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Midterm

Midterm Study Guide

13 Pages
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Department
Economics
Course Code
ECN 104
Professor
Amy Peng

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Pa g e | 1
Introduction to Microeconomics Mid-term Review
Chapter 1 Thinking like an Economist
1.Economics: Studying Choice in a World of Scarcity
Scarcity Problem The core problem that Economics tries to address.
Cost-Benefit principle A firm or person is better of taking an action only
if the extra benefits (marginal utility) outweigh the extra cost (marginal cost).
2.Applying the Cost-Benefit Principle
Rational Person Someone with well-defined goals who tries to fulfill them
the best they can.
Economic surplus The benefit of taking any action less the cost.
Opportunity Cost The value of the next best alternative that is given up
as a result of a choice.
Positive Economics Concerned with what is, can be backed up by data.
Normative Economics Concerned with what should be, subjective
arguments.
Fallacy Composition Argument that because something is true for a part,
it is true for the whole.
Post Hoc Fallacy Post hoc, ergo propter hoc.
3.Pitfall 1: Ignoring Opportunity Costs
Time value of money The fact that a dollar is worth more in the future
then now.
4.Pitfall 2: Failure to Ignore Sunk Costs
Sunk cost a cost that is beyond recovery at the moment of decision.
5.Pitfall 3: Failure to Understand the Average-Marginal Distinction
Marginal cost increase in total cost from carrying out one more unit.
Marginal benefit increase in total benefit from carrying out one more
unit.
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Pa g e | 2
Average benefit average benefit per unit of activity.
Average cost average cost per unit of activity.
6.Economics: Micro and Macro
Microeconomics study of individual choices under scarcity and its
implications on individual markets.
Macroeconomics study of the performance of national economies and
government policies to try and improve it.
Chapter 2 Comparative Advantage: The Basis for Exchange
1.Exchange and Opportunity Cost
Absolute advantage a person has an absolute advantage if they take less
time to perform a task then another.
Comparative advantage A person has a comparative advantage if their
opportunity cost of performing a task is less then anothers.
Productivity units of output per hour by units of input per input per hour.
2.Comparative Advantage and Production Possibilities
OC activity A = Loss from activity B / gain in activity A
Principle of Increasing Opportunity Cost when expanding production
of any good, first employ those resources with the lowest opportunity cost.
Only after that does it make economic sense to use resources that have higher
opportunity cost.
3.Factors the Shift the Economys Production Possibilities Curve
Increases in productive resources or improvements in knowledge and
technology cause the PPC to shift outward.
4.Comparative Advantage and International Trade
Nations can benefit from exchange, even though one trading partner may be
more productive than the other in absolute terms.
Chapter 3 Supply and Demand: An Introduction
1.Markets and Prices
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Pa g e | 3
Quantity supplied/demanded the total amount of a good of uniform
quality that all sellers/buyers are willing to produce/purchase at a single
price during a period of time.
Supply/demand curve A curve or schedule showing the total quantity of a
good of uniform quality that sellers/buyers want to sell/buy at each price
during a particular period of time provided all else is constant.
Supply as an equation QS = a +bPS, where QS=quantity supplied,
PS=supply price, a=horizontal intercept, and b=reciprocal of slope.
Demand as an equation QD = c -dPD, where QD=quantity supplied,
PD=supply price, c=horizontal intercept, and d=reciprocal of slope.
Equilibrium quantity Q* = c-d(c-a/b+d)
2.Markets, Equilibrium, and Efficiency
The Equilibrium Principle a market in equilibrium leaves no
unexploited opportunities for individuals.
The Efficiency Principle economic efficiency occurs when total economic
surplus is maximized. Efficiency is an important social goal because, when
the pie is larger, everyone gets a bigger piece.
Efficient quantity the quantity that results in the maximum possible
economic surplus from producing and consuming the good. The level of
production for which the cost and benefit of one more unit are the same.
Economic efficiency condition that occurs when all goods and services
are produced and consumed at their respective socially optimal levels.
3.Explaining Changes in Price and Quantities
Change in the quantity demanded/supplied along the curve from a
change in price.
Change in demand/supply shift of the entire demand/supply curve.
Law of supply states that as price falls, ceteris paribus, supply will also fall.
Factors that shift supply
i.A change in input prices.
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Description
P a g e 1 Introduction to Microeconomics Mid-term Review Chapter 1 Thinking like an Economist 1. Economics: Studying Choice in a World of Scarcity Scarcity Problem The core problem that Economics tries to address. Cost-Benefit principle A firm or person is better of taking an action only if the extra benefits (marginal utility) outweigh the extra cost (marginal cost). 2. Applying the Cost-Benefit Principle Rational Person Someone with well-defined goals who tries to fulfill them the best they can. Economic surplus The benefit of taking any action less the cost. Opportunity Cost The value of the next best alternative that is given up as a result of a choice. Positive Economics Concerned with what is, can be backed up by data. Normative Economics Concerned with what should be, subjective arguments. Fallacy Composition Argument that because something is true for a part, it is true for the whole. Post Hoc Fallacy Post hoc, ergo propter hoc. 3. Pitfall 1: Ignoring Opportunity Costs Time value of money The fact that a dollar is worth more in the future then now. 4. Pitfall 2: Failure to Ignore Sunk Costs Sunk cost a cost that is beyond recovery at the moment of decision. 5. Pitfall 3: Failure to Understand the Average-Marginal Distinction Marginal cost increase in total cost from carrying out one more unit. Marginal benefit increase in total benefit from carrying out one more unit. www.notesolution.com P a g e 2 Average benefit average benefit per unit of activity. Average cost average cost per unit of activity. 6. Economics: Micro and Macro Microeconomics study of individual choices under scarcity and its implications on individual markets. Macroeconomics study of the performance of national economies and government policies to try and improve it. Chapter 2 Comparative Advantage: The Basis for Exchange 1. Exchange and Opportunity Cost Absolute advantage a person has an absolute advantage if they take less time to perform a task then another. Comparative advantage A person has a comparative advantage if their opportunity cost of performing a task is less then anothers. Productivity units of output per hour by units of input per input per hour. 2. Comparative Advantage and Production Possibilities OC activity Aoss from activity B gain in activity A Principle of Increasing Opportunity Cost when expanding production of any good, first employ those resources with the lowest opportunity cost. Only after that does it make economic sense to use resources that have higher opportunity cost. 3. Factors the Shift the Economys Production Possibilities Curve Increases in productive resources or improvements in knowledge and technology cause the PPC to shift outward. 4. Comparative Advantage and International Trade Nations can benefit from exchange, even though one trading partner may be more productive than the other in absolute terms. Chapter 3 Supply and Demand: An Introduction 1. Markets and Prices www.notesolution.com
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