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ECN 104 Study Guide - Final Guide: Richard Thaler, Communication Problems, Planned EconomyPremium

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ECN 104
Study Guide

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ECN104 – Introductory
Final Exam Study Guide
Ryerson University – Fall 2015

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ECN 104 - Lecture 1 - Limits, Alternatives and Choice
Ten Key Concepts:
The individual
Facing trade-offs
Opportunity Costs
Choosing a Little More or Less
The Influence of Incentives
Interactions Among Individuals
Specialization and Trade
The Effectiveness of Markets
The Role of Governments
The Economy as a Whole and the Standard of Living
Production and the Standard of Living
Money and Inflation
Inflation - Unemployment
Scarcity and Choice:
Resources can only be used for one purpose at a time
Only have enough time to do one thing
Scarcity requires that choices be made
The cost of any good, service, or activity is the value of what must be give up to
obtain it
No such thing as free goods
Rational Behaviour (purposeful)
Rational self-interest entails making decisions to achieve maximum utility
Utility is the pleasure or satisfaction obtained from consuming a good or
Different preferences and circumstances (including errors) lead to
different choices - ex. before entering uni, decided to get a degree, have
to choose a field of study by observing what is going on in the economy.
people in late 90s who chose a computer related field got better payoff.
2006 financial sector good, later economy crashes
Rational self-interest is not the same as selfishness
Marginal Analysis: Benefits and Costs
Most decisions concern a change in current conditions; therefore the
economic perspective is largely focused on marginal analysis.
Each option considered weights the marginal benefit against the marginal
Whether the decision is personal or one made by business or gov, the
principle is the same
The marginal cost of an action should not exceed its marginal benefits
Theories, Principles and Models:
The scientific method:
Observe the world (real data, prices, quantities, GDP)

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Formulate hypotheses to explain cause and effect relationships based
upon facts
Test by comparing actual outcomes to the hypothesized predictions
Accept, reject, modify hypotheses as indicated
Deriving Theories
Theories, principles, and models are purposeful simplifications
Principles are used to explain and/or predict the behaviour of individuals
and institutions
Terminology (Optimization; elasticity...)
Generalizations (average consumer, representative firm/agent etc...)
Other-Things-Equal Assumptions (Ceteris Paribus)
It is necessary to hold other contributing factors in order to judge the
effect one variable has upon another. Economists must test their theories
using the real world as their laboratory.
Graphical Expression
Many economical relationships are quantitative, and are demonstrated
Microeconomics versus Macroeconomics:
Microeconomics examines
individual units and their decision making process
Macroeconomics examines
The whole economy
The Individual’s Economic Problem:
Individuals are confronted with the need to make choices because their wants
exceed their means to satisfy
Limited income
Unlimited wants
Budget constraint (Budget line)
A schedule or curve that shows the various combinations of two products
a consumer can purchase with a specific money income
The model assumes two goods, but the analysis generalizes to all goods
available to consumers
Slope of the graphed budget lie is the ratio of the price of the good measured on
the horizontal axis
The budget line illustrates a number of important ideas
Points on or inside the budget line are attainable
Points on or outside the budget line are unattainable
The budget line does not indicate what a consumer will choose only what
they can choose
Income changes will shift the budget line.
Greater income will shift the line out and to the right, allowing consumers
to purchase more of both goods
Increasing income lessens scarcity but does not eliminate it
Society's Economic Problem:
Scarce Resources
Land or natural resources
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