ECON 2010 Study Guide - Fall 2018, Comprehensive Midterm Notes - Amplitude Modulation, Microsoft Powerpoint, Economic Surplus
5 Nov 2018
School
Department
Course
Professor
University of Colorado - Boulder
ECON 2010
Principles of Microeconomics
Midterm
Fall 2018
Prof. Christian Hennigan
Ch.1 Ten Principles of Economics
Wednesday, August 29, 2018
10:10 AM
Questions to think about:
• What kinds of questions does economic address?
• What are the principles of how people make decisions
• " " how people interact?
" " how the economy as a whole works?
The reason why we have economics: resources are scarce
Scarcity: the limited nature of society's resources
Society has limited resources
Economics: the study of how society manages its scarce resources
Economists study:
• How people decide what to buy, how much to work, save, and spend
• How firms decide how much to produce, how many workers to hire
• How society decides how to divide its resources between national defense,
consumer goods, protecting the environment, and other needs
Principle 1: People face trade offs (making decisions--to get something that we like, we
have to give up something else that we also like)
• Efficiency: society gets the most from its scarce resources
• Equality: prosperity is distributed uniformly among society's members
• Tradeoff: to achieve greater equality, could redistribute income from wealthy to
poor--but this reduces the incentive to work and produce (shrinks the size of the
economic "pie")
Principle 2: The cost of something is what you give up to get it
• Making decisions (compare costs with benefits of alternatives; need to include
opportunity costs)
• Opportunity costs: what must be given up to obtain some item
o What did you give up to make this choice? What is your time worth?
• Ex: the opportunity cost of going to the movies is the price of the ticket + the value
of time you spend in the theater
Principle 3: Rational people think at the margin
• Rational people…
o Systematically and purposefully do the best they can to achieve their
objectives
o Given the available opportunities
o Make decisions by evaluating costs and benefits of marginal changes
find more resources at oneclass.com
find more resources at oneclass.com
o "Thinking at the margin": Keep adding and thinking about the next one until
the cost is greater than the benefit
• Ex: if you have unlimited data, you're more willing to use more of it/ if you have
limited data you'll use less
Principle 4: People respond to incentives
• Incentive: something that induces a person to act
• Ex: when gas prices rise, consumers buy more hybrid cars and fewer gas cars
Principle 5: Trade can make everyone better off
• People benefit from trade & specialization
o People can buy a greater variety of goods & services at a lower cost
• Countries also benefit from trade and specialization
Get a better price abroad for goods they produce
Buy other goods more cheaply from abroad than could be produced at home
Principle 6: Markets are usually a good way to organize economic activity
• Market: a group of buyers/sellers (doesn't have to be in a single location)
• "organizing economic activity"=
o What goods/services to produce
o How much of each to produce
o Who produces and consumes these
• Decentralized: there is no govt. committee that makes the decisions about what
goods to produce etc. Instead, firms & households determine them bc they act in
markets
• Adam Smith "The Wealth of Nations"
• Prices: determined by interaction of buyers /sellers, reflect the good's value to
buyers and the cost of producing the good
• Invisible Hand: prices guide self-interested households and firms to make
decisions that maximize society's economic well-being
Principle 7: Govts. Can sometimes improve market outcomes
• Governments…
o Enforce property rights/rules & maintain institutions that are key to a market
economy (people won't want to work, produce, invest, or purchase if there's a
large risk of getting their stuff stolen)
▪ Ex: a restaurant won't serve meals if the customers don't pay before
leaving
o Property rights: the ability of an individual to own and exercise control over
scarce resources
o Promote efficiency
▪ Avoid market failures: markets left on their own fails to allocate
resources efficiently
▪ Externality: production or consumption of a good affects bystanders
(source of market failure)
find more resources at oneclass.com
find more resources at oneclass.com
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ECON 2010 Full Course Notes
Verified Note
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