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Final

ECN 104 Study Guide - Final Guide: Economic Equilibrium, European Cooperation In Science And Technology


Department
Economics
Course Code
ECN 104
Professor
Paul Missios
Study Guide
Final

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ECN104 INTRODUCTORY MICROECONOMICS
WEEK 1
CHAPTER 1: FIRST PRINCIPLES
SUMMARY
-ALL ECONOMIC ANALYSIS IS BASED ON A SET OF BASIC PRINCIPLES
THAT APPLY TO THREE LEVELS OF ECONOMIC ACTIVITY:
1. WE STUDY HOW INDIVIDUALS MAKE CHOICES
2. WE STUDY HOW THESE CHOICES INTERACT
3. WE STUDY HOW THE ECONOMY FUNCTIONS OVERALL
- INDIVIDUAL CHOICE IS THE BASIS OF ECONOMICS
Individual Choice
-INDIVIDUAL CHOICE is the decision of what to do and what not to do
- there are FOUR BASIC PRINCIPLES behind individual choices:
1. Resources are scarce
2. The real cost of something is what you must give up to get it
3. “How much?” is a decision at the margin
4. People usually take advantage of opportunities to make themselves better
off
Principle #1: Choices Are Necessary Because Resources Are Scarce
- a resource is anything that can be used to produce something else
ie. Land, labour, capital, human capital
- human capital is the skills, knowledge, and experience possessed by an individual
or population, viewed in terms of their value or cost to an organization or country
- resources are scarce- the quantity available isn’t large enough to satisfy all
productive uses
ie. Petroleum, lumber, intelligence, time
Principle #2: The True Cost of an Item Is Its Opportunity Cost
-OPPORTUNITY COST is what you must give up in order to get an item
- Opp. Cost is crucial to understanding individual choice
- All costs are ultimately opportunity costs
Principle #3: “How Much?” Is a Decision at the Margin
- it is a trade-off when you compare the costs with the benefits
-MARGINAL DECISIONS are decisions about whether to do a little more or a
little less of an activity and the study is known as MARGINAL ANALYSIS
ie. Hiring one more worker, studying one more hour, etc.
Principle #4: People Usually Respond to Incentives, Exploiting Opportunities to
Make Themselves Better Off
- an incentive is anything that offers rewards to people who chance their behavior
Interaction: How Economies Work
-INTERACTION of choices is when my choices affect yours and vice versa
- This is a feature of most economic situations
- Principles that underlie the interaction of individual choices:
1. There are gains from trade
2. Markets move toward equilibrium

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ECN104 INTRODUCTORY MICROECONOMICS
3. Resources should be used as efficiently as possible to achieve society’s goals
4. Markets usually lead to efficiency
5. When markets don’t achieve efficiency, government intervention can
improve society’s welfare
Principle #5: There Are Gains From Trade
- Mutual gains that individuals achieve by specializing in doing diff. things &
trading
- individuals engage in trade: they provide goods & services to others & receive in
return
- people can get more of what they want through trade than they could if they tried
to be self-sufficient
- this increase in output is due to SPECIALIZATION where each person
specializes in the task they are good at performing
- this way an economy can produce more
Principle #6: Markets Move Toward Equilibrium
- because people respond to incentives, markets move toward equilibrium
- an economic situation is in equilibrium when no individual would be better off
doing something different
- any time there is a chance the economy will move to a new equilibrium
ie. Once a rule of the road was established, there were strong INCENTIVES for
individuals to stay on the “usual” side of the road, so once established, the rule of
the road would be self-enforcing—that is, an equilibrium
Principle #7: Resources Should Be Used As Efficiently As Possible to Achieve
Society’s Goals
- an economy is efficient if it takes all opportunities to make some people better off
without making other people worse off
-EQUITY is when everyone gets their fair share
Efficiency vs. Equity
Ie. Handicapped-designated parking spaces in a busy parking lot
-in EQUITY, making life “fairer”
-in EFFICIENCY, making sure all opportunities to make people better off have
been exploited by never letting parking spaces go unused
-how far should policy makers go in promoting equity over efficiency?
Principle #8: Markets Usually Lead to Efficiency
-incentives built into a market economy already ensure that resources are usually
put to good use
-opportunities to make people better off are not wasted
-EXCEPTION: market failure (the individual pursuit of self-interest found in
markets makes society worse off)  the market outcome is inefficient
Principle #9: When Markets Don’t Achieve Efficiency, Government Intervention
Can Improve Society’s Welfare
- individual actions have side effects not taken into account by the market called
EXTERNALITIES
-one party prevents mutually beneficial trades from occurring in attempt to capture
a greater share of resources for itself

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ECN104 INTRODUCTORY MICROECONOMICS
-some goods cannot be efficiently managed by markets
ie. Freeways in LA
Economy- Wide Interactions
- principles that underlie economy-wide interactions:
Principle #10: One Persons Spending is Another Persons Income
- as a result, chances in spending behavior can spread throughout the economy
Principle #11: Overall Spending Sometimes Gets Out of Line With the Economy’s
Productive Capacity
- spending below the capacity leads to a recession; spending in excess leads to inflation
Principle #12: Government Policies Can Change Spending
WEEK 2
CHAPTER 2: TRADE-OFFS AND TRADE
SUMMARY
- a MODEL is any simplified representation of reality used to better understand
real-life situations
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