Wednesday, November 29, 2006

Naked Economics Study Guide

Here are the major areas of Naked Economics to take a look at. This is not a shortcut around reading the entire book - it is meant to help you concentrate on important points. The points that are mentioned are things that you should feel comfortable wtih - have a passing knowledge of them ("Oh, yeah, I remember was ____"). There are some study questions at the end in blue to help you, also. This is all for your assistance in understanding the book; none of it will be collected and graded.

If anyone wants to borrow my book (with notes/highlighting, etc) throughout a school day or overnight, come on by and let me know!

We will be discussing the book the first few days of class as a precursor to Unit 1. There will be a quiz on the critical content as well as information from the book on your Unit 1 Test.

Enjoy! :)



Economic way of thinking - pxiii

Chapter 1 - The Power of Markets

Market Allocation - p3
Invisible Hand of the Economy - p4
Utility - p6+
Opportunity Cost - p9
Demand/Externalities - p10
Cost/Benefit Analysis - p11
Profit Motive - p11
Human Capital - p12+
Barriers to Entry - p14
Market price, pricing decisions & price discrimination - p15+
Lessons of markets - p18+
Globalization - p20+

Chapter 2 - Incentives Matter

Incentive - p23
Command vs. private property - p24
Free Rider problem - p24+
Incentives in Economic Systems - p27
Law of Unintended Consequences & Disincentives - p29+
Behavioral Economics - p34
Game theory & Prisoner's Dilemma - p34+
Externalities - p35
Trade & Quotas - p37
Taxation & Laffer curve - p38+
Deadweight Loss - p40
Tax Systems - p41

Chapter 3 - Government and the Economy

Externalities - p43+
Government solutions to externalities - p48+
Government makes market economies possible - p51+
Property Rights - p54
Public Goods & Free Riders - p57+
Redistribution - p59
Equity vs. Efficiency - p60

Chapter 4 - Government and the Economy II

Government inefficiency - p63
Gov't allocation vs. private allocation - p67
Effects of regulation - p69+
Economic Thinking - p72
Deadweight loss - p74
Taxes as regulation/Effects of taxation - p74+
Laffer Curve - p76
Effect of minimum wage - p77+

Chapter 5 - Economics of Information

Adverse Selection - p82+
Economics of Discrimination - p83+
Assymetry of Information - p84+
Screening mechanism - p89
Equality of information - p90+
Branding - p91
Perfect Competition - p92
Monopolistic Competition/Oligopoly - p92
Signaling - p93+

Chapter 6 - Productivity & Human Capital

Fantasy Spending - p98
Income Inequality - p99
Human Capital - p99+
Scarcity - p100
Human capital and job creation - p102+
Displacement - p104+
Productivity - p107
Standard of Living - p108
Rule of 72 - p109
Income Inequality - p111+
Zero sum game - p115

Chapter 7 - Financial Markets

Purposes of financial market - p118
Rules for investing - p119
Basis of financial instruments - p120+
Efficient Market theory - p129
Investment guidelines - p132+
Diversification - p134

Chapter 8 - The Power of Organized Interests

Incentives for interest groups - p138
Consumer/Producer Surplus & Taxes - p142
Price Ceilings and Floors - p142
Laissez faire economics - p143
Trade - p144+

Chapter 9 - Keeping Score

**Is not micro, will not be part of this course**

Chapter 10 - The Federal Reserve

**Is not micro, will not be part of this course**

Chapter 11 - Trade and Globalization

Benefits of trade - p187+
Globalization - p189
Economic interdependence - p189+
Absolute & Comparative Advantage - p190+
Losers from trade - p191
Protectionism - p193
Trade raises real income - p195
Tariffs - p195
Cultural Homogenization - p199
Externalities from trade - p200
Sweatshops - p201
Comp Adv of poor countries - p201

Chapter 12 - Development Economics

Wealth & Poverty of nations - p206+
What makes one country wealthy whan another isn't? - p208+
Property Rights - p209

Study Questions: (Feel free to answer here if you'd like some feedback from me and/or peers) :)

1) How has competition affected your life and in what ways? (p37) Are you better or worse off than your parents?

2) Name 5 underground economies created as a result of taxes. (p37)

3) "We know that people seek to make themselves better off, however they may define that. Our best hope for improving the human condition is to understand why we act the way twe do and then plan accordingly. Programs, organizations and systems work better when they get the incentives right." (p42). To predict outcomes in economics, we need to understand human behavior. What are some other "laws" of human behavior (like self-interest) that might help us understand the workings of the economy better?

4) On p56, the author describes government's institutions that "form the tracks on which capitalism runs". Find 5 of these institutions and describe their role in facilitating capitalist rules.

5) What are some other examples of information assymetry? (p85)

6) In a competitive market, there should be no profits. T/F and why?

7) What human capital do you possess?

8) Does our free-market economy make poverty inevitable?

Good luck! Have fun! :)


champion said...

