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ECN 104 FINAL Review.docx

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ECN 104
Halis Yildiz

Chapter 1 Limits Alternatives and ChoiceEconomy comes from a Greek word for one who manages a householdScarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to haveEconomics is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wantsPrinciple 1 People Face Tradeoffs oTo get one thing we give up another thingEfficiency means society gets the most that it can from its scarce resourcesEquity benefits of those resources are distributed fairly among people in society2 The cost of something is what you give up to get it oOpportunity cost of an item is what you give up to obtain that item3 Rational people think at the margin oPeople make decisions by comparing costs and benefits at the margin4 People respond to incentives oWhen apple prices rise people decide to eat more pears and fewer apples5 Trade can make everyone better off oPeople gain from their ability to trade6 Markets are usually a good way to organize economic activity oInvisible handPrices7 Governments can sometimes improve market outcomes oMarket failure market fails to allocate resources efficiently government can intervene to promote efficiency and equity Economic way of thinking Involves thinking analytically and objectivelyScientific Method Systematic pursuit of knowledge through the formulation and testing of hypothesesTheoretical Economics involves establishing economic theories by gathering systematically arranging and generalizing from facts Process of deriving and applying economic theories and principlesGeneralizations Economic Theories principles and laws are generalizations relating to the economic behaviour or to the economy itselfoEx Consumer spending rises when person income increasesCeteris Paribus It is assumed that all other variables except those under immediate consideration are held constant for particular analysisMicroeconomics focuses on the individual parts of the economyoHow householdfirm make decisionshow they interact in specific marketsPositive statements are statements that attempt to describe the world as it isoBased upon factscauseandeffect relationships without value judgmentsNormative statements are statements about how the world should beoCalled prescriptive analysisbased on opinions and values ex ought to beUtility Satisfaction a consumer obtains from the consumption of a goodserviceBudget Line finite amount of income to be distributed over two goods Economic resources all natural human and manufactured resources that go into production of goods and resourcesTypes of resources Economic all natural human and manufactured resources that go into production property land forests minerals capital human made resources machines investment purchasing machinery human resources labour physical and mental to produce entrepreneurial ability human resources that combine other resources to produce a productConsumer goods satisfy wants directly while capital goods do so indirectly by aiding the production of consumer goodsEfficiency getting the most from available resourcesFull employment use of all available resources to produce wantsatisfying goods and servicesFull production all employed resources should be used so that they provide the maximum possible satisfactionProductive efficiency production of goods and services in the least costly wayAllocative efficiency production of goods and services most wanted by societyProduction possibilities table lists different combinations of two products that can be produced with available resources in a full employmentproduction economyProduction possibilities frontier PPF 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 the table in a graphOpportunity cost how much good you give up in order to obtain a specific goodoOpportunity cost increases with amount produced more pizza less robotsoPPF steeper production possibilities curve is concave bowed from originAllocative efficacy is decided by comparing marginal cost MC to marginal benefit MBoMarginal Benefit Extra benefit associated with consuming one more unitoMarginal Cost Extra opportunity cost of that extra unitoResources are efficiently allocated when MBMC MBMCtoo few is produced MCMBtoo many is producedAn individual nation is limited by the production possibilities curve but NOT when there is international specialization and tradePositive relationship variables move in same directionNegative inverse relationship variables move in opposite directionLine Slope is constant Curve nonlinear Slope changesSlope Change in yaxis valueChange in xaxis valueSociety wants are unlimited and insatiable Resources for producing goods and services are scarce fundamental facts constituting economic problem and providing foundation of economicsChapter 2 The Market System and the Circular FlowEconomic system particular set of institutional arrangements and a coordinating mechanism to respond to the economic problem
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