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by: Elmore Funk


Elmore Funk
GPA 3.64
Joseph Calhoun

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Joseph Calhoun
Class Notes
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Popular in Macroeconomics

Popular in Economcs

This 28 page Class Notes was uploaded by Elmore Funk on Thursday September 17, 2015. The Class Notes belongs to ECO 2013 at Florida State University taught by Joseph Calhoun in Fall 2015. Since its upload, it has received 53 views. For similar materials see Macroeconomics in Economcs at Florida State University.




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Date Created: 09/17/15
ECO 2013 Principles of Macroeconomics Chapter 3 Supply Demand and the Market Process 7 Learning Goals 1 Investigate and describe consumer behavior Chapter heading Consumer Choice and the Law of Demand Skip 2 sections Consumer Surplus Responsiveness of Quantity Demanded to Price Changes Elastic and Inelastic Demand Curves Key terms Law of demand v 1 When the price of a good increases why do you usually buy less of it 2 Distinguish a change in demand from a change in quantity demanded Chapter heading Changes in Demand Versus Changes in Quantity Demanded Key term C 1 r What is the difference between demand and quantity J J 7 Draw two separate demand curves For one illustrate a change in demand For the other illustrate a change in quantity demanded Factors that cause a change in demand 9959 3 Investigate and describe rm behavior Chapter heading Producer Choice and the Law of Supply Skip 2 sections Producer Surplus Responsiveness of Quantity Supplied to Price Changes Elastic and Inelastic Supply Curves Key terms Opportunity cost of production Pro t Loss Law ofSupply What is the role of pro ts and losses in a market economy When the price of a good increases why is a rm usually willing to make more of it 4 Distinguish a change in supply from a change in quantity supplied Chapter heading Changes in Supply Versus Changes in Quantity Supplied What is the difference between supply and quantity supplied Draw two separate supply curves For one illustrate a change in supply For the other illustrate a change in quantity supplied Factors that cause a change in supply 1 2 3 4 5 Build a market model and illustrate how equilibrium is reached Chapter heading How Market Prices are Determined Supply and Demand Interact Key terms M arket Equilibrium Economz39c ef ciency Draw the market supply and demand model Identify three prices one that would produce a surplus one that would produce a shortage and one that would result in market equilibrium 6 Demonstrate how markets respond to changes in demand and supply Chapter heading How Markets Respond to Changes in Demand and Supply Draw the market supply and demand model Illustrate how each of the following changes would change equilibrium price and quantity 1 an increase in demand 2 a decrease in demand 3 an increase in supply 4 a decrease in supply Draw the market supply and demand model Illustrate how each of the following simultaneous changes would change equilibrium price and quantity 1 an increase in demand and an increase in supply 2 a decrease in demand and a decrease in supply 3 an increase in demand and a decrease in supply 4 a decrease in demand and an increase in supply 7 Recognize how prices and the invisible hand principle create market order Chapter heading How Markets Respond to Changes in Demand and Supply sections Invisible Hand Principle and Prices and Market Order Provide an example of the invisible hand working in a market Functions of market prices Koofers quotExam 1 for ECO 2013 w Calhoun Summarized Drew Loef er Adam Smith invisible hand the tendency of the competitive market process to direct selfinterested individuals into activities that enhance the economic welfare of society prrice rises quantity demand decreases All things constant increase in consumer income demand curve shifts to the right Increase in price of important resource used to produce a good decrease in supply Decrease in price supply increase Increase in price ofa good increase in quantity supplied ofa good Technological advance that lowers the cost ofproduction ofa good increase of supply Transaction costs reduce our ability to gain from potentially advantageous trades 3 decisions must be made by economies 1 What goods will be produces 2 How will goods be produced 3 For whom will goods be produced In order to prosper entrepreneurs must undertake projects that create wealth amp increase the value of resources If resources are used efficiently more of one good can be produced if less of another is being produced The 2 basic ingredients in any economic decision 1 Scarcity 2 Choice Association IS NOT causation Positive statements can be proved Normative statements cannot be proven Peoples marginal decisions They weigh additional costs amp benefits ofactivities before making a decision All you can eat buffet for 12 gt Iim ate 3 servings amp contemplated on a 4th He should only go for the 4th if his marginal benefit of the additional serving is greater than ZERO gt Susan eats four servings but leaves a half a 5th uneaten This is because her marginal value of food has fallen to zero Increase in the price ofa good AND an increase in the amount bought amp sold Increase in the demand for the