5) What are some other examples of information assymetry? (p85)

I can't remember what examples are in the book, but isn't insider trading an example? And used car salesmen or real estate agents who could omit details to sell something?

Just a guess...

Kate said...

I'm just kind of posting this to get my blog address out there, but I guess I will respond to Beth's question...

Information asymmetry is when when two people are dealing with a sale together (a buyer and a seller) and one of the parties knows more about the product then the other. Typically, the seller knows more, but it is possible the buyer would know more about the product.

Real estate agents, like Beth said, are a good example of this. Also, insurance providers to health insurance consumers and art sellers are good examples.

Hopefully this is what I was supposed to do!

rusch said...

i dont completely understand the production possibility curves.. how do you know when its constant/increasing/decreasing/zero?? but mainly constant and zero..?

im confused.

KM said...

Hey Ellen -

We'll go over it in class, but just fyi - the constant, increasing, decreasing are describing what happens when you trade off to produce more of a good.

So - in the example for the assignment - the first graph asks you to look at what happens when you go from producing zero of good A to 1 of good A (you lose 2 of good B). Then, what happens when you go from producing 1 of good A to producing 2 of good A (you lose 2 of good B). Then, what happens when you go from producing 2 of good A to producing 3 of good A (you lose 2 of good B).

So - you are losing 2 of good B each time you produce one more of good A. It is constant opportunity cost.

The second example, though (now, I don't have the packet right in front of me, so bear with me here if the numbers are wrong) - what happens when you go from producing 0 of good A to producing 1 of good A? (lose 2 of good B). What happens when you go from producing 1 of good A to producing 2 of good A? (lose 4 of good B). What happens when you go from producing 2 of good A to producing 3 of good A? (lose 6 of good B). So - that is increasing opportunity cost.

HTH - it's easier when we can draw it on the board... :)


KM said...

Yes, Beth & Kate - both right, and yes, this is what you were supposed to do. :)


Erica said...

I have a question in regard to the PPC's as well. Thanks for explaining the difference between the different types of PPC's but i am still confused about the PPC's that have two lines coming from one spot. Sorry you probably have no idea what i am talking about but it is like...two curves come from one point on the y axis? I dont understand that are two differet values on the x axis efficient with respect to the one point on the y. I am sorry if this make absolutely no sense whatsoever.

KM said...

Hey Erica -

The one that changed like that meant that there were changes in one part of the economy but not in the other. I don't have the sheet right in front of me - but if consumer goods was on the side while capital goods were on the bottom, then if there was a big change in the capital goods market but not in consumer goods, the line would stay at the same point on the side but go to a point further out on the bottom.

It doesn't happen often ('course, this is all conjectional - what country makes only two goods??) - but it's good for analysis. :)

hth -


kfbare said...

1) How has competition affected your life and in what ways? Are you better off than your parents?

Because of competition, I am posting this blog, watching a 60 Minutes, eating a warm dinner from our oven, wearing clothes, texting on my cell phone, listening to music... the list goes on. I don't think I am better off than my parents. My parents didn't know how a computer would effect them. They lived their lives just fine with typewriters and recordplayers or whatever they used back in the day. Competition provides new toys and processes, but I don't think it makes different generations "better off".

kfbare said...

Adding to information assymetry... the book used a used-car dealership. Yes, the dealer knows more about the car, but the buyer assumes there are problems with the vehicle if the original buyer had taken it to a used-car dealership. So the buyer wants a discount. This discount makes high-quality car owners less willing to sell their cars.

KM said...

Katie Bare...are you able to do all that at once? I am so jealous. ;)

I am a ten-thing at a time kind of person. I often joke to students - I can do 10 things at once, but you just asked me to do the eleventh, and that threw me over! Ha!

Interesting point - does technology mean we're better off? A peer in your class was reading something for Ancient/Med History about the founding of agriculture being the worst possible thing that could have happened in history. Interesting, hey? Does it make us better off, or just with more time on our hands to do more stuff, which creates more...

and on and on and on.

Amazingly, as I sit here writing this in my office, I have a game of "Inspector Parker" open in another window, some writing I'm doing open in another, a load of wash in the laundry, another in the dryer, a treadmill calling my name (sigh), student work to grade upstairs, a wedding dress to draw up plans for + bridesmaids' dresses that my customer just told me she wanted me to make also, little girls' capes to make for Easter...and on and on and on. Am I better off than my parents? I'm making more right now per year than my dad did the year he died. That, however, was 16 years ago and I have 2 univ degrees more than him. Am I better off because of the education, or just luck?

My, am I philosophical this evening...

keri said...

