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Midterm Study Guide

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ECN 104
Amy Peng

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. 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
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