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Study Guide

ECON 1B03- Final Exam Guide - Comprehensive Notes for the exam ( 42 pages long!)


Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes
Study Guide
Final

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McMaster
ECON 1B03
Final EXAM
STUDY GUIDE

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What is Economics?!
!
Economics: the study of how society allocates scarce resources to satisfy society's unlimited
wants!
Scarcity: means that society has limited resources and therefore cannot produce all the goods
and services people wish to have !
Microeconomics: focuses on the individual parts of the economy!
how households and firms make decisions and how they interact in specific markets!
Macroeconomics: looks at the economy as a whole!
economy-wide phenomena, including inflation, unemployment, and economic growth!
Market Economy: allocates resources through the decentralized decisions of firms and
households!
households decide what to buy and who to work for !
firms decide who to hire and how much to produce !
!
Basic Principles!
every economic issue involves individual choice!
households:!
who will work?!
attend college or university?!
firms:!
what goods and how much will be produced?!
what resources should be used in production!
at what price should goods be sold?!
!
Economic Rationality: systematically and purposefully using information to make the best
decisions for oneself to achieve one's objectives!
we assume that when people are making decisions, they are acting rationally!
Perfect Information: everyone knows everything and there is no uncertainty !
Asymmetrical information: when someone knows more about something than someone else!
ex. a chef knows if the salmon is fresh but a prospective buyer does not !
Resource: anything that can be used to make something else !
can also be called factors of production or inputs!
the big 4 resources are: labour, land, capital and entrepreneurship !
!
Opportunity Costs!
most of the time, to get one thing we usually have to give up something else:!
full-time schooling vs. full-time emplyment!
leisure time vs. work!
everything you have to give up to get something else is called your opportunity cost!
it's the cost of the best forgone alternative !
Example:!
you decide to attend Mac and tuition = $8000, textbooks = $1000, housing = $6000 and
total is $15,000!
this is an explicit cost!
instead of coming to Mac you could have worked at Tim Hortons and earned $23,000
income!
this is a forgone alternative and implicit cost (not an out-of-pocket expense)!
you also passed up a job at Walmart which would have given you a $25,000 income!
so the opportunity cost is the value of the best forgone alternative!
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opportunity cost = explicit + implicit!
in the example above it would be $40,000 ($15,000 + $25,000)!
!
Marginal Thinking!
Marginal changes: small, incremental changes!
economically rational thinkers make decisions at the margin !
the "invisible hand"!
concept of how the free market operates - determining a price that benefits both seller
and buyer!
!
Eciency!
Eciency: using resources as best as possible to meet society's goals!
markets that are left to operate freely with no intervention from outside sources like a
government!
this involves economic decisions!
Equity: a fair allocation/distribution of resources!
!
Time Periods!
economics consider 2 time horizons!
Short Run (SR): the present and near future where everything can change. Firms can't adjust
their business plans to any great degree; consumers can't change their buying strategies to
any great degree!
Long Run (LR): the time period way down the road when everything can change. Firms and
consumers can react quickly to economic events !
!
Positive vs. Normative Statements!
Positive Statements: statements about what actually is; facts!
Ex. high interest rates reduce demand for mortgages!
Normative Statements: statements about what should be; opinions and value judgments!
Ex. the banks should raise the interest rate to discourage consumers from taking on
mortgages !
!
Economic Models!
we try to model human behaviour so we can make accurate predictions about potential
economic!
how changing the price will change buyer's reaction!
this involves making assumptions based on theory !
ex. assume price going up = people will buy less of it !
!
!
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