good Demand increases ampsupply decreases 9 equilibrium price will RISE FALL or STAY THE SAME amp price will increase Increase in supply of a good reduces the price of the good AND increases the quantity sold A demand curve rightward shift with no change in supply but occur because of an increase in quantity supplied and price over a twoyear period As price increases quantity demanded decreases quantity supplied increases Macro chapter 1 study guide questions Multiple Choice Identiij the choice that best completes the statement or answers the question Equot E 5 V39 9 gt1 9 Which of the following is true a Scarcity and poverty are basically the same thing b Poverty implies that some basic level of need has not been attained c Scarcity is the result of prices being set too high d All of the above are true Economics is the study of how a individuals make choices because of scarcity b to succeed in business c to make money in the stock market d the morals and values of people are formed When an economist states a good is scarce she means that a production cannot expand the availability of the good b it is rare c desire for the good exceeds the amount that is freely available from nature d people would want to purchase more of the good at any price When economists say an individual displays economizing behavior they simply mean that the individual is a making a lot of money b purchasing only those products that are cheap and of low quality c learning how to run a business more effectively d making choices to gain the maximum bene t at the least possible cost quotThe national debt is too large The government must stop spending so much moneyquot This statement is a a normative statement b a positive statement c a testable hypothesis d both b and c Which of the following is a guidepost to economic thinking a The value of a good can be objectively measured b Individuals should never make a decision without having complete information c Incentives matter d Goods are scarce for the poor but not for the rich Competitive behavior a occurs as a reaction to scarcity b occurs only in a market system c occurs only when the government allocates goods and services d always generates waste In economics the statement quotThere is no such thing as a free lunch quot refers to which of the following a Individuals must always pay personally for the lunch they consume b Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers c Restaurant owners would never give away free lunches d All good theories are testable 1 gt0 0 Equot 5 U quotIf income were redistributed in favor of the poor we would eliminate scarcity The preceding statement is a essentially correct b incorrect because scarcity has already been eliminated among the poor in wealthy countries such as the United States c incorrect it fails to recognize that poverty will be present as long as resources are scarce d incorrect it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity Which of the following is not scarce a an individual s time b air c pencils d automobiles People make decisions at the margin Thus when deciding whether to purchase a second car they would compare a the total bene ts eXpected from two cars with the costs of the two cars b the additional bene ts eXpected from a second car with the total cost of the two cars c the dollar cost of the two cars with the potential income that the two cars will generate d the additional bene ts of the second car with the additional costs of the second car The basic difference between macroeconomics and microeconomics is that a macroeconomics looks at how people make choices and microeconomics looks at why they make those choices b macroeconomics is concerned with economic policy and microeconomics is concerned with economic theory c macroeconomics focuses on the aggregate economy and microeconomics focuses on small components of that economy d macroeconomics is associated with the fallacy of composition and microeconomics has little to do with the fallacy of composition The highest valued alternative that must be given up in order to choose an action is called its a opportunity cost b utility c scarcity d ceteris paribus Which of the following actions is consistent with the basic economic postulate the guidepost that incentives matter a Consumers buy fewer potatoes when the price of potatoes increases b A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the neXt election c Farmers produce less corn because corn prices have declined d All of the above If Susan bought nine gallons of gasoline at 150 per gallon the car wash cost 1 but if she bought 10 gallons of gasoline the car wash was free Given that Susan is going to get the car wash the marginal cost of the tenth gallon of gasoline is a zero b 50 c 100 d 150 16 20 2 Positive economics differs from normative economics in that a positive economics deals with how people react to changes in bene ts and normative economics deals with how people react to changes in costs b positive economic statements are testable and normative statements are not c positive economic statements tell us what we should be doing and normative economics tells us what we should have done d positive economic statements focus on the application of the theory and normative economic statements are theoretical Which of the following represents a normative