ECO 2023 Exam 1

Economics

The study of how society allocates resources and makes choices give scarcity

Scarcity

concept that there is less of a good freely available than what individuals would like

Opportunity cost

The value of opportunities lost; next best alternative

If Florida decides to restrict building condos on a strip of beach to protect the coast, housing prices will increase. Identify the Alternatives, Choice, and Trade-off.

Alternatives- {restrict building (and by how much), not restrict building}, Choice- restrict building condos, Trade-off- lower housing prices

What is a model?

A simplified representation of real and complex situations

Why are models useful in Economics?

It helps uncover causal relationships (Ex: Does X cause Y?)

How does scarcity informs choices from a set of alternatives?

The presence of scarcity means we must make choices- act of selecting among alternatives

Resources

Inputs used to produce economics goods

Different categories of Resources

Human capital, Labor, Capital, Natural

Economic theory

a set of definitions, postulates, and principles assembled in a manner that makes clear the cause-and-effect relationships between variables.

Econometrics

a set of statistical tools used to identify causal relationships in data

How does changes in incentives change decision making?

Changes in incentives (monetary of otherwise) influence behavior in a predictable way. (higher the costs, the lower that people want that good)

Utility

The subjective benefit or satisfaction a person expects from a choice or course of action

Economic good

Item or service when consumed utility increases

Economic bad

Item or service when consumed utility decreases :(

How does trades make people better off?

It allows them to consume goods and services they may not be able to otherwise. Individuals should trade if the benefits from trade exceed the costs.

Unintended consequences

Economic actions often have indirect effects known as secondary effects, which can lead to unintended consequences.

Positive economics

Economics that describes the way things are (positive statements are refutable, testable, or falsifiable; not necessarily true). Ex: Large businesses earn too much profit.

Normative Economics

Economics that describes the way things ought to be (Involves value judgements, not refutable). Ex: Large businesses earn too much profit

Ceteris Paribus and why is it important?

Means all other things constant, it is important for uncovering and describing casual relationships.

What Microeconomics focus on?

It focuses on studying the behavior of individuals or groups of individuals (households, firms, etc.) and the effects of their behavior

What does Macroeconomics focus on?

It focuses on how aggregate human behavior affects highly aggregated outcomes like inflation, GDP, etc.

Division of labor

Separation of tasks in production to different people to improve efficiency.

Division of knowledge

Separation of knowledge across different individuals.

What are the assumptions of the model of a PPF?

1. Only two goods

2. Fixed amounts of productive resources

3. Fixed technical knowledge (fixed technology)

4. Full and efficient use of resources

What does A, B, D, and F mean?

Attainable and efficient

What does C mean?

Attainable but inefficient

What does E mean?

Unattainable

What is the formula for opportunity cost?

give up/gain

What does a Linear slope mean in a PPF?

The opp. cost is constant.

What does a “Bowed-out” slope mean in a ppf?

The opp. cost is increasing.

What factors shift the PPF?

• Changes in Resource quantity and quality

• Technological improvements

• Changes in Rules, Institutions, or Environment

• Changes in Availability of Inputs

An outward shift means?

More ability to produce

An inward shift means?

Less ability to produce

What is absolute advantage?

Who can produce more with the same resources.

What is comparative advantage?

Who can produce something at a lower opportunity cost.