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Study Guide

[ECN 104] - Final Exam Guide - Comprehensive Notes for the exam (75 pages long!)


Department
Economics
Course Code
ECN 104
Professor
John Isbister
Study Guide
Final

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Ryerson
ECN 104
FINAL EXAM
STUDY GUIDE

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Chapter 1 notes
Microeconomics: The study of the allocation of scarce resources among competing ends.
Is Economics a science or a study?
o It is a science: There is a lot of math and predictions in the course. Are the predictions any good?
They are not as good as predictions as bio/ physics. We have a better record of predictions than
other social science.
o It is a social science/ study: It is the most scientific of the social sciences
o Therefore, it is classified as a study
Why is it micro and not macro? Synonym for microeconomics: Price theory
o It deals with individual decision making.
o How do firms make decisions? - individual firms
o Individual markets are also looked at (all the milk market/ all the dairy markets)
o Prices of individual goods and services
In Economics:
o We look at businesses from outside to inside instead of vice versa.
When does it serve the public?
o All businesses have to use Economics, whether for-profit or non- profit.
o We aren't just private people. We are citizens of a certain place.
o The principles of choice can be made privately or publically.
o Making sense of the news is taught
o We learn to look at the forest and not to focus just on the tree.
look at the big picture instead of focusing on the small details
12 basic principles of Economics: 9 are looked at in Microeconomics
o Individual choice is the decision by an individual of what to do, which necessarily involves a
decision of what not to do.
1. Choices are necessary because resources are scarce.
A resource can be anything that can be used to produce something else.
Examples are: land, labour, capital {Can be bought or sold (shovel/ factory)}, human
capital {cannot be bought or sold (students trying to make a future)}
Resources are scarce- the quantity available isn't large enough to satisfy all productive
uses.
Examples: air (we breath it in. In huge cities like Toronto, it is scarce), petroleum,
lumber, intelligence.
If a resource is not scarce, it is not an economic issue.
In a place like Antarctica, air isn't scarce, because there isn't people and machines
who are using it.
In a place like Toronto/ New York, air is scarce since everyone wants a healthy life
2. The true cost of an item is its opportunity cost
The real cost of an item is its opportunity cost: what you must give up in order to get it
Example: Ice cream or coffee? If you buy the coffee, you are giving up the ice cream
which is the opportunity cost.
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3. 'How much?' is a decision at the margin. (ex: how much spaghetti will I buy?)
You make a trade-off when you compare the costs with the benefits of doing something
Decisions about whether to do a bit more or a bit less of an activity are marginal
decisions.
I ate many bananas, should I eat one more?
The study of decisions is called marginal analysis
4. People usually respond to incentives, exploiting opportunities to make themselves better off
An incentive is anything that offers reward to people who change their behaviours.
Ex: price of gasoline rises so people buy more fuel efficient cars.
Ex: Better jobs are offered if you have a degree in a certain course so people major
in that course.
Strong version of an incentive: everyone responds to the economic incentives
Weak version of an incentive: Enough people respond to the economic incentives that
the markets adjust to the equilibrium.
The weak version is all we need for the market system to work. As long as some
people respond, the market system will resolve that problem
o The rest of the principles underlie the interaction of individual choices.
5. There are gains from trade
In a market economy, individuals engage in trade: they provide goods and services to
others and receive goods and services in return.
There are gains from trade: people can get more of what they want through trade than
they could if they tried to be self- sufficient.
We specialize in certain things so we can provide goods in a group. We cannot
specialize in everything.
Specialization is important in creating productivity. And because we specialize, we
have to trade.
6. Markets move forward equilibrium
An economic situation is in equilibrium when no individual would be better off doing
something different.
Any time there is a change, the economy will move to a new equilibrium.
Positive vs. normative statements:
Positive (the description of something): There are around 260 seats in this class,
they are red leather seats. This is a terrific room to lecture in because it is large and I
can see all the students and they can see me.
Normative (what should be): This class would be better if the chairs were more
spread out and there was more room.
7. Resources should be used as efficiently as possible to achieve society's goals. (Normative)
An economy is efficient if it takes all opportunities to make some people better off
without making others worse off
To be efficient is to get most out of your resources. There shouldn't be any waste in
regards to the resources.
Should economic policy makers always strive to achieve economic efficiency?
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