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ECON 1B03 Study Guide - Midterm Guide: Comparative Advantage, Average Cost, Productive Efficiency


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

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Ch. #1 - Introduction to Micro
Economics
Economics study of how society allocates its scarce resources to satisfy
oSCARCITY means society has limited resources, cant produce all good
and service people want
Micro economics individual parts of economy, eg households make decisions,
how they interact in specific markets
Macro economics economy as a whole, economy-wide phenomena, inflation,
unemployment, economic growth
Market economy allocates resources through decentralized decisions of firms
and households.
oHouseholds decide what to buy and who to work for
oFirms decide who to hire and how much to produce
Command or centrally planned economy, production and distribution
decisions made by central authority
Basic principles of Economics
oHousehold and economy face many decisions:
Who will work
What goods and how much to produce
What resources should be used in production
What price should goods be sold
Resource-anything that can be used to produce something else
oLand, labour, physical capital(buildings, machinery, etc.)
Opportunity cost of something is everything you have to give up to get it
oThe cost of the best forgone alternative
Equilibrium no incentive, no purpose to do something, in a state of

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Specialize in tasks we do best, trade with others we need that they can
provide (GAINS FROM TRADE)
Efficiency, means society makes the best use of its resources (economic
decisions)
Market failure, when market fails to allocate resources efficiently
Equity, fair distribution of resources (political decisions)
Externality, impact of person or firm on bystander
Market power ability to influence market prices
Positive statements, statements that attempt to describe the world as it is
(descriptive analysis)
Normative statements, statements about how the world should be
(prescriptive analysis)
The Circular-Flow Diagram
Firms
o Produce and sell goods and services
o Hire and use factors of production
Households
o Buy and consume goods and services
o Own and sell factors of production
Markets for Goods and Services
Firms sell
Households buy

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Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Land, labour, and capital
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