that we are able to produce more each year and be more productive People worry about the population but there are few that live in worse or equal society as our ancestors We have the ability to live comfortably We have years of life clean water clean air ways to communicate etc The UN estimates of population say that there will be a peak somewhere between 9 and 11 billion No runaway population growth There are vast amounts of inequality within economic growth DAY TEN An important part of economics is that there are economic systems that punish the bad people Take a look inside systems to find out if systems do help those around us Can costs go up with no feedback meaning that there s no question Think about a new product It can cost billions to invent but after invention only costs about a penny to make After it s discovered it loses value or becomes costless The only way to make pro t is to sell for more than the product took to make Takeaway A lot of economics is going to look like this Poverty is not the same as inequality Since 1970 The wage gap between the poorest and the richest has decreased There has been an 80 reduction in extreme poverty in 40 years The rates are dropping so greatly that the lines b come almost negligible The share of people living in absolute poverty is below 8 of the world population Is there hallowing out Are wellpaying middleincome jobs disappearing Everywhere in the population is richer today than they were in years past So yes the middleclass is being hallowed out The people getting rich the fastest are the global middleclass The American Poor The American lowest 20 stands at the 85th percentile of the globe Income Inequality or Poverty The average South Korean lives 26 years longer and earns 15 times as much income as they did only 50 years ago The average Mexican lives longer than the average English did 50 years ago Infant mortality in Nepal is lower than it was in in Italy 50 years ago So what is the right kind of inequality to focus on Functional inequality Height and Health Cross country v within country Intelligence Maybe Entrepreneurial risk taking Remember the terms of EXTENSIVE v INTENSIVE GROWTH The experience of poor peasants Inadequate sanitation and water Inadequate fuel sources Inadequate housing DAY ELEVEN The Experience of Early Urbanities 18201900 Disease Medicine Refrigeration Cleanliness of Clothes Cleanliness of Bodies Filthy Streets Just think about the products that we take for granted Every piece of data is an understatement of how good things have gone Your productivity wherever you may be skyrockets before you notice a wage increase You won t notice it right away can take 4080 years to see the increase What did the world look like in the early 1900s There were constant threats No known treatments or cures The most infection diseases happen today from ies Every year that we are alive the average life expectancy increase by one thirdone half A child born today has a 30 chance of living to the age of 100 A current 80 year old has a 77 of living to the age of 100 In 1910 you could have had 67 chronic conditions by the time you were 65 Americans today spend less time dying than they did 100 years ago What about Cancer There has been a slow and steady decline The probability of getting cancer is greater at older ages then when you are young Cancer is less of a threat today than it was in the past According to Murphy and Topel The value of health improvements are worth approximately 60 of GDP per year from mortality declines alone approximately 10 trillion per year American Living Standards over the past 100 years Labor Market Workweek Vacation Household Labor Commutes Retirements Women s issues Household Amenities 3 of homes had electricity now 99 have it Health Death rate now is less than a third of what it used to be Top things that kill us now are actually less deathly than what was killing us years ago Human Capital We are better educated today than we were 100 years ago Think about what you were learning then compared to now 7 of Americans completed high school in 1800 now over 80 Income DAY TWELVE Each person in American productively earns 100000 a year but doesn t earn that income The 1950s Middle Class in Today s Terms JK Galbreath s Af uence Society We would by all accounts be considered miserably poor Today s Poor in Today s Terms 99 have electricity running water ush toilets fridge 95 have a TV 90 have a phone 71 have a car 70 have AC How Rich is Rich We re so rich that we regularly have to rede ne what it means to be poor It is a tautology that 50 of American families have income below the median We change the measure of poverty from an absolute one to a relative one The Census Reports The current poverty thresholds do not adjust for nding levels and standards of living that have occurred since 1965 The of cial thresholds were approximately equal to half of median income in 19631964 People have seen their basic needs increase Material standards have improved We don t de ne poverty by material standards Prosperity How much effort do I have to exert to get the things that I want How much effort do I have to put in to get the result that I want Less effort to get the same result use that option because you re more prosperous Has productivity increaseddecreased based on goods Things are about 25 ties easier to achieve today than they were 50 years ago When is a spoon NOT a spoon You re not really buying a spoon you re buying a physical good that completes a service ie delivering food to your mouth You have to separate the physical good with the ultimate economic usevalue Is a home today the same as a home in 1800 Even if income didn t change the poorest American in 1900 would be better off because of income being worth more today than it was worth back then If you re only spending 13 of your budget on food and food became less available you wouldn t be that affected because there s so much room in your budged today If prices increase we can still manage to afford our needs Because we are spending so little on necessities we have room to make other improvements on our being Health care education etc Why are spending so much on health care Because we can 174 of GDP is spent on healthcare Only 10 of that comes out of our pockets What else do we get Ability to pay taxes and purchase public goods Typical person today pays more in taxes than on food shelter etc DAY THIRTEEN They typical budget for an American budget changes over time Necessities are super inexpensive The richer you get the less you spend on necessities The major goods in our budget right now are education healthcare and environment We had no national defense system 150 years ago In 1900 47 billion dollars was spent on the Department of Defense In 2014 8155 billion was spend on the Department of Defense Remember Scarcity is the focus of Economics Income seriously understates the extent and magnitude of economic growth Commodities themselves do not matter but rather the services provided by consumption Real economic growth is estimated by up to 14 per year Is health care a good deal today Are today s goods and services a good deal Ask would you buy 1970s products at 1970s prices with 1970s prices with 1970 s income What about today s income Product Proliferation It is a mere luxury anymore Money can t buy you happiness but it can buy the goods and services you need to be happy In 1930 what percentage didn t have health insurance 100 did not have health insurance no systematic health policies Today 16 of people in the US do not have health insurance but this is a national crisis More people have a mobile phone than the number of people who have toilets When you have a phone you reduce the cost of information Users can get information a lot quicker than expected Income and Poverty 19672014 1967 one in 25 families earned 100K in today s dollars 2014 247 of families earned 100k up over 4 over 2008 1967 9 families earned 75k in today s dollars 2014 362 of families earned 75k up almost 5 over 2008 1967 163 of families earned less than 15000 and 277 earned less than 25000 2014 126 of families earned less than 15000 and 236 earned less than 25000 Individual wage data since 1980 for nonsupervisory production workers suggest stagnation Income and Mobility Level of income is different than the change in income What has happened to economic mobility over time One in 5 workers become rich 21 of workingage adults reach richness for at least one year by the time they reach 60 Has poverty fallen in last half century Some studies and some popular assert that antipoverty measures have been ineffective Meyer and Sullivan nd that it matters whether you look at income measures of poverty v consumption measures The real poverty rate fell by 264 percentage POINTS since 1960 85 percentage points of this fall have occurred since 1980 Risk Compare tripling of wheat prices in 1800 to tripling of wheat prices today starvation versus fewer iPod downloads Global annual death rate from weather related natural disasters declined by NINETY NINE percent since 1920 242 per million killed in 1920s now only 3 per million Workplace 100 years ago over 61 deaths per 100000 workers today less that 4 100k Murder rate has gone down Potentially liVing in the most peaceful time period in history more or less People receiVing the death penalty has gone down A LOT Other Trends Computing efficiency The less known application of Moore s Law Koomey s Law The ef ciency of computing has imposed by a factor of 40000 since 1985 physics suggest another 2 million times is possible
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