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Econ Midterm 1 study notes.docx

12 Pages

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ECON 101
Fiona Rahman

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ECON101 Midterm 1Chapter 1All economic questions arise because we want more than we can getOur inability to satisfy all our wants is called scarcityBecause we face scarcity we must make choicesThe choices we make depend on the incentives we faceAn incentive is a reward that encourages an action or a penalty that discourages an actionFactors of production are grouped into four categories Land Labour Capital EntrepreneurshipEfficiency is achieved when the available resources are used to produce goods and services1At the lowest possible price and2In quantities that give the greatest possible benefitEquity is fairness but economists have a variety of views about what is fairSix key ideas define the economic way of thinking A choice is a tradeoff People make rational choices by comparing benefits and costs Benefit is what you gain from something Cost is what you must give up to get something Most choices are howmuch choices made at the marginincentives Choices respond to A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choiceOnly the wants of the person making a choice are relevant to determine its rationalityThe opportunity cost of something is the highestvalued alternative that must be given up to get itWhat is your opportunity cost of going to an ACDC concertTo make a choice at the margin you evaluate the consequences of making incremental changes in the use of your timeThe benefit from pursuing an incremental increase in an activity is its marginal benefitThe opportunity cost of pursuing an incremental increase in an activity is its marginal costIf the marginal benefit from an incremental increase in an activity exceeds its marginal cost your rational choice is to do more of that activityAn economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at handBut testing an economic model is difficult so economists also use Natural experiments Statistical investigations Economic experimentsChapter 2The production possibilities frontier PPF is the boundary between those combinations of goods and services that can be produced and those that cannotTo illustrate the PPF we focus on two goods at a time and hold the quantities of all other goods and services constantWe achieve production efficiency if we cannot produce more of one good without producing less of some other goodEvery choice along the PPF involves a tradeoffOn this PPF we must give up some cola to get more pizzas or give up some pizzas to get more colaThe PPF determines opportunity cost
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