ECON 208 Final: Complete and Comprehensive 81 Page Final Exam Study Guide Fall 2015
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ECON208– Microeconomic Analysis and
Final Exam Study Guide
McGill University – Fall 2015
ECON 208- Lecture 1- Introduction to Economics
1.1 What is Economics?
Economics is the study of the use of scarce resources to satisfy unlimited human
● A society’s resources are usually divided into land, labour, and capital
(machines). Economists refer to resources as factors of production. Outputs
are goods (tangible) or services (intangibles).
Scarcity and Choice
● Resources can produce only a fraction of the goods and services desired by
● Scarcity implies the need for choice
● Every choice has an associated cost- opportunity cost
● Opportunity cost is defined as the benefit given up by not using resources in
the best alternative way.
Fig. 1-1 in Textbook
The whole green area are possible combinations= attainable and possible.
It represents scarcity and choice
● All points that line on or inside the line would be attainable combinations.
● The negatively sloped line provides a boundary between attainable and
● The opportunity cost of getting 1 extra slice of pizza is half of a beer that must
be given up
Fig. 1-2 in Textbook
A Production Possibilities Boundary (PPB)
The PPB represents:
● Opportunity Cost
- Points e and f show scarcity; they are unattainable with current resources
- Points a,b,c,d show choice. They are all attainable, but which one will be
Always think in terms of the best alternative.
Ex. The Opportunity COST of a Bachelors Degree:
● Out of pocket money: fees and books and materials
o 4 years ($6,000+$1,500)= $30,000→ capital
● What you give up: salary→ If not going to school, alternative best use of time
(which is the resource)
o 4 years $20,000= $80,000→ time
● Total Cost: $110,000
Ex. Consider your decision whether to go skiing for the weekend
In general, the opportunity cost for any activity includes three things:
● The direct cost of the activity, plus
● Whatever you give up in order to do the activity, minus
● Whatever savings the activity generates
Four Economic Problems
1. What is Produced and How?
● Resource allocation determines the quantities of various goods that are
● In terms of our previous illustration, what combination of civilian and military
goods will be chosen?
● Will the economy be inside the production possibilities boundary= inefficiently
2. What is consumed and by Whom?
● What determines how economies distribute total output? Why do some
people get a lot while others get only a little?
● Will the economy consume exactly what it produces?
● Microeconomics is the study of the allocation of resources as it is affected by
the workings of the price system
3. Why are Resources sometimes Idle?
● An economy is operating inside its production possibilities boundary if some
resources are idle
● Under what circumstances are workers seeking jobs unable to find them?
● Should governments worry about idle resources? Is there anything
governments can do about it?
● Unemployment is expensive because the economy does not gain from it
(cannot tax them), less demand→ less production. Resources we are not
using (workers) and produce more. Social services go for the unemployed
4. Is Productive Capacity growing?
Fig 1-3 In Textbook The Effect of Economic Growth on the PPB
● Growth in productive capacity is shown by an outward shift of the PPB
● Point d was initially unattainable. But after sufficient growth, it becomes
● Macroeconomics is the study of determination of economic aggregates.
Economics and Government Policy
The policy and effectiveness of government policy is relevant to discussing all
● It can alter the allocation of the economy’s resources to make society as a
whole better off
● It can be used to improve the distribution of consumption across individuals→
equality and distribution.
● It is also part of the discussion of why economic resources are sometimes
idle (ex: unemployment)