statement a Incentives matter b The temperature in this room is 120 degrees c It is too hot in this room d People will buy less butter at 150 per pound than they will at 100 per pound The economic way of thinking stresses that a changes in personal costs and bene ts will exert a predictable in uence on the choices of human decision makers b only direct monetary costs matter in making decisions c if a good is provided free to an individual its production will not consume valuable scarce resources d secondary effects are not important to consider when making decisions Which of the following is a positive economic statement a The federal minimum wage should be raised to 650 per hour b The United States spends too much on national defense c Higher rates of investment lead to higher rates of economic growth d Economics is more interesting to study than history When economists use the term ceteris paribus they indicate a the causal relationship between two economic variables cannot be determined b the analysis is true for the individual but not for the economy as a whole c all other factors are assumed to be constant d their conclusions are based on normative economics rather than positive economic analysis In economics the bene t or satisfaction that an individual gets from an activity is called a scarcity b utility c opportunity cost d ceteris paribus Critical Thinking and Application 22 2 W 2 25 4 If economics is correct in its assumption that people are rational why then would anyone choose to smoke cigarettes A radio station gives quotfree moneyquot to those listeners whose names are drawn and announced over the airwaves from postcards the listeners sent into the radio station Is the money really free for the listener Why would a radio station give money to listeners Does this violate the economic way of thinking Joe observes that a car in 1925 sold for an average of 500 versus 20000 for a 2005 model He concludes that 2005 cars must be 40 times better than 1925 cars What s wrong with this way of thinking 2 6 27 2 2 NOW 30 3 Evaluate this statement quotPeople engaged in economizing behavior will always buy the lowest priced item they can ndquot Homeowners can deduct interest payments on their mortgages from their federal income taX If this deduction were removed how would the housing market be affected If people are selfinterested why does anyone give money to public radio When Mother Theresa won the Nobel Peace Prize the monetary award was well in excess of 100000 Did she accept the money If so what did she do with it Who is more likely to drive carelessly Sue in her 1980 Ford with bad brakes or Sally who has a 2005 BMW with all the most recent safety options A popular video program used to teach primary school children about economics de nes scarcity as quotwhen you don t have enough of something quot Evaluate this de nition based on your understanding of the scarcity concept Macro chapter 1 study guide questions Answer Section BACDACABDBDCADBBCACCB L234567890L234 567890L 111111111122 ECO 2013 Principles of Macroeconomics Chapter 2 Some Tools of the Economist 6 Learning Goals 1 Def39me and recognize examples of opportunity costs Chapter heading What Shall We Give Up Key term Opportunity cost LeBron James would have incurred a large opportunity cost from going to college What is your opportunity cost of going to college Can opportunity costs be objectively measured Why or Why not 2 Discern why voluntary trade creates value Chapter heading Trade Creates Value Key term T 39 costs What are the two important aspects of voluntary exchange 2 How do transactions costs decrease the bene ts of voluntary exchange 3 Realize why property rights are key to economic progress Chapter heading The Importance of Property Rights Key term Private property rights Property rights change behavior in four key ways 2 3 4 4 Illustrate the concepts of tradeoffs opportunity costs and growth Chapter heading Production Possibilities Curve Key terms Production P quot quot39 39 C urve r Entrepreneur Creative Destruction Draw a PPC with two goods you like to purchase on the axes Place point A at an inef cient point point B at an ef cient point and point C at an unattainable point Four factors that could potentially shift the PPC outward 1 2 3 4 5 Recognize that specialization and division of labor lead to higher output levels and living standards Chapter headings Trade Output and Living Standards Human Ingenuity and the Creation of Wealth Addendum Key term Law of comparative Macro Chapter 2 study guide questions Multiple Choice Identiij the choice that best completes the statement or answers the question Equot E 5 V39 The opportunity cost to the United States of placing a man on the moon was a the loss of government revenues that were allocated to the mission b the cost of all production involved in the space program c the loss of utility from the highest valued bundle of products that had to be forgone because ofthe moon mission d less than zero because the longrun bene t of the project will be greater than the cost When Benjamin Franklin wrote quotRemember that time is money quot he understood a the incentives created by property rights b the law of comparative advantage c the concept of opportunity cost d that watches cost money Which of the following best describes the implications of the law of