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by: Elmore Funk


Elmore Funk
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Martha Evans

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Martha Evans
Class Notes
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This 10 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 Martha Evans in Fall. Since its upload, it has received 43 views. For similar materials see /class/205446/eco-2013-florida-state-university in Economcs at Florida State University.




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Date Created: 09/17/15
STUDY GUIDE for FIRST EXAM EC02013O3 FALL 2011 Martha Evans Instructor Note This study guide is intended to be used as a tool to help you prepare for the test It is an outline representing the topics that have been emphasized in the book and the slides for each sectionchapter It is NOT an exact representation of the way that questions will be phrased on the test A BRIEF HISTORY of the MARKET SYSTEM This is from lecture not in book 1 What are the three questions all groups of people must answer 00 What will we produce 393 How will we produce it 39139 For whom will we produce 2 What are the three possible rationing mechanisms for scarce goods and what behavioral incentives are created by each 393 Price It encourages individuals to engage in the production of goods and services to generate income 39239 First come first served Encourages individuals to waste a substantial amount of time waiting in line 39239 Political Process encourages individuals to waste time and other resources in competing with others to influence the political process 3 Karl Marx published Das Kapital in three volumes between 1861 1894 The Russian Revolution followed in 1917 after which time most of the modern world split into using one of two economic systems What are they and how do they answer the three questions from 1 differently CHAPTER 1 THE ECONOMIC APPROACH 1 What is the important driver of human behavior that has resulted in competition as well as determined social political cultural and even religious traditions across time o v w ho gets what Incentives 2 How are poverty and scarcity different Can they both be eliminated 392 Absence of poverty implies some basic level of need has been met 39239 An absence of scarcity would imply that all our desires for goods are fully satisfied 3 How were scarce goods rationed in primitive societies How are they rationed in market economies Which rationing method is superior and why 39239 In primitive societies rationing was done though whoever was bigger 4 Eight Guideposts to Economic Thinking a The use of scarce resources to produce a good is always costly This statement is usually associated with the saying There s no such thing as a free lunch Why does obtaining more of a scarce good ALWAYS Involve a cost v Because someone must give up something if we must have more of a scarce good b Individuals choose purposefully therefore they will economize What is meant by economizing Gaining a specific benefit at the least possible cost c Incentives matter How do rational people respond to changes in costs relative to the benefits of their choices As personal benefits costs from choosing an option increases other things constant a person will be I likely to choose that option d Economic reasoning focuses on the impact of marginal changes What Does the term marginal mean How is a marginal cost different from an average cost v Term used to describe the effects of a change in the current situation Example a producers marginal cost is the cost of producing an additional unit of a product given the producers current facility and production rate A manufactures of producing automobiles total of production divided by the total number of cars the manufacture produces may be 25000 but the u of producing an additional automobileor 1000 automobiles might be lower CHAPTER 1 THE ECONOMIC APPROACH cont d 00 o 00 e Since information is scarce uncertainty is a fact of life Is it reasonable for people to exhaust all possible sources of information before making decisions Why or why not 39239 NO because info is costly to acquire and at some point it simply isn t worth it anymore Limited knowledge and uncertainty about the outcome generally characterize the decision making process f In addition to their initial impact economic events often generate secondary effects that may be felt only with the passage of time What do we mean by secondary effects Hint I used increases in the minimum wage as an example of a decision that could have secondary effects g The value of a good is subjective and varies with individual preferences Think of utility or benefit in association with this statement What does this have to do with the creation of real economic value 399 Individuals value good differently moving goods that individuals value more highly are primary sources of economic progress h The test of an economic theory is its ability to predict and explain events in the real world Why is knowledge of human behavior with regard to scarcity so important These guideposts are important because they enable us to predict human behavior and thus outcomes to forecast and make the best decisions Positive versus Normative Economic Thinking Which way of thinking is objective Subjective Which way of thinking is a better tool for analysis and decisionmaking and thus to allocate scarce goods Be able to differentiate a positive from a normative statement 39I39 Normative Economicsobjective vs Positive Economicssubjective 39239 Positive the scientific study of what is among economic relationshipsneed not be correct but must be testable 392 Normative judgments about what ought to be in economic matterscannot be proven false cause they are based on value judgements