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Econ 101 Midterm 1 Review.docx

8 Pages

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ECON 101
Wokia Kumase

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Chapter 1: What is Economics? Define economics and distinguish them between micro and macro – economics - Economics is the social science that involves using the limited resources to satisfy unlimited human wants o All economic questions arise because we want more than we can get.  This is called scarcity. Scarcity forces us to make choices. Our choices are influenced by incentives. - While MICROeconomics deals with choices by individuals and businesses, MACROeconomics deals with choices of nations. What are the two big questions of economics? - How do choices determine what, how, and for whom goods and services are produced, and in what quantities? o What one country makes varies and changes over time. Different countries specialize in different products and therefore produce mainly that product. o How a good is produced is by using the Factors of Productions  Land (Rent produces income)  Labour (Wages produces income)  Capital (Interest produces income)  Entrepreneurship (Profit produces income) o For whom the goods are produced for depends on the incomes that people earn. Large income families can buy a wide range while low income families can only buy essential needs - How can choices made for self-interest also promote social interest? o The government steps in and provides laws that act as incentives to promote social interests while one pursuits self-interest. Economic Way of Thinking - Every choice is a trade off o You are always giving up something in order to obtain something else - Everything must be rational o After comparing the benefit and cost, the choice that obtains the greatest benefit over lowest cost - Benefit – What you gain o Everyone’s preferences are different and since benefit is the gain that brings pleasure, benefit varies - Extras! o The opportunity cost is something else you had to give up in order to obtain that good or service.  Opportunity cost has two components:  Things you can’t afford to buy if you purchase (i.e concert ticket)  Things you can’t do with your time spent (i.e if you go to that concert) o Marginal Benefit is the benefit you obtain by pursuing an incremental increase in an activity o Marginal Cost is the additional opportunity cost you experience by pursuing an incremental increase in an activity Economics as a Social Science and Policy Tool - Positive statements are statements about “what is”. o Can be tested by checking them against facts - Normative statements are statements about “what ought to be” o They are beliefs and therefore cannot be tested or convinced with facts - Economic Models are a simplified description of the economic world that includes only features needed for the purpose of explaining it - Exogenous Variable is a variable whose value is given in a model. - Endogenous Variable is a variable whose value is determined within the model These tools are useful for personal decisions, advising businesses and the government on economic policies Graphs - Horizontal line is the x-axis, vertical line is the y-axis, (0,0) is the origin - Positive (DIRECT) Relationships are when variables move in the same direction o Slope is positive - Negative (INVERSE) Relationships are when variables move in opposite directions o Slope is negative - Unrelated (INDEPENDENT) Relationships when variables are constant o Slope is non-existent; horizontal or vertical line on the graph  Slope is the “change in” the graph. Therefore, it would be the ΔY/ΔX  For Linear graphs, the slope at each point is the same  For Curve graphs, the slope at each point is different Chapter 2: The Economic Problem Production Possibility - Production Possibility Frontier (PPF) is the boundary between unattainable and attainable production possibilities o There are multiple points on the PPF that are considered production efficiency combinations  Efficiency being the production of the highest possible output from the available resources o Points inside the PPF are attainable but are considered to be inefficient o Points outside the PPF are unattainable and are considered to be impossible Opportunity Cost - Opportunity cost is a ratio of the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the PPF - When the shape is of a right side of a hill, that is due to the resources not being equally productive in all activities o Resources most suitable for that activity are to be use first - When the shape is of a y = 1/x function, it shows increasing opportunity cost - When moving along the line of the PPF, you must give up one of the resources to obtain the other resource; therefore the opportunity cost of additional X is the amount of Y you had to give up Using Resources Efficiently - Marginal Benefit is the benefit from consuming one more unit of a good o Marginal Benefit Curve slopes downward because of the decreasing marginal benefit - Marginal Cost is the opportunity cost of producing one more unit of a good o Marginal Cost Curve slopes upwards because of the increasing marginal cost - NOTE: There are two ways of using the Marginal Benefit/Cost so do not be confused! It can be interpreted differently in terms of basic and PPF version Economic Growth - Is the expansion of the PPF (movement of the graph to the right) - It is moves when there are changes in resources or technology (the FOP) - Economic Growth is only achievable in the future if we consume less products today Gains from Trade - Production increases if people specialize in the activity that they have the comparative advantage in o Comparative advantage is when someone producing a good can produce it at a lower opportunity cost than anyone else o Absolute advantage is when someone producing a good uses the same quantity of resources and produces more than anyone else
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