Econ 101 First Midterm Material
Economics: the study of choices people make and the actions they take in order to make the best use of
scarce resources in meeting their wants and needs. Essentially a social science; a human's actions in the
face of scarcity. Economic choices pertain to a simple rule. Consider some activity, X. If the benefits of
X outweigh the costs of X, do activity X. If not, don't.
• Microeconomics: the study of choices and actions of individual economic units such as
households, firms, consumers, etc.
• Macroeconomics: the study of behaviour of the aggregate economy, including issues such as
unemployment, inflation, and changes in the level of national income.
Economic allocations of resources can be evaluated on the basis of many things including efficiency,
equity, and moral or political consequences. Positive economics involve statements about what is and
can be tested and proven; for example, “If the price of coffee rises, people will buy less coffee.”
Normative economics, however, involve statements about what ought to be and cannot be tested
because they are based on opinions; for example, “Taxes should be used to distribute income from high
income groups to low income groups.”
The model used for economics (the Neoclassical Paradigm Model) is an empirical model, meaning it is
based more so on observation than theories or logic. Therefore, it comes with some cautions:
1. The Correlation Fallacy: the incorrect belief that correlation implies causation.
2. The Post Hoc Fallacy: a kind of correlation fallacy, meaning an error of reasoning that a first
event caused a second event because the first happened before the second. For example, people
shop before christmas and therefore shopping causes Christmas.
3. Fallacy of Composition: the view that what is good for the individual is good for the group.
AProduction Possibilities Frontier shows all the
combinations of goods and services that a society can
possibly produce, given its resources and its level of
technology. In the figure shown, pointsA, B, and C
are all possible combinations. Point Y is unattainable
given this society's resources at this particular point in
time, and point X, while attainable, is inefficient.
There is not one country in the world that is placed
right on the curve of their PPF because every country
has some form of unemployment. What will cause
PPF to shift out?
• Discovery of new resources
• Technological innovation
• Workers are more productive
• Increase in population
Opportunity Costs are forgone benefits that arise when the resources are not used in the next best
alternative way; what one has sacrificed for that opportunity.
opp cost = what is given up / what is gained
Scarcity implies choice, and choice implies opportunity cost. Economic theory tells us that the graph of
the PPF must curve out from the original shape because this models the Law of Increasing Cost; in
order to produce extra amounts of one good, society must give up ever increasing amounts of the other. Demand
As a product's revenue price increases (decreases) the quantity demanded decreases (increases) ceteris
paribus In terms of the demand curve, a change in quantity demanded is moving along an existing
demand curve while a change in demand is a shift of the demand curve to the left or right.
Achange in quantity demanded is brought about by a change in price while a change in demand is
brought about by a change in income, tastes, change in prices of related goods, etc.
Essentially, demand refers to the entire relationship between price and the quantity of a good or service
being demanded at each price. It is ultimately what we know as the demand curve. Quantity demanded
refers to one point on the demand curve; how much of a product is demanded at one particular price.
• Price of Substitutes: two goods are considered to be substitutes when they satisfy the same
needs (ex. coffee and tea)
◦ if the price of a substitute of good X increases (decreases) the demand curve for the original
commodity shifts in (out) and the quantity demanded increases (decreases)
• Prices of Complements: products that tend to be used jointly (ex. coffee and cream)
◦ if the price of a complements increases (decreases) the demand curve for the other
commodity shifts in (out) and the quantity demanded decreases (increases)
• Preference/Taste: brands, advertising, cultural/political aspects, fads, etc.As preference
changes, demand changes.
• Expectations/“Forecasts”: the consumer's anticipation of what will happen to the price of a good
in the future may cause the demand curve to shift. For example, if the price of a commodity is
expected to increase in the near future, consumers might being to stock up on the good.
◦ Normal Good: as income increases (decreases), the demand for a normal good increases
(decreases). For exampl