ECON 102 EXAM 1

All decisions can be considered what?

economic decisions

what is most important to consider when making choices?

the comparison of costs and benefits

costs

expenses/negatives

benefits

rewards/positives/profits

What if the costs are greater than the benefits?

Don’t do that action. Look for an alternative. Reevaluate your options and choose a better alternative.

marginal

additional

marginal question examples

How many additional hours should I study? How much more should a firm produce?

This type of thinking will tell us to keep doing the activity as long as __________ > ____________.

marginal benefits, marginal costs

rationality assumption

the assumption that people do not intentionally make decisions that leave them better off (are rational)

incentives

a reward or punishment for engaging in a particular activity

Whether personal, business, or political, we will see that incentives ____ affect decision making.

do

If you want to behave in a certain way, differently than they are already acting, you have to ___________________.

give them a reason to do so.

positive incentive examples

money, candy, extra credit, company awards

negative incentive examples

jail, fines, getting fired

effective incentives _______ the costs or benefits of an action.

change

examples: why put a bank robber in jail?

how do little kids sports leagues get more parents to coach teams?

unintended consequence

an undesired and unanticipated result from a policy or incentive. this can occur if the incentive isn’t designed properly

Suppose your rich uncle is going to award you $2000 for each A grade you receive each semester. What is a possible unintended consequence?

you start cheating, you start to take easier classes, you quit friends and extracirriculars because of excess focus

The government greatly increased and lengthened unemployment benefits during Covid. The result?

people were paid more to NOT work than to work

What is one of the most powerful incentives in free market (capitalist) economic systems?

profit

What is the self interest in this case?

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”- Adam Smith

they both win. firms/business want to earn profits. consumers want food.

Self-interest does not just mean people try to make as much money as possible? It could also mean:

pursuit of goals, friendship, charity

what makes us have to make choices

scarcity

when does scarcity occur?

when human wants and needs exceed the limited resources available to satisfy them

scarcity = ?

fact of life. always will exist.

What is scarcity not?

it is NOT a shortage. Markets can have shortages or even surpluses. It is NOT the same thing as poverty. Scarcity affects both the rich and the poor.

goods

tangible items we can see, feel, touch, eat, and so on (ex: clothing, food, cars)

services

intangibles we desire, tasks preformed by others

ex: lawn care, education, dog walking

What type of economy is the US usually categorized in?

a service economy

economics

the study of how people allocate their limited (scarece) resources to satisfy their unlimited wants

what can you also think of economics as?

the study of how people make choices

resources

things used to produce goods and services to satisfy people’s wants

wants

what people would buy if their incomes were unlimited (anything you place value on)

economics doesn’t distinguish between ______ and _______.

needs, wants

how do individuals think about how to make choices to satisfy their needs and wants?

how do i spend my time and money?

how do firms think about how to make choices to satisfy their needs and wants?

What goods should I produce with my scarce labor and capital supply?

how does the government think about how to make choices to satisfy their needs and wants?

should we produce civilian or military goods?

scarcity cannot be eliminated by _______.

markets, technology, or governments

any economy must _____________.

choose methods for resource allocation

Market Economy (US)

• prices and quantities set in relatively free markets

• laws protect private property

• very decentralized

Command Economy (soviet Russia)

• lack of profit and innovation incentives

• gov’t doesn’t have information on efficiency

microeconomics

the study of decision making undertaken by individuals or households and by firms (like looking through a microscope to focus on the smaller parts of the economy)

macroeconomics

the study of the behavior of the economy as a whole.

what does macroeconomics deal with?

• deals with economy wide phenomena

• unemployment rates

• interest rates

• inflation

• monetary and fiscal policy

aggregates

macroeconomics deal with these. totals such as total output in an economy

modern economic theory blends _____ and ____ concepts

micro, macro

positive economics

purely descriptive statements or scientific predictions. statement can be tested true or false

normative economics

analysis involving value judgements or opinions; relates to whether things are good or bad a statement of what ought to be

• cannot be proven true or false

• what we “should” or “ought to”

empirical

data, numbers, predictions

models

simplified representations of the real world used as the basis for predictions or explanations

models are useful if

they predict economic phenomena accurately

models are tested using

real world data

economic models examine and predict

how people act NOT how they think

behavioral economics

emphasizes psychological limitations and complications which may interfere with rational decision making

thought biases and logical fallacies

bounded rationality

hypothesis that people are nearly, not fully, rational. We see that people cannot examine every choice available to them. Instead they use simple rules of thumb to sort alternatives (ex: buying a car)

economic models need to be built on series of

assumptions

“ceteris paribus” definition

latin for focus on a single variable of interest

“ceteris paribus” goal

focus on a single variable of interest

variable:

well defined item that can take on different values

dependent variable

left hand side (variable we are trying to explain)

independent variable

variables we freely change then study how they relate to dependent variable

direct relationship

two variables move in the SAME direction (+ slope on graph)

inverse relationship

two variables move in OPPOSITE direction (- slope on a graph)

If wage is the dependent variable, what might some independent variables be? In other words, what determines a person’s hourly wage?

wage = f (skills, experience, education, job, demand for labor, location, dangerous job?, female)

what determines the price of a good?

price = f(supply, demand)

production:

any activity that results in the conversion of resources into products that can be used in consumption

• inputs → output goods

resources or factors of production

inputs that are used to produce things that people want

input types

land, Labor, physical capital, human captial

land

land, natural resources

labor

people, employees

physical capital

manufactured resources, machines, buildings, equipment

human capital

person’s training and education

entrepreneurship (subdivision of labor)

person who organizes, manages, and assembles the other resources. Virtually no new businesses could get started or operate without entrepreneurs. you have to be a risk taker, and make business decisions

with each choice made…

we give up some alternative.

oppurtunity cost

the highest valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

in economics, cost is always a _________ oppurtunity

forgone

the value of trade off is represented by the ________, (that which you give up to obtain something else)

oppurtunity cost

chart deriving oppurtunity cost

scarcity→ choices → oppurtunity cost

consumer goods

these goods are produced for our personal satisfaction, we directly consume these

physical capital

manufactured resources used to produce consumer goods or even produce more physical capital, we don’t directly consume

to produce physical capital inputs, we must give up some consumer goods. this creates an oppurtunity cost of __________

lower consumption

why do we produce capital inputs then

to increase future production and consumption