Pitfalls to Avoid in Economic Thinking Ceteris Paribus Good Intentions versus Good Outcomes Fallacy of Composition and Association is Not Causation Match the following statements with the appropriate fallacies above a As your next President I plan to reduce drug use among college students by spending more money to apprehend drugpushers Note Studies have shown that it s more effective to spend money on drug abuse education than on apprehension of pushersceterus paribus b Whenever there has been unusual sunspot activity the economy has been in a recession Therefore sunspot activity causes recessions association is not causation c As your realtor I can t tell you how much it s worth to add a swimming pool to your home to increase its market value unless we know what other factors increase the market value of homes good intentions vs good outcomes It s great that wages are rising in our community Our elected officials should push for national wage increases Fallacy of composition 0 CHAPTER 1 THE ECONOMIC APPROACH cont d 7 Opportunity Costs Which of the below would 39 7 starting up a new business r view as costs for CHAPTER 2 SOME TOOLS OF THE ECONOMIST 1 This chapter began with an emphasis on Opportunity Cost How should opportunity cost be considered in these examples What are the opportunity costs of these choices a When to attend college Timeforegone earningsany other activity b Whether or not to accept an offer to play professional sportscollege c Whether to build a civic center instead of a hospitalimprovement in educationwellbein of low income families 2 How Trade Creates Value Be able to give an example such as the ticket scalping question from the lecture notes Should ticket scalping be prohibited Why or why not 393 Value can be created by exchanges that more goods to individuals who value them more 3 Transactions Costs What are they and how do they affect the potential gains from trade Should an individual spend as much time as necessary to find the best deal on something heshe wants to purchase 393 Time effort and other resources needed to search out resources needed to search out negotiate and consummate an exchange 4 Middlemen Stockbrokers Realtors and Mutual Fund Managers Do these professionals increase or decrease the gains from trade HowWhy 39239 Increase gains from trade reduce transaction costs a person who buys and sells or arranges trade 6 Comparative Advantage Application What should we produce Make sure you can a identify which party has comparative advantage in a comparison of production possibilities and b whether or not output could be expanded with division of labor and specialization What price should be charged for each good if economies specialize and trade CHAPTER 2 SOME TOOLS OF THE ECONOMIST cont d 7 Property Rights Several Points to Know a What are they 39239 the right to use control and obtain benefits from resources good or service b What are the three ways that property rights create incentives 392 Incentive to care and manage what they own 00 Incentive to conserve for the future 39I39 Can use their resources in ways beneficial to others c Do people behave differently toward privately owned property versus commonly owned property In what way Hint Think of the example of the possible differences between East and West Germany in terms of property values care of the environment etc prior to the fall of the Berlin Wall v I I d How are property rights protected for intellectual property Copyrights and patents 8 PRODUCTION POSSIBILITIES MODEL KEY POINTS a What does the model tell us ie what do the x and y axes represent What does the curve joining them represent 392 Show the maximum amount of any two products that can be produced from a fixed set of resources and the possible trade offs in production between them b What combinations of x y are efficient Inefficient Impossible 392 Point inside the curve us inefficient meaning it s not making use of all its resources c If points outside of the existing curve are unattainable how does an economy ever expand its possible output Hint What factors will shift the curve outward 39239 Increase in the economy s resource has would expand ability to produce goods and services 0 Advancements in technology 0 Improvements in the rulespolicies laws and institutions 0 v Giving up current leisure time o o o d Why is it important for an economy to save Hint How does an economy expand its Production Possibilities for the future Remember the discussion in class regarding the low savings rates in the U 5 versus the high savings rates among the Asian Tiger countries and China CHAPTER 3 SUPPLY DEMAND AND THE MARKET PROCESS 1 What is the Law of Demand What does it tell us about how consumers respond to an increase in price Is the relationship between price and quantity demanded positive or inverse What is the Second Law of Demand 399 The n relationship between price of a good and the quantity consumers are willing to purchaseas the price of a good rises consumers buy less 39239 Availability of substitutes explain this negative relationship 2 What is the difference between Quantity Demanded what affects it and Demand what affects Demand Does a shift in Price affect Demand or Quantity Demanded 4 What is meant by consumer surplus producer surplus Where are these areas on the model 39239 The area below the demand curve but above the actual price paid 4 What does the term elastic demand mean Inelastic demand What factors determine elasticity of demand How does an inelastic curve appear on the model An elastic curve CHAPTER 3 SUPPLY DEMAND AND THE MARKET PROCESS cont d 5 Know the Demand Curve Shifters and which way the curve will shift with changes in each 6 What is the Law of Supply What does it tell us about how producers respond to an increase in price Is the relationship