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ECN 104 Study Guide - Final Guide: Monopolistic Competition, Externality, Oligopoly

Course Code
ECN 104
Tsogbadral Galaabaatar
Study Guide

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Microeconomics Review
Chapter 1 – The Principles of Economics
Scarcity: the limited nature of society’s resources
Economics: the study of how society manages its scarce resources
Efficiency: the property of society getting the most it can from its scarce
Equity: the property of distributing economic prosperity fairly among the
members of society
Opportunity cost: whatever must be given up
to obtain some item
Rational people: people who systematically and purposefully do the best they
can to achieve their objectives
Marginal changes: small incremental adjustments to a plan of action
Incentive: something that induces a person to act
Property rights: the ability of an individual to own and exercise control over
scarce resources
Market economy: an economy that allocates resources through the decentralized
decisions of many firms and households as they interact in markets for goods and
The goal of efficiency:
oMarket failure: a situation in which a market left on its own fails to
allocate resources efficiently
oExternality: the impact of one person’s actions on the well-being of a
The goal of equity:
oEven when the invisible hand is yielding efficient outcomes, it can
nonetheless leave sizable disparities in economic well-being.
Productivity: the quantity of goods and services produced from each hour of a
worker’s time
Inflation: an increase in the overall level of prices in the economy
Business cycle: the irregular and largely unpredictable fluctuations in economic
activity, as measured by the production of goods and services or the number of
people employed

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Chapter 2 – Thinking Like an Economist
The scientific method involves observation, theory, and more observation
Circular-Flow Diagram: a visual model of the economy that shows how dollars
flow through markets among households and firms
The Circular Flow
C o p yrig h t © 2014 b y Ne lso n Ed u c a tio n Ltd . 2-9
Production Possibility Frontier: a graph that shows the combinations of output
that the economy can possibly produce given the available factors of production
and the available production technology
Microeconomics and Macroeconomics

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Microeconomics: the study of how households and firms make decisions and how
they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation,
unemployment, and economic growth
When economists are trying to explain the world, they are scientists.
When they are trying to help improve it, they are policy advisers
Positive statements: claims that attempt to describe the world as it is
Normative statements: claims that attempt to prescribe how the world should be
Because of differences in scientific judgments and differences in values, some
disagreement among economists is inevitable.
Chapter 3 – Interdependence and the Gains from Trade
Absolute advantage: the comparison among producers of a good according to
their productivity
Comparative advantage: the comparison among producers of a good according
to their opportunity cost
Opportunity cost: whatever must be given up to obtain some item
The gains from specialization and trade are based not on absolute advantage but
rather on comparative advantage.
When each person specializes in producing the good for which he or she has a
comparative advantage, total production in the economy rises.
For both parties to gain from trade, the price at which they trade must lie between
the two opportunity costs
Chapter 4 – The Market Forces of Supply and Demand
A market is a group of buyers and sellers of a particular product.
A competitive market is one with many buyers and sellers, each has a negligible
effect on price.
In a perfectly competitive market:
oAll goods exactly the same
oBuyers & sellers so numerous that no one can affect market price – each is
a “price taker
The quantity demanded of any good is the amount of the good that buyers are
willing and able to purchase.
Law of demand: the claim that the quantity demanded of a good falls when the
price of the good rises, other things equal
Demand schedule:
a table that shows the relationship between the price of a good and the quantity
Price = y – axis, Quantity = x – axis
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