Exam 1 Study Guide - Rudbeck Spring 2008

Exam 1 Study Guide - Rudbeck Spring 2008 - ECON 2105...

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ECON 2105 – MACROECONOMICS DR. RUDBECK EXAM #1 STUDY GUIDE Chapter 1 Economy – “one who manages a household” Economics: study of how societies allocate scarce resources Scarcity: limited nature of society’s resources -Must be limited resources -Unlimited wants and needs In a market economy, prices allocate resources 10 principles of economics 1. People face trade-offs -There’s no such thing as a “free lunch” -Efficiency occurs when society gets the most out of its resources—when resources go to the highest valued use for the lowest cost -Equity: fairness; equal distribution 2. The cost of something is what you give up to get it. Example: College -Tuition -Books -Food -Housing -Forgone wages Opportunity Cost: whatever must be given up to obtain an item -Time spent -Money spent -Land used 3. Rational people think at the margin -Margin: small incremental adjustments to behavior -Marginal Cost (MC): additional costs/incremental costs -Marginal Benefit (MB): additional benefit/value MB > MC If MB = MC, then there will be indifference.
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Example: Airline -Athens to Sparta -$100,000 cost to airline to fly -200 seats on airplane -Average cost of seat: $500 -1 seat left -Airline would take $300, loss of $200, MC = 0, MB = 300 4. People respond to incentives; change behavior with changes in costs and benefits Policy -Government requires seatbelts to be worn in cars -People drive more recklessly -# of accidents increases -# of driver and passenger fatalities decreases -# of pedestrian fatalities increases FDIC (Federal Deposit Insurance Corporation) -Give 2 banks for free -Bank failures increase 5. “Voluntary” trade can make society better off -Trade allows for specialization 6. Markets are usually a good way to organize economic activity -Laissez-faire: no government involvement -Markets maximize efficiency Price of goods Benefit—goes to highest value -When cost increases, prices increase -Draft—command process—not efficient -Market system is more efficient 7. Government sometimes improves market outcomes Market failures: 1. Externalities – both negative and positive (i.e. global warming, public education, shit like that) 2. Market power 3. Public goods – Non-rivalrous—if I consume some, no less is left for someone else (radio) – Non-excludable—can’t stop someone from consuming
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Example of a Public Good: National Defense “free riding” – enjoying the benefit, yet not paying for it (too few goods provided by market) Market failure government can come in and try to fix externalities Taxes – negative externalities
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Exam 1 Study Guide - Rudbeck Spring 2008 - ECON 2105...

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