between price and quantity supplied positive or inverse What is meant by the terms Economic cost Accounting cost profit losses Be able to calculate economic costs profit loss What do the Demand and Supply curves represent upward Supply curve and downward Demand curve Why do they slope What does the term elastic supply mean Inelastic supply What factors determine elasticity of supply How does an inelastic curve appear on the model An elastic curve Know the Supply Curve Shifters and which way the curve will shift with changes in each What does the term market equilibrium mean Is the market efficient at equilibrium Why or why not How do market participants know what the other side suppliers versus buyers is thinking if they don t communicate directly Hint The role of Price in the market HOW MARKET PRICES ARE DETERMINED SUPPLY and DEMAND INTERACT a If a market is in an initial equilibrium what will be the effect of an Increase in Demand on equilibrium price and quantity What will be the effect of a Decrease in Demand on equilibrium price and quantity 039 If a market is in an initial equilibrium what will be the effect of an Increase in Supply on equilibrium price and quantity What will be the effect of a Decrease in Supply on equilibrium price and quantity c What is the market outcome market price and quantity if there is an Increase in Demand and at the same time an Increase in Supply CHAPTER 3 SUPPLY DEMAND AND THE MARKET PROCESS cont d d What is the market outcome market price and quantity if there is a Decrease in Demand and at the same time a Decrease in Supply Whenever Quantity Demanded and Quantity Supplied are not in balance there is a tendency for price to change in a manner that will correct the imbalance 17 a How is market price affected by an Excess Demand b How is market price affected by an Excess Supply Adam Smith had a special way of describing the phenomenon of market self adjustment f buyers and sellers rarely interact and don t even know each other what communicates information to the market as to consumers valuation of goods and services What did Smith call this phenomenon Market conditions provide powerful incentives to both consumers and suppliers What incentive drives the behavior of suppliers Of Entrepreneurs Of resource owners Market Efficiency What two conditions are required for market efficiency Note The best way to study for Chapter 3 is to draw the models by hand and change price shift Demand and shift Supply in all different directions You will need to explain and interpret and components of an economic model Evaluate the outcomes in terms of the effect on quantity demandedsupplied andor price You will soon become expert in this important skill This is critical to the rest of the course so I encourage you to practice CHAPTER 7 TAKING THE NATION S ECONOMIC PULSE 1 What is the definition of Gross Domestic Product Make certain that you know what it is and what it isn t ie what s the difference between an intermediate good and a final good Why are economists concerned with levels of economic output What is excluded from GDP Are financial transactions included Income transfers Purchase and sale of goods produced in a prior year Geographic Boundaries of GDP Would goods and services produced by U S citizens working in a foreign country be included in US GDP Whywhy not CHAPTER 7 TAKING THE NATION S ECONOMIC PULSE cont d 4 Two Ways of Measuring GDP a Expenditure Approach What are the components of the Expenditure Approach Which component is the largest Be able to provide examples of each For the government sector which is largest state county and local or federal What is meant by net exports c Income Approach What are the components of the Income Approach Which component is the largest Be able to give examples of each What is meant by net income of foreigners d Will the results be different if GDP is measured using the Expenditure Approach versus the Income Approach e What is the difference between GDP and GDP per capita How is GDP per capita calculated 5 Nominal versus Real Values a What does the term Nominal represent Real b What is a price index What is the purpose of a price index What are the two price indexes that economists use Which one is used to measure how all prices in the economy have changed the broadest measure Which one is used to compare changes in the cost of the typical consumer basket of goods and services c What does the term base year mean What is the base year value d How is a nominal value for GDP converted to a real value Know the formula for converting nominal GDP to real GDP See Exhibit 6 on page 159 e What does the term inflation mean What is the formula for calculating inflation Can this be applied to both the GDP Deflator and the Consumer Price Index Work some examples from Exhibit 5 on page 158 of the text f How would you inflate an earlier value to a current value if you want to see what the equivalent would be in today s dollars Know the formula for this Ex I want to see what my father s hourly wage rate of 150 per hour from 1947 would be worth today Assume the price index was 87 when he was earning 150 and it s 1100 today CHAPTER 7 TAKING THE NATION S ECONOMIC PULSE cont d 6 What are some of the shortcomings of GDP as a measure of current output and income Be familiar with five ways in which GDP might be an imperfect measure What is meant by the the underground economy Would the effects of pollution widescale terrorist acts and natural disasters potentially over or understate GDP 7 Is GDP as a measure of income growth over time biased We know that the levels of real GDP have risen dramatically since 1930 but in what way may this increase be upwardly biased In what way might it also be biased in a downward direction


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