Econ 2010 Exam 1 Study Guide

Topics: Economics, Cost, Adam Smith Pages: 5 (1117 words) Published: December 11, 2012
Chapter 1: Economics and Economic Reasoning

What Economics Is:
* Economics- the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society * Coordination- how the three central problems facing any economy are solved * The Three Central Problems of Economics Include

* What, and how much, to produce
* How to produce it
* For whom to produce it
* Scarcity- the goods available are too few to satisfy individuals desires

* Scarcity has 2 Elements: our wants and our means of fulfilling those wants * The degree of scarcity is constantly changing
* An economy deals with scarcity through COERCION
* Limiting people’s wants and increasing the amount of work individuals are willing to do to fulfill those wants

Modern Economics:
* Early Times:
* Economics was base on deduction (a method of reasoning in which one deduces a theory based on a set of almost elf evident principles) * The traditional principles are the assumptions that people are rational and self interested * Modern Economics

* Based on induction (a method of reasoning in which one develops general principles by looking for patterns in the data

A Guide to Economic Reasoning
* Economic reasoning involves abstracting from the unimportant elements of a question and focusing on the important ones by creating a simple model that captures the essence of the issue or problem * Levitt’s Model

* People do what is in their best interest financially and it assumes that people rely on a cost/benefit analysis to make decisions * Every choice has costs and benefits decisions are made by comparing the two

Marginal Costs and Marginal Benefits
* The relevant costs and relevant benefits to economic reasoning are the expected incremental (additional) costs incurred and the expected incremental benefits that result from that decision * Marginal Cost- the additional cost to you over and above the costs you have already incurred * Means not counting the suck costs (costs that have already been incurred and cannot be recovered) * Marginal Benefit- the additional benefit above what you have already derived * Comparing Marginal Cost and Marginal Benefits will often tell you how you should adjust your activities to be as well off as possible * Economic Decision Rule:

* If the marginal benefits of doing something exceed the marginal costs, do it * If the marginal costs of doing something exceed the marginal benefits do not * Economic reasoning is based on the premise that everything has a Cost

Opportunity Cost
* Opportunity cost- is the benefit that you might have gained from choosing the next-best alternative

Economic and Market Forces
* Economic forces- the necessary reactions to scarcity
* Market force- economic force that is given relatively free rein by society to work through the market * Ration by changing prices
* When there is a shortage the price goes up
* When there is a surplus price goes down
* The invisible hand- the price mechanism (the rise and fall of prices guide our actions in a market) * Economic Reality- controlled by Social, cultural and political forces * Often Social and Political Forces work against the invisible hand * The invisible hand ensures that the quantity supplied equal the quantity demanded at some price * Countries laws and social norms determine whether the invisible hand will be allowed to work * What happens in a society can be seen as the reaction to, and interaction of, these three forces: economic forces, political and legal forces, and social and historical forces

Economic Insights
* Abduction- method of analysis that uses a combination of inductive methods and deductive methods * Economic Model- a framework that places...
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