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ECON 1B03 Study Guide - Final Guide: Competitive Equilibrium, Perfect Competition, Economic EquilibriumPremium

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Hannah Holmes
Study Guide

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Introduction to Microeconomics
Fall 2018
Final Exam
Prof: Hannah Holmes
Exam Guide
1. The Basics
2. Production Possibilities
3. Advantages and Trade
4. Markets
5. Market Equilibrium
6. Price Elasticity of Demand
7. Point Elasticity
8. Other Kinds of Elasticity
9. Welfare, Externalities & Public Goods
10. Government Policies
11. Production and Costs
12. Perfect Competition
13. Monopoly
14. Monopolistic Competition
15. Oligopoly
16. Markets for Resources
17. Consumer Theory
18. Consumer Preferences

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Section 1 - The Basics
1. Economics: how society allocates scare resources to satisfy society’s unlimited
- Resources (factors of production/inputs): anything used to make something else à
labour, land, capital, entrepreneurship
- Scarce: quantities available at one time are limited
- Microeconomics: individual parts of economy, how decisions are made
- Market economy: firms, households make the decisions and firms decide how much
to produce and who to hire
o We assume people are acting rationally using al information possible to
make the best decisions
- Perfect versus Asymmetric information
o Perfect information: when everyone knows everything
o Asymmetric: someone knows more about something than someone else
- Marginal changes: small, incremental changes
o This is how economically rational thinkers make decisions
- Opportunity cost: cost of everything one gives up to get something else
o Consider the best forgone alternative
- Explicit cost vs Implicit cost: money paid versus lost wages
- Positive economics: the way something is
- Normative economics: how things should be
- ‘The Invisible Hand’ we all act in our own self-interest
2. Efficiency: using resources as best as possible to meet goals
o Free markets use to efficiency
- Two time horizons
o Short Run (SR): present, very near future
§ Not everything can change
o Long Run (LR): far in the future
§ Everything can change
- Economic Models
o Model human behaviour to make accurate predictions
o Assumptions need to be based on theory
Exercise Questions
Question 1
What are the four factors of production?
Do we find perfect or asymmetric information in the market?
Question 2

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Labour, land, capital, and entrepreneurship. Factors of production are anything that could be
used to make something else
There is always asymmetric information in a market, as not everybody knows everything.
Section 2 - Production Possibilities
1. Production is constrained by:
a. Resource endowmentan economy at one point in time only has so many
available resources
b. Current technology: one best way to produce
- Producing efficiently means using all resources in the best way possible
o To produce more of one thing, you need to produce less of another thing
2. Production Possibilities Frontier (PPF): every combinations of goods possible,
using current resources efficiently with current technology
o Shows opportunity cost
o If it’s not on the PPF, it’s either inefficient or it’s unattainable due to a lack of
resources or insufficient technology
o You can be on the PPF producing efficiently, but it’s not what society wants
§ This is social inefficiency
§ You need to produce combination of goods that society wants
- Increasing opportunity costs: ‘bows out’ the more you want, the more $ it is
o Move least efficient resources first, so if you produce more, you’re using their
better resources
- Calculating PPF: figure out what you give up to gain ‘x’ number of another good
o Number given up/number attained gives you the opportunity cost
o If there’s a constant opportunity cost, it’s a straight line
- |slope|: opportunity cost of good on horizontal axis
o Shifts in PPF: change in technology/resources
o Rightward: economic growth
o Leftward: economic contraction
o |slope of the PPF| equals opportunity cost
Exercise Questions
Question 1
What are the two factors that production is constrained by?
Resource endowment and current technology
Question 2
How do you produce efficiently?
Use all resources in the best way possible
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