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Econ midterm.docx

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University of British Columbia
ECON 101
Clive Chapple

ECON 101: Revision for midterms Main concepts: Chapter 1: 10 principles, definitions, key concepts Chapter 2: Circular flow, PPF, normative vs positive, micro macro, scientific method Chapter 3: Absolute and comparative advantage, opportunity cost, imports exports, gains from trade, specialization Chapter 4: supply and demand, key concepts Chapter 5: elasticity, total revenue Chapter 6: Price controls 1- Definitions 2- Key concepts 3- Graphs 4- Summary CHAPTER 1: INTRODUCTION 1. Efficiency: The property of society getting the most of it can from its scarce resources Equity: The property of distributing economic prosperity fairly among the members Opportunity cost: whatever must be given up to obtain some item Marginal changes: small incremental adjustments to a plan of action Incentive: something that induces a person to act 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 Market failure: a situation in which a market left on his own or government fail to allocate scare resources Externality: the impact of one person’s action on the well being of a bystander, costs or benefits of production or consumption that are experienced by third parties, but not by the producers or consumers who cause them Property rights: the ability of an individual to own and exercise control over scarce resources Productivity: the quantity of goods and services produced from each hour of a worker’s time Inflation: a sustained increase of the average price level in the economy Business cycle: fluctuations in economic activity such as employment and production 2. Because economic goods are finite ressources and individual consummers, firms and government have infinite wants, scarcity exists. 10 Principles (TCMITMGPIIU): 1- People face tradeoffs: To get one thing you must give up another one. Trade offs include: guns and butter, clean environment and high level of income, efficiency and equity. 2- The cost of something is what you give up to get it: making decisions require comparing the costs and benefits. As long as economic resources are used in the production of a good, a cost is involved even if a price is not (OPPORTUNITY COST) 3- Rational people think at the margin: Make decisions by comparing marginal benefits and marginal cost. This also helps to measure utility which is the satisfaction derived from consuming a good or a bundle of good. Rational people take an action only if the action’s marginal benefit exceeds its marginal cost. 4- People respond to incentive: People change their behaviour when the costs and benefits of their actions change. People underestimate the importance of incentives. 5- Trade can make everyone better off: trade allows country to specialize in what they do best and to enjoy a greater variety of goods and services 6- Markets are usually a good way to organize economic activity: free markets contains many buyers and sellers of numerous goods and services. Household and firms interacting in markets acts as if they are guided by an invisible hand. Market price act as a signal, buyers look at the price when determining how much to demand and sellers how much to supply. Market prices reflect both the value of a good to society and the cost to society of making the good. Buyers and sellers whish to reach outcomes that maximize the welfare of society 7- Government can sometimes improve market outcomes: invisible hand can work only if the government enforces the rules and maintains the institutions. Markets work only if property rights are enforced. Government needs to intervene to promote efficiency and equity. Market failure and externality need government to promote effi
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