Competition affects our lives daily. I think the way that I am most affected by competition is the competition for school and the competition that different mass marketing agencies try to get to us. People way that the competition to get into good colleges is at it's height now. I think this has a lot to do with money, power, and the relation of these two things to the economy. Second of all, we are constantly being bombarded with advertisements, the competition between companies is sometimes laughable, other times it is just annoying. Especially when the competition gets so extreme that you have a hard time telling where one thing stops and the other begins. By this I mean you have Pepsi create a cherry flavored cola, and then two minutes later you turn around and Coke has brought out a cherry flavored cola (or the other way around, I am not going to research to see who did it first). Or you have all these different flavored water companies kicking each other around coming up with new fruit flavors for our water and then they have to compete to see who has the fewest whatevers in the drink so that the health concious love it, etc.
As far as me being better off than my parents, its' hard to say. I think Katie is right because our parents didn't know any different, so it's not like they had a bad life as children. I think that I have some things easier than my parents (with the touch of a button I can put hundreds of CD's onto one digital chip that I can take with me everywhere), but with ease comes stress. Because we can do so much we are expected to do more. WHatever happened to the good old days where the kids came h ome to warm chocolate chip cookies and a black and white television? YOu have to take the good with the bad either way. I sure wish I could have some warm cookies though.

KM said...

Hmmm...there are warm cookies in my crazy is that?

Are you spying on me?


There's a whole new study within economics dealing with the econ of leisure and technology. I haven't had a lot of background on it, though. I'll see what I can find. Interesting. :)

ZachLange said...

Life might be easier in some respects like having washers and dryers, microwaves, satellite TV. But then again if you want to have enough money to afford those luxuries the level of education is higher. My Grandfather didn’t even complete eighth and he made enough money to be one of the first owners of a colored Television on his block. The equivalent to that nowadays would be something like a 72” plasma screen TV, and besides some rare exceptions, there aren’t too many high school dropouts nowadays who are financially comfortable enough to splurge a few grand on one of those. My parents generation was at the point where you could get by fine without college. The simple fact that you had a degree wasn’t enough to get you a job in every case, if you were a savvy determined kid straight out of high school you probably had the knowledge to compete in the workforce with college grads. With advancements in technology now however you need technical skills that most times you can only learn in college, which by the way usually takes at least 5 years now. Technology has made our lives more complicated, but for those of us who can do 10 things at a time like Mrs. McDaniel, or eleven like Katie life is a lot easier, if new technology didn’t make our lives easier or more convenient than we would still be hunters and gatherers. Every day life becomes easier with technology, but the amount of time and education needed to take advantage of it is going to keep increasing.

Now I just got to think of something else to post before I go to bed…

ZachLange said...

This is a quick question, right now im assuming i just did the graph wrong, becuase, well it was wrong when we went over the graphs in class. But in hopes that i wasn't completely wrong i have a question.

In the increasing opportunity graph i went up by two's on the bottom and on the side i went up by ones. And in stead of the graph being on a outward curve it was more like one of those asymtope things where it never quite reaches zero...if that makes sense, its hard to explain without showing it. Anyways i dont think that is a possibility for an opportunity cost graph, but could i have maybe graphed something related?

KM said...

Oooh...math words...

A PPC will always touch at both axes, because it's showing the OC for the goods. You can have a convex or concave curve (like Wojtek mentioned before), but it has to be touching on both axes.

D Mac said...

so, just to clarify, this is for the second week of school, not the first.

anyways, i just feel i really need to say that since reading this book i see examples of economics all over the place. i'll be doing something and just all the sudden notice 'hey, this is something they talked about in that book we had to read' so...yea, really glad i read it.

D Mac said...

kb, in response to your statement that you don't think you are any better off than your parents: i partly agree with you. in regards to how they didn't know how technology invented in the era they grew up in would affect them in the long run, we still don't know how many of the things we've come up with will affect us in the future as well.

i think the primary difference between our parents and ourselves as far as quality of life is in the amount of time we have to do things other than worry about our survival. if one looks at this most people these days are indeed better off than their parents were in past times, and definitely better off than their grandparents before them.

Erica said...

What exactly is Marginal Analysis? I've looked over all of my notes and i cant figure it out. thanks so much

KM said...

Erica -

All marginal analysis does is look at decision making - "at the margin".

Margin = the next

So - marginal cost = what is the next cost I would bear? Marginal benefit = what is the next benefit I would receive.

Everyone makes decisions at the margin. You decide depending on what will happen if you more. So - you stay up one more hour to study. Cost? One less hour of sleep. Benefit? Let's just say it increases your score by 7 points. Is it worth it? I dunno. Would it be worth it to you? I guess it depends on how tired you are and what that 7 points would do to your score (it would do a lot to an 80%, not so much to a 47%).

Marginal analysis can be very personal - like that. It can also be incredibly precise, as you'll see when we get into market analysis in unit 3.

It's also the basis of all of economics. You knew that, you just didnt' have the official terms. :)

KM said...

Derek - excellent analysis on your blog. I've used that in the past (not so math detailed), but have gotten the blank look that all teachers live for...the one that says..."wha...?"

So I stopped using it.

I love the NE book for just the reason you mention - it gives econ without the math, and allows you to learn economic reasoning without all the technical stuff. I gave a copy to Mr. Johnson to read. :)

And...once you learn econ, you notice it everywhere. I tell ya, it makes the world go 'round.

yay! :)