ECON 1B03 Study Guide - Final Guide: Marginal Cost, Perfect Information, Marginal Product
by OC2487412
School
McMaster UniversityDepartment
EconomicsCourse Code
ECON 1B03Professor
Hannah HolmesStudy Guide
FinalThis preview shows pages 1-3. to view the full 33 pages of the document.
Chapter 1 Introduction
Economics
● 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
Scarce
● 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
themselves
● 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
receipt
Implicit Cost
● The lost wages from not working
Best Forgone Alternative
● The thing that you gave up that has the greatest value
Market
● 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
households
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)
Microeconomics
● Deals with decision making at the individual level
● Focuses on the individual parts of the economy
Macroeconomics
● 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
Efficiency
● Using resources as best as possible to meet society’s goals
Equity
● 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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