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
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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
Resources: $16
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
unattainable combinations
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
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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
used resources?
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
(unemployment insurances).
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
four problems
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)
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