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Angela Trimarchi

EC120-OC Lesson Notes Lesson 1 – Chapters 1,2,3 and Appendix Chapter 1: - Scarcity of resources: requires that decisions be made about allocation - Economics is the study of how these decisions are made - Every choice is a trade-off, something is given up - Opportunity cost: the highest valued alternative that is given up when a certain action is chosen - A rational decision-maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost - People respond to incentives (changing costs and benefits) - All market participants benefit from specialization and exchange - A market economy (characterized by decentralized decision making of millions of households and firms seeking their own self-interest) can be highly successful way of organizing economic activity in a way that promotes general economic well-being - Government sometimes can improve on market outcomes. The market economy does not always allocate resources efficiently Chapter 2: - Economists apply the methods of science: o Theory o Collect data o Analyze the data - Assumptions are used in economic models to simplify reality in order to improve our understanding of the world - A visual model of the economy: circular flow diagram - A mathematical model: the production possibilities frontier - Microeconomics focuses on individual markets within the whole economy- the determination of equilibrium prices and exchange quantities. Macroeconomics is the study of economics as a whole – inflation, unemployment, and economic growth - Positive statements: deal with matters of fact, and are capable of being verified - Normative statements: statements of opinion – what ought to be - Economic analysis is frequently used for government policy decisions. Economists do sometimes disagree on policy matters because they have different values, however, there is a huge body of evidence and fact that is agreed upon about economic issues - Chapter 2 appendix: review of meaning graphs, graphs are used to visually express economic ideas that would be less clear if described in words Chapter 3: - Everyone can benefit from voluntary exchange. Interdependence is preferable to economic self-sufficiency - Differences in opportunity cost determine comparative advantage. Specialization and exchange make trading partners better off - Absolute advantage: a good is produced by one person/region/ country with fewer inputs - Comparative advantage: a good is produced with a lower opportunity
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