comparative advantage If each person sells goods for which he or she has the greatest comparative advantage in production and buys those for which his or her comparative advantage is least the a total output available to each person can be expanded by specialization and exchange b total output will fall c buyers of goods will gain at the expense of sellers d sellers of goods will gain at the expense of buyers Keri decided to sleep in today rather than attend her 9 am economics class According to economic analysis her choice was a irrational because economic analysis suggests you should always attend classes that you have already paid for b irrational because oversleeping is not in Keri s selfinterest c rational if Keri has not missed any other classes d rational if Keri values sleep more highly than the bene t she expects to receive from attending the class Which of the following is not one of the basic economic questions that all economies must answer a What will be produced b To whom will the goods produced be allocated c How will goods be produced d Which government agency will set the prices of the goods produced The owners of private property will a use their property for sel sh ends taking no account of the impact their behavior has on others b use their property in ways that others value because the market will generally reward them with pro ts or a higher selling price if they do so c nd very little incentive to take care of the property or conserve it for the future d lose pro ts when they take the wishes of others into consideration gt1 9 0 Ken values his boat at 5000 and Monica values it at 8000 If Monica buys it from Ken for 7000 which of the following is true a Ken gains 2000 of value and Monica gains 1000 of value b Ken gains 7000 ofvalue and Monica loses 7000 ofvalue c Ken gains 7000 of value and Monica gains 3000 of value d Ken and Monica both gain 7000 of value When collective decision making the political process is used to resolve economic questions regarding the allocation of resources a decentralized decision making is present b central planning and political bargaining will replace market forces c individual preferences are of no importance d economic equality will result The law of comparative advantage suggests that a individuals states and nations can all bene t if they trade with others b free trade among nations is harmful to an economy c each economy should strive to be selfsuf cient d each country should attempt to produce roughly equal amounts of all goods When resources are being used wastefully or inefficiently the production possibilities curve shifts inward production possibilities curve shifts outward c economy is operating at a point inside its production possibilities constraint d economy is operating at a point outside its production possibilities constraint lt79 Which of the following is a transaction cost a price of a ticket to a concert b price of food eaten before a concert c time spent standing in line to buy the ticket d price of a Tshirt at the concert Private property rights eXist when property rights are a exclusively controlled by the owner or owners b transferable to others c protected by legal enforcement d all of the above When an economy is operating ef ciently the production of more of one good will result in the production of less of some other good because a consumers do not want more of both goods b resources are limited scarce and efficiency implies that all are already in use the production possibilities curve shifts inward as more of one good is produced technological improvement can only improve the production of a single good 9 Which of the following would allow the production possibilities curve for an economy to shift outward a a better social organization of economic activity such as conversion from socialism to capitalism an increase in the labor force or resource base more investment leading to better technology and more innovation all of the above 57 9 U39 0 gt1 Use the figure to answer the following question Figure 2 1 1 Good 2 B Good 1 In Figure 21 which shows the production possibilities curve a A is efficient b B is inefficient c C is unattainable d all of the above are true According to the law of comparative advantage a each producer should strive toward selfsufficiency in order to maximize the total production of the economy b each product should be produced by the lowest opportunity cost producer in order to maximize output c one should never compare one39s abilities with those of another d each product should be produced by the individual who can produce more of that product than any other individual I When individuals engage in a voluntary exchange both parties are made better off II By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society39s resources a lis true H is false b I is false H is true c Both 1 and H are true d Both 1 and H are false 20 The following questions relates to the material in the addendum to Chapter 2 Use the production possibilities data for Lebos and Slavia below to answer the questions Table 2 4 Refer to Table 24 Which of the following is correct a In Lebos the opportunity cost of producing one unit of food is equal to one unit of clothing b In Slavia the opportunity cost of producing one unit of food is equal to two units of clothing c The opportunity cost