ECO-2013 Study Guide - Comprehensive Midterm Guide: Physical Capital, Cople, Open Market Operation

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7 Feb 2017
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ECO 2013
MIDTERM EXAM
STUDY GUIDE
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Chapter 1 Notes
- What Is Economics About?
o Economics tries to explain and predict the behavior of consumers, firms, and
government
o Alfred Marshall
Political Economy or Economics is a study of mankind in the ordinary
business of life; it examines that part of individual and social action which
is most closely connected with the attainment and with the use of the
material requisites of wellbeing
o Scarcity and Tradeoffs
Scarcity leads to tradeoffs which result in making choices
Scarcity requires that some wants remain unfulfilled
Issues of equity, justice, and fairness are embedded with scarcity
o Historically, mechanisms that have been used to deal with the problem of
scarcity:
1. Force
2. Tradition
3. Authority
4. Market
5. Combinations of 1-4
- The Economic Way of Thinking
o Always have these guidelines in your economic thought process:
1. There are always tradeoffs
2. Individuals choose purposefully
3. Incentives matter
4. Think on the margin, not in total or on average
5. More information leads to better decision making, but more
information is costly to get
6. Many choices create a secondary effect
7. Value is subjective
8. Economic thinking is scientific thinking
o There are always tradeoffs
Referred to as economizing behavior- try to get the most benefits for the
least cost or effort
Rational behavior
o Incentives matter
As the incentive goes up, you will be more likely to do something and vice
versa
The ietie does’t hae to e oey
o Think on the margin, not in total or on average
Marginal means additional or incremental
Rule to live by:
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Continue to engage in an activity as long as the expected marginal
benefit is greater than the expected marginal cost
o More information leads to better decision making, but more information is costly
to get
Refer back to 1-4
1. There are always tradeoffs
2. Individuals choose purposefully
3. Incentives matter
4. Think on the margin
o Many choices create a secondary effect
The primary effect is often immediate and visible
The secondary effect usually comes later and is not as visible
o Value is subjective
Beauty is in the eyes of the beholder
Value is determined by the purchaser
o Economic thinking is scientific thinking
Economists use data and information generated by people to explain and
predict actions
- Positive and Normative Economics
- Pitfalls to Avoid in Economic Thinking
o Do’t ake oe of these errors:
1. Violation of ceteris paribus
Ceteris parius is Lati for other thigs ostat
We want to isolate variable 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
Assuptio: hat’s good for the idiidual is good for the group
Makig this assuptio he it’s false is the fallay
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