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ECON 1B03 Study Guide - Final Guide: Marginal Cost, Perfect Information, Marginal Product

Course Code
Hannah Holmes
Study Guide

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Chapter 1 Introduction
The study of how society allocates scarce resources to satisfy people's’
unlimited wants
Resources/ Factors of Production (FOP)
Anything used to make something else
Four main categories of resources are:
1) Labour
2) Land
3) Capital
4) Entrepreneurship
The quantities of resources available at any time are limited in supply
Means that society has limited resources and therefore cannot produce all the
goods and services people wish to have
One of the scarcest resources is time
Economic Rationality
People use the information they have to make the best decisions for
Systematically and purposefully using information to make the best decisions
for oneself to achieve one’s objectives
Perfect Information
Everyone knows everything they need to know with certainty
There would be no risks involved in making any decision
Everyone knows everything with no uncertainty
Asymmetric Information
Someone knows something somebody else doesn’t know
When someone knows more about something than someone else does
Marginal Thinking
Thinking incrementally, in terms of doing one
more of something
Economically rational thinkers make decisions at the margin
When you think marginally, you’ll come to the best decision given the
information you have
Marginal Changes
Small incremental changes
For Example, if you own a calculator company and produce 2000 calculators a week,
it is better to increase the number of calculators produced by one at a time instead of
increasing it to 2500 per week. This way you don’t lose.
Opportunity Cost
Cost of everything you give up to get something else

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It’s the cost of the best forgone alternative
For Example, if you buy tickets to a blue jays game you are spending $30 as well as
a shift at work where you could have made $100
Explicit Cost
You actually had to pay out some money to buy the ticket and you got a
Implicit Cost
The lost wages from not working
Best Forgone Alternative
The thing that you gave up that has the greatest value
The coming together of buyers and sellers to buy and sell goods and services
Market Economy
Allocates resources through the decentralized decisions of firms and
Free Markets
Where all decision making is decentralized
Consumers decide what and how much they want to buy and firms decide
what and how much they want to produce and sell
There’s no government authority telling buyers or sellers what they can do
Centrally Planned Economy
A central authority (government) dictated how resources would be allocated
for production and consumption
Mixed Economy
We are mostly a free market but do have some industries that are government
owned (GO Transit)
Deals with decision making at the individual level
Focuses on the individual parts of the economy
Looks at economy-wide phenomena
Looks at the economy as a whole
Economic Models
Models can explain how an economy works
Used to predict what would happen in a market or in an entire economy if
some economic factor changed
Essentially, economics try to model human behaviour
We try to model human behaviour so we can make accurate predictions about
potential economic outcomes

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This involves making assumptions based on theory
Positive Economics/Statements
Tells it the way it is, the way the world actually works
Policy makers need to know that if they do such-and-such, then
such-and-such will result
Statements about what actually is; facts
For Example, High interest rates reduce the demand for mortgages
Normative Economics/Statements
Points at what should be, how things ought to be
Policy makers, using their own judgments, decide what should happen, based
on their own opinions and what economists predict will happen for various
options they might choose
Statements about what should be; opinions and value judgments
For Example, The banks should
raise the interest rate to discourage consumers from
taking on mortgages
Flow of Income
How money moves through the economy
Flow of Goods and Services
How actual products move through the economy
The “Invisible Hand”
We all act in our own self-interest
We create a demand for goods and services that compels others to supply
those goods and services in the most efficient manner
If the market is left to operate freely, the invisible hand will bring these buyers
and sellers together and a price will result where buyers and sellers all benefit
Using resources as best as possible to meet society’s goals
A fair allocation/distribution of resources
Time Periods
Short Run (SR)
The present (and very near future) when not 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 Statements
Statements about what actually is; facts
Normative Statements
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