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


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

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McMaster
ECON 1B03
Introduction to Microeconomics
Fall 2018
Final Exam
Prof: Hannah Holmes
Exam Guide
Included:
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
wants
- 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
does
- 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?
Answer
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
Answer
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?
Answer
Resource endowment and current technology
Question 2
How do you produce efficiently?
Answer
Use all resources in the best way possible
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