of producing food in Lebos is less than the opportunity cost of producing food in Slavia d All of the above are correct Refer to Table 24 Which of the following is con ect a Lebos has the comparative advantage in both goods b Slavia has the comparative advantage in food c Lebos has the comparative advantage in food d Lebos has the comparative advantage in clothing The process by which new products and methods of production are continuously replacing old ones is known as a opportunity cost b the production possibilities frontier c creative destruction d the fallacy of composition Critical Thinking and Application 21 22 23 A popular video program used to teach economics to primary school children de nes opportunity cost as quotwhat you give up to get somethingquot In light of your understanding of opportunity cost how would you modify this de nition An economics professor points to a student in the front row and announces that quotsitting in class is the thing you value most during this time periodquot Is the professor correct Why or why not The president of a large public university proclaims quotIf we can get the state government to fund our new football stadium it will not cost us anything quot Evaluate this view from an economic perspective 24 25 26 27 28 Mark and John are 10yearold twins who do not get along They have opened separate lemonade stands and are competing with each other selling lemonade on their block Their mother observes that Mark is very good at making lemonade and John is an excellent young salesman She suggests they both could make more money if they worked together John counters that two stands will always make more money than one Who is right Why A department store buys a wool coat for 120 and sets its retail price at 300 The coat costs 85 to produce When the coat doesn t sell the store marks the price down to 200 then 100 and nally 70 At 70 Amy buys the coat What was the coat s true value Why Jim values his car at 2000 and Kelly values it at 5000 Can value be created in this situation How Suppose Jim refuses to sell for less than 6000 Is value destroyed Why or why not Market economies are often criticized for how they answer the basic question quotFor whom are goods producedquot This criticism usually comes from people who believe that the distribution of income is not quotfairquot Is there some way to separate production from distribution so that we can leave production just as it is but make the distribution of income quotfairerquot It can be said that ultimately consumers are the driving force in answering the three basic economic questions Explain the consumer s role in providing these answers Macro Chapter 2 study guide questions Answer Section CCADDBABACCDBDDBCDCC L234567890L234 567890 11111111112 Macro Chapter 3 Study Guide Questions Multiple Choice Identiij the choice that best completes the statement or answers the question 1 Ifthe price of tickets to the World Series were set below the equilibrium price the quantity demanded would be smaller than the quantity supplied the demand for World Series tickets would be highly responsive to the price there would be no transactions between buyers and sellers of the tickets the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available 9979 Which of the following would cause the price of automobiles to rise a a decrease in the wages of autoworkers b a reduction in the price of bus travel c an increase in the price of gasoline d an increase in consumer income I The height of the demand curve for a commodity indicates the maximum amount the consumer would be willing to pay for each unit of the good 11 The height of the supply curve for a commodity indicates the minimum price the seller would accept for each unit of the good a I is true 11 is false b I is false 11 is true c Both I and H are false d Both I and II are true If the market price is above the equilibrium price there will be a tendency for price to decrease causing a the quantity demanded to decrease and the quantity supplied to increase until they are equa b the quantity demanded to increase and the quantity supplied to decrease until they are equa c both quantity demanded and quantity supplied to decrease until they are equal d both quantity demanded and quantity supplied to increase until they are equal According to the law of supply as the price of a good decreases a buyers will buy more of the good b sellers will produce more of the good c buyers will buy less ofthe good d sellers will produce less of the good If the demand for donuts increased what would be the effect on the equilibrium price and quantity of donuts a price increases quantity decreases b price decreases quantity decreases c price increases quantity increases d price decreases quantity increases gt1 12 quotFalling consumer income from the recent recession has hurt automakers in more ways than one Not only have sales of new cars fallen but car prices have fallen as well As a result the major automakers have announced cutbacks in production and layoffs of workersquot Which of the following places these statements in the proper economic terminology within the conteXt of the supply and demand model Note It may help to graph this rst a a decrease in demand and a decrease in supply b a decrease in demand and a decrease in quantity supplied c a decrease in quantity