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Final

ECON101 Study Guide - Final Guide: Excludability, W. M. Keck Observatory, Market Power

54 pages73 viewsFall 2013

Department
Economics
Course Code
ECON101
Professor
J.Scott Beesley
Study Guide
Final

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Clinton Richardson
Economics 101 – Notes
1. Chapter 1 – The Ten Principles of Economics
2. Chapter 2 – Thinking Like an Economist
3. Chapter 3 – Interdependence and the Gain From Trade
4. Chapter 4 - The Market Forces of Supply and Demand
5. Chapter 5 – Elasticity and its Application
6. Chapter 6 – Supply, Demand, and Government Policies
7. Chapter 7 – Consumers, Producers, and the Efficiency of
Markets
8. Chapter 8 – Application: The Costs of Taxation
9. Chapter 9 – Application: International Trade
10. Chapter 10 – Externalities
11. Chapter 11 – Public Goods and Common Resources
12. Chapter 13 – The Costs of Production
13. Chapter 14 – Firms in Competitive Markets
14. Chapter 15 - Monopoly
15. Chapter 16 – Monopolistic Competition
16. Chapter 17 – Oligopoly
17. Chapter 18 – The Markets for the Factors of Production
18. Chapter 20 – Income Inequality and Poverty
.
Midterm #1 –
Wednesday,
October-02-13
Midterm #2 –
Monday,
November-04-13
Final – Friday –
2:00pm,
December-13-13
Final
Friday, December-13-13 – 2:00pm
Cumulative, but much more heavily weighted
on Chapters 14-18,20
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Clinton Richardson
Chapter 1 – The Ten Principles of Economics
Vocab
1. Scarcity – the limited nature of society’s resources
2. Economics – the study of how society manages its scarce resources
3. Efficiency – the property of society getting the most it can from its scarce resources
4. Equity – the property of distributing economic prosperity fairly among the members of
society
5. Opportunity Cost – whatever must be given up to obtain some item
6. Rational People – people who systematically and purposefully do the best they can to
achieve their objectives
7. Marginal Changes – small incremental adjustments to a plan of action
8. Market Economy – an economy that allocates resources through the decentralized
decisions of many firms and households as they interact in markets for goods and
services
9. Property Rights – the ability of an individual to own the exercise control over scarce
resources
10. Market Failure – a situation in which a market left on its own fails to allocate resources
efficiently
11. Externality – the impact of one person’s actions on the well-being of a bystander
12. Market Power – the ability of a single economic actor (or small group of actors) to have
substantial influence on market prices
13. Productivity – the quantity of goods and services produced from each hour of a worker’s
time
14. Inflation – an increase in the overall level of prices in the economy
15. Business Cycle – fluctuations in economic activity, such as employment and production
Principles
Principle #1 – People face trade-offs
Making decisions requires trading off one goal against another
Efficiency vs. Equity
Acknowledging life’s trade-offs likely allows people and societies to make good decisions
because they understand the options that they have available
Principle #2 – the cost of something is what you give up to get it
Because people face trade-offs, making decisions requires comparing the costs and
benefits of alternative courses of action,
Principle #3 – Rational people think at the margin
Economists use the term marginal changes
Make decisions based on marginal benefits (an increase in an activities overall benefit
that is caused by a unit increase in the level of that activity, all other factors stay
constant) and marginal costs (the increase or decrease in the total cost of a production
run for making one additional unit of an item)
Marginal decision making can help explain some questions
Goods/items that are plentiful are cheaper no matter the need for them (ex. Water) vs.
goods/items that are scarce but not necessary for life are more expensive (ex.
Diamonds)
Will only take action if the marginal benefit exceeds the marginal cost
Principle #4 – People respond to incentives
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Clinton Richardson
Incentive – something that induces a person to act. (such as the prospect of a
punishment or reward)
Incentives are crucial to analyzing how market works. Ex.) apple prices go up means
loss of some consumers but allows more workers in the orchards
The effect of a good’s price on the behaviour of buyers and sellers in the market
Principle #5 – Trade can make everyone better off
Countries always compete in trading in the world economy but this can help.
By trading with other people, people can buy a greater variety of goods and services at a
lower cost
Trade allows countries to specialize in what they do best and to enjoy a greater variety of
goods and services
Principle #6 – Markets in general are efficient and self-correcting, but subject to some
fundamental limitations
Communism failed, market economy is now seen in most countries
Invisible Hand Theory – Adam Smith – the prices are the instruments with which the
invisible hand directs economic activity
Supply and demand – sellers look at the price when determining how much to demand
and sellers look at the price when deciding how much to supply.
Principle #7 – Governments can sometimes improve market outcomes
Invisible hand can only work if government enforces law – not a fair assumption to
believe everyone will live justly
Rely on government to enforce rights over things we produce
Promotes efficiency and equity
Adjust to market failure and market power.
Principle #8 – A country’s standard of living depends on its ability to produce goods and services
Productivity: the quantity of goods and services produced from each hour of a workers
time
Principle #9 – Prices rise when the government prints too much money
Inflation – an increase in the overall level of prices in the economy
Germany – when government produces large amounts of a nations money, the prices go
up
Principle #10 – Society faces a short-run trade-off between inflation and unemployment
Business cycle: fluctuations in economic activity such as employment and production
Principles 1-4: how to make decisions
Principles 5-7: how people interact
Principles 8-10: how the economy works as a whole
Market limitations
Imperfect information leading to an unfair deal/no deal (Ex – Akerlof’s article about
lemons)
Effects on other parties, not accounted for in the market
Too much “market power” on the part of some firms
Highly unequal income distributions
The general economic finding is that most initiatives which aim at equalizing incomes
tend to reduce efficiency.
This “efficiency vs equity” argument is a fundamental question in micro and macro as
well
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