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ECN 104 (143)
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Midterm Study Guide

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ECN 104
Amy Peng

P a g e 1 NTRODUCTION TO M ICROECONOMICS M IDTERM R EVIEW Chapter 1 Thinking like an Economist 1. Economics: Studying Choice in a World of Scarcity N Scarcity Problem J The core problem that Economics tries to address. N Cost-Benefit principle J 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 N Rational Person J Someone with well-defined goals who tries to fulfill them the best they can. N Economic surplus J The benefit of taking any action less the cost. N Opportunity Cost J The value of the next best alternative that is given up as a result of a choice. N Positive Economics J Concerned with what is, can be backed up by data. N Normative Economics J Concerned with what should be, subjective arguments. N Fallacy Composition J Argument that because something is true for a part, it is true for the whole. N Post Hoc Fallacy J ^9}ZZ} 72}}Z} :_ 3. Pitfall 1: Ignoring Opportunity Costs N Time value of money J The fact that a dollar is worth more in the future then now. 4. Pitfall 2: Failure to Ignore Sunk Costs N Sunk cost J a cost that is beyond recovery at the moment of decision. 5. Pitfall 3: Failure to Understand the Average-Marginal Distinction N Marginal cost J increase in total cost from carrying out one more unit. N Marginal benefit J increase in total benefit from carrying out one more unit. N Average benefit J average benefit per unit of activity. N Average cost J average cost per unit of activity. 6. Economics: Micro and Macro N Microeconomics J study of individual choices under scarcity and its implications on individual markets. N Macroeconomics J 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 N Absolute advantage J a person has an absolute advantage if they take less time to perform a task then another. N Comparative advantage J A person has a comparative advantage if their opportunity }Z}}K]L2Zl]ZoZZZLL}Z[Z: N Productivity J units of output per hour by units of input per input per hour. 2. Comparative Advantage and Production Possibilities N OC activity Ass from activity B gain in activity A
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