demanded and a decrease in quantity supplied d a decrease in quantity demanded and a decrease in supply Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly Economic theory would suggest that the observed data could best be explained as a an increase in supply while demand remained relatively constant b a decrease in both supply and demand c an increase in demand while supply remained relatively constant d a sharp increase in both supply and demand A decrease in the supply of a good will a decrease the demand for the good b cause the price ofthe good to fall c lead to an increase in the price of the good d increase the quantity of the good bought and sold Which of the following would most likely decrease the price of beef a lower prices of grains used to produce cattle fee b higher prices for chicken a substitute for beef c a cow disease that destroys millions of cattle and makes their meat un t for consumption before they are ready for market d an increase in consumer income A decrease in the price of our will shift the supply curve for donuts a leftward causing the equilibrium price to increase and quantity to decrease b leftward causing the equilibrium price and quantity to decrease c rightward causing the equilibrium price to decrease and equilibrium quantity to increase d rightward causing the equilibrium price and quantity to increase When Adam Smith said economic activity was directed by an quotinvisible handquot he was referring to the fact that a competitive markets motivate altruistic individuals to pursue productive activities that only serve their private interests b when economic activity is directed by competitive markets the actions of selfinterested individuals will generally serve the public interest c invisible forces will lead to economic chaos unless wise central planning directs economic activity d scarcity is largely the result of invisible forces that would be eliminated if individuals were free to pursue their own selfinterests A hurricane damaged much of the housing in Miami Shortly thereafter the price of plywood rose signi cantly The events suggest that a a decrease in the supply of plywood caused the price of plywood to rise b an increase in the supply of plywood caused the price of plywood to rise c a decrease in the demand for plywood caused the price of plywood to rise d an increase in the demand for plywood caused the price of plywood to rise 16 l D 2 O 2 If the demand for a good increases which of the following will generally occur in a market setting a The price of the good will decrease b The supply of the good will increase c The quantity supplied will increase d Producer pro ts will fall A freeze in Florida devastates the orange crop at the same time a new study is released showing the health bene ts of vitamin C leading consumers to want to buy more orange juice How will the equilibrium price and quantity of orange juice change in response to the combination of these two events Equilibrium quantity will decrease equilibrium price will increase Equilibrium price will decrease the effect on quantity is ambiguous Equilibrium price will increase the effect on quantity is ambiguous Equilibrium quantity will increase the effect on price is ambiguous 9979 Critical Thinking and Application Economists maintain that the price of a product has no effect on demand How can this be true Susan says quotIf the price of wool coats goes up suppliers will offer more of the coats for salequot Brad replies quotIt takes three months to harvest wool and employ all the steps necessary to produce a wool coat Quantity supplied cannot possibly increase for three monthsquot Is Brad correct Why or why not Sam lives in a town with a population of 3000 He says quotThis town really needs a pizza restaurant People want pizza and would be willing to pay a lot for it but no one will open a pizza place because they couldn t make any moneyquot Evaluate Sam s statement A recent editorial in a local newspaper argues quotConsumers need to know more about products than just their price They need to know how these prices are determined who owns the businesses and the wages of the workersquot Is the editorial writer correct Why or why not An agricultural economist reports that corn prices are very high this year and that corn growers are earning substantial pro ts He concludes that government action is needed to direct more farmers to grow corn Is such action necessary Why or why not Around Easter time the price of eggs rises Some consumers complain about this and claim stores are price gouging Are there any positive functions played by the higher price of eggs around Easter What would happen if the price of eggs were not permitted to rise by law ECO 2013 Principles of Macroeconomics Chapter 1 The Economic Approach 4 Learning Goals 1 Identify and list the critical components of economics Chapter heading What is Economics About Key terms Scarcity Resource What is 39 How are scarcity and choice related How are scarcity and poverty different If price is not used as a rationing device what are other alternatives 2 List and provide examples of the eight guideposts of economic thinking Chapter heading The Economic Way of Thinking Key terms Opportunity cost Economizing behavior Utility M arginal Secondary effects Scientific thinking Eight guideposts l Example 2 Example Chapter 1 Class Notes 962011 12800 AM Econ tries to explain and predict the behavior of consumers firms and gov Scarcig cornerstone of economic thinking scarcity leads to tradeoffs which result in making choices Historical ways of dealing with scarcity include forcewar tradition emphasize on past ways authority gov and church development of markets and a combo of the four Scarcity requires that some wants remain unfulfilled Issues of equity justice and fairness The Eight Guidelines of Economic Thinkinq 1 There are always tradeoffs o What you give up is your oggortunig cost the value of the next best alternative Not the sum of everything you give up 2 Individuals choose purposefully o Referred to as economizing behavior try to get the most benefits for the least cost or effort 0 Aka rational behavior 3 Incentives matter 0 Doesn t have to be money 0 As the incentive increases you will be more likely to do something 4 Think on the margin not in total or on average 0 Marginal means additional or incremental 0 Rule to live by continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost 5 More information leads to better decision making but more information is costly to get 6 Many choices create a secondary effect 0 The primary effect is often immediate and visible 0 The secondary effect usually comes later and is not as visible 7 Value is subjective o Determined by the purchaser 8 Economic thinking is scientific thinking 0 Economists use data and information generated by people to explain and predict actions Don t make these economic errors 1 Violation of ceteris paribus 0 all other things constant 0 we want to isolate variables so we typically allow only one to change at a time 2 Good intentions do not necessarily result in good outcomes 3 Association is not causation 4 Fallacy of Composition 0 making the assumption that what s good for the individual is good for the group and the assumption turns out to be wrong Chapter One Review 962011 12800 AM I The Economic Approach Economics The study of human behavior with a focus on decision making Scarcig a fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Resource an input used to produce economic goods Land labor skills natural resources and capital are examples Rationing allocating a limited supply of a good or resource among people who would like to have more of it When price performs the rationing function the good or resource is allocated to hose willing to give up the most other things in order to get it How are scarcity and choice related Because goods are scarce we must often make a choice among alternatives How are scarcity and poverty different Scarcity is objective factual because items are scarce we can t always completely fulfill our desires for goods and services Poverty is subjective a matter of opinionand is usually determined by your level of income However what is considered poverty in one country may be considered rich in another If price is not used as a rationing device what are other alternatives Government rationing and rst come first serve basis II The Economic Way of Thinking Opportuniy Cost the highest valued alternative that must be sacrificed as a result of choosing an option Economizing Behavior choosing the option that offers the greatest benefit at the least possible cost m the subjective benefit or satisfaction a person expects from a choice or course of action Marginal term used to describe the effects of a change in the current situation usually the cost of producing an additional unit of a product Seconda Effects the indirect impact of an event or policy that may not be easily and immediately observable In policy these effects are often both unintended and overlooked Scienti c Thinking developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain realworld events Theories that are inconsistent with the real world are invalid and must be rejected The Eight Guideposts 1 The use of scarce resources is costly so decision makers must make trade offs 2 Individuals choose purposefully they try to get the most from their limited resources 3 Incentives matter choice is influenced in a predictable way by changes in incentives 4 Individuals make decisions at the margin 5 Although information can help us make better choices its acquisition is costly 6 Beware of the secondary effects economic actions often generate indirect as well as direct effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict III Positive and Normative Economics Positive Economics attempts to determine what is A verifiable or refutable proposition Ex If the price of gas rises people will buy less gas Normative Economics is about what ought to be Ajudgment call based on preferences and philosophical views of the advocate Ex The price of gasoline is too high What is the difference between positive and normative economics IV Pitfalls to Avoid in Economic Thinking Ceteris Paribus other things constant Fallacy of Composition erroneous view that what is true for the individual part will be true for the group whole Four Common Mistakes 1 Violation of the ceteris paribus condition can lead one to draw the wrong conclusion 2 Good intentions to not guarantee desirable outcomes 3 Association is not causation 4 The fallacy of composition what s true for